Slavery no more? – EU adopts the FLR

November 2024  |  FEATURE | RISK MANAGEMENT

Financier Worldwide Magazine

November 2024 Issue

Although sounding like a practice from a bygone age, forced labour – whereby individuals are compelled against their will to provide work or service through the use of force, fraud or coercion – is still very much with us. And the figures are alarming.

According to a 2022 analysis by the International Labour Organization (ILO), Walk Free and the International Organization for Migration – ‘Global Estimates of Modern Slavery: Forced Labour and Forced Marriage’ – 28 million men, women and children are in forced labour worldwide. Their activity generates $236bn in illegal profits every year.

Drilling down, the analysis found that 63 percent of forced labour takes place in the private sector (17.3 million people), including in domestic work, manufacturing, construction and agriculture. In addition, nearly 4 million people live in forced labour imposed by state authorities and more than half of all forced labour occurs in high-income and upper-middle income countries (while Asia and the Pacific have the highest numbers when weighted against population, the percentage of people is highest in Arab states).

Moreover, the prevalence of forced labour across the globe is not just a severe violation of human rights, it also undermines legitimate businesses and commercial activities. In recert years, a cadre of forced labour bans have sought to address this state of affairs.

“The US Tariff Act is the most established and, since amendments to section 307 introduced in 2016, has been used extensively to impound goods suspected of being produced as a result of forced labour,” says Áine Clarke, head of investor strategy at the Business & Human Rights Resource Centre. “The US has also passed the Uyghur Forced Labour Prevention Act, while Canada and Mexico have enacted their own forced labour import bans, along with bans proposed by lawmakers in the European Union (EU) and Australia, among others.”

In terms of a European context, forced labour is particularly prevalent, with the most recent ILO figures estimating there are 880,000 persons in forced labour (1.8 per 1000 inhabitants) across EU member states. Typically, domestic work, agriculture, manufacturing and construction are the main sectors where forced labour victims are found.

In a bloc-wide initiative to address the issue, the European Commission (EC) presented its proposal for a Forced Labour Regulation (FLR) in September 2022, which was subsequently adopted by the European Parliament in April 2024 following intensive inter-institutional negotiations.

Aims of the FLR

Part of a growing body of international legislation and trade agreements designed to hold companies accountable for human and labour rights abuses, the FLR has been designed to provide certainty to EU consumers that the products they purchase were not made with forced labour.

Moreover, the FLR carries no company size thresholds, with all companies importing into, buying and selling products on the EU market or exporting from the EU falling within the scope of the legislation.

“The main aim of the FLR is to ban products made with forced labour from being sold, imported or exported within the EU market, including those involving forced child labour,” summarises Frédéric Louis, a partner at WilmerHale. “It covers all products, regardless of origin or sector, but does not cover logistical services such as transport and distribution.

“Excepting these services, the FLR targets all companies involved in any stage of a product’s supply chain, including manufacture, production, harvest, extraction, working or processing,” he continues. “This includes domestic and imported goods, online sellers and intermediaries like online marketplaces. The FLR also has mandated that companies ensure their supply chains are free from forced labour.”

As set out in the European Parliament’s agreed text, the FLR creates an EU-wide framework for enforcing a ban on products made with forced labour (with special provisions for small and medium-sized enterprises to minimise undue burdens), including through investigations, new IT solutions and cooperation with other authorities and countries.

Under the FLR, national authorities or, if third countries are involved, the EC, will investigate suspected use of forced labour in companies’ supply chains. If the investigation concludes that forced labour has been used, authorities can demand that relevant goods be withdrawn from the EU market and online marketplaces, and confiscated at the borders. The goods would then have to be donated, recycled or destroyed. Goods of strategic or critical importance to the EU may be withheld until the company eliminates forced labour from its supply chains.

“The focus of investigations is designed to be on the economic operators and, where relevant, product suppliers involved in the steps of the supply chain as close as possible to where the forced labour likely occurs, and with the highest leverage to prevent, mitigate and end its use,” notes Ms Clarke.

In addition, at the insistence of the European Parliament, the EC will draw up a list of specific economic sectors in specific geographical areas where state-imposed forced labour exists. This will be a criterion to assess the need to open an investigation. The EC can also identify products or product groups for which importers and exporters will have to submit extra details to EU customs, such as information on the manufacturer and suppliers of these products.

The FLR also facilitates cooperation with third countries, for example in the context of existing dialogues or implementation of trade agreements. This may include information exchange on risk areas or products and sharing best practices, particularly with countries with similar legislation in place. The EC, acting as a lead competent authority, may also carry out checks and inspections in third countries, if the relevant company and the government of the third country agree to it.

Areas of concern

While the FLR undoubtedly represents a crucial step forward in ensuring economic actors address forced labour concerns in their supply chains, under the threat of financial penalty, numerous areas of concern remain to be addressed before the full force of the legislation can be felt.

“Unfortunately, the FLR does not go far enough on ensuring that victims of abuse are remediated for the harm they faced,” observes Sian Lea, business and human rights manager at Anti-Slavery International. “We have advocated for remediation as a precondition to lifting a ban, knowing how integral it is for ending harm and preventing further mistreatment.

“We have also pushed for a reversal on the burden of proof on products made with state-imposed forced labour, such as cotton from Turkmenistan or all products coming from the Uyghur Region, but this was omitted from the FLR’s final text,” she continues. “The result is that it will be up to competent authorities to prove that a specific product was in fact made with forced labour, rather than starting with that presumption.”

Toolkit for compliance

Provisions of the FLR require companies to ensure they have adequate procedures in place to identify, monitor and address any instances of forced labour in their supply chains. In its analysis of the legislation and its requirements, Jenner & Block suggests a number of actions to help companies prepare for the full ambit of the FLR, as outlined below.

First, identify the highest areas of risk based on the FLR’s factors. This may include, for instance, noting which products are offered in quantity in the EU market, or whether any products may originate from areas with suspected or actual state imposed forced labour.

Second, assess and document each stage of the upstream supply chain of products that go to market, including all activities, processes and actors involved. The FLR specifically names the extraction, harvesting, production and manufacturing of a product in whole or in part. It also includes work and processing related to the product. Companies should have a keen understanding of their upstream process and ensure that appropriate records have been maintained. In the event of an investigation, it will be critical to show records for each stage of that process.

Third, conduct due diligence, such that companies can show authorities how they identified risks, and, if those risks existed, how those companies mitigated their impact or eliminated them altogether.

“Companies must adopt robust due diligence practices,” advises Mr Louis. “This includes complying with EU and national regulations and international guidelines, such as those from the ILO. They should also establish transparent supply chains and be ready to provide detailed product information to authorities.

“Larger businesses face stricter requirements for information collection, while small and medium-sized enterprises have a lighter burden but must still manage risks in their supply chains,” he continues. “Regular audits and adherence to ILO indicators are crucial for assessing and improving working conditions. This includes conducting thorough risk assessments to identify potential forced labour risks, establishing clear policies and codes of conduct, and implementing regular inspections.”

Penalties and enforcement

Where a violation is suspected to have taken place within the EU, the relevant member state will bear primary responsibility, whereas if the forced labour is alleged to have occurred outside of the EU, the EC will have exclusive jurisdiction.

Moreover, failure to comply with relevant requirements in the FLR will attract all the sanctions in the regulation, including a financial penalty. “Products will be banned and removed from the market and will not be imported or exported,” affirms Ms Lea. “Banned products already on the market will be withdrawn and disposed of, and any banned products remaining with the company will also be disposed of. Failure to comply will result in fines.”

To help enforce the FLR, a new Forced Labour Single Portal is being set up, which includes guidelines, information on bans, a database of risk areas and sectors, as well as publicly available evidence and a whistleblower portal. A union network against forced labour products is also being considered as a means of improving cooperation between authorities.

“However, for those companies that are successful in eliminating forced labour from their supply chains, banned products can be allowed back on the market,” adds Ms Clarke.

Proof in the pudding

Once formally approved by the European Council and published in the EU Official Journal (expected during the autumn of 2024), the FLR enters into force the following day. Thereafter, EU member states will have three years to begin applying the new legislation – an undertaking some commentators believe could meet with limited success.

“We are cautiously optimistic about the FLR’s success in preventing increasing amounts of products made from forced labour from entering or leaving the EU market,” opines Mr Louis. “The FLR’s stringent framework – including a general prohibition on products made with forced labour and rigorous due diligence requirements – is designed to tackle these issues. The threat of severe sanctions, including the prohibition of such products in the EU market, will serve as a strong deterrent for large companies with existing compliance functions.

“However, the FLR’s success will depend on widespread compliance,” he continues. “This, in turn, depends on sufficient efforts to educate businesses big and small, as well as on proactive, effective and equivalent enforcement by all national competition authorities and close cooperation between the EC, member states, customs authorities and international organisations.”

For Ms Clarke, the proof is very much in the pudding. “The FLR is a big step forward in shielding consumers in the EU against products made with forced labour and goes some way to making companies accountable for human rights violations in their supply chains,” she concludes. “There is some evidence in support of import bans leading to corporate practices changing, particularly when they cover bigger markets. The reality, however, is that this evidence is limited.”

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Fraser Tennant