Companies are devoting more effort, thought, commitment and resources to environmental, social and corporate governance (ESG) considerations in all of their industries. The focus of ESG has mainly focused on climate change and sustainability, but the “S” of ESG is becoming increasingly important to consumers and other stakeholders. As global corporate citizens increasingly speak out about asserting their identity and values, it is critical to reflect on how their global trade and compliance policies and supply chains reflect these values. Issues like forced labor in the supply chain, third-party diligence, and how to create an ethical culture are integral parts of a strong compliance program. But these issues also provide opportunities for businesses to fundamentally reflect their values and meet what consumers demand with their money.
We focus here more particularly on the issue of forced labor related to Uyghur Muslims in the Xinjiang region. Not only is the issue of forced labor in supply chains coming under scrutiny due to media reports and activist work, but regulators are also paying more attention to this issue, to namely US Customs & Border Protection (CBP). Consumers are increasingly using their purchasing power to reward companies that take meaningful steps to ensure their supply chains are free from forced labor and child labor, and to punish companies that do not.
Companies need to take a close look at their business and regulatory compliance infrastructure to ensure that they are not only implementing best practices to reduce legal risk, but also to affirm their commitment to ESG. Below, we discuss the background and steps businesses can take as best practices.
The US government has dramatically increased its surveillance of products made by forced labor, especially in China’s Xinjiang region. Since 2019, CBP has issued a series of Suspension Orders (WROs) on imports, including cotton and tomato products, and, most recently, solar panels (see our blog posts here and here) – where CBP believes that these imports involve the use of forced labor. In addition, the Commerce Department added more than 40 Chinese companies to the list of entities of the Bureau of Industry and Security (BIS) related to human rights violations in Xinjiang; and the Treasury Department through the Office of Foreign Assets Control (OFAC) sanctioned various entities and politicians in Xinjiang.
On July 13, 2021, several agencies, including the Departments of State, Commerce, Homeland Security, Labor and Treasury, as well as the US Trade Representative, released an update to the “Xinjiang Supply Chain Business Advisory ” (” Opinion “). . The advisory notes that “businesses and individuals who do not exit Xinjiang-related supply chains, businesses and / or investments could be at high risk of violating US law.” The opinion followed the EU guidelines on forced labor, published on July 12, 2021.
The increased attention of agencies should be seen as a stern warning to companies with global supply chains – especially those that use components and sub-components (i.e. inputs, including raw materials) from Xinjiang. But more importantly, given the issue of forced labor more broadly, companies engaged in ESG and speaking out on stakeholder values should assess their internal policies, procedures and compliance frameworks to ensure they are ensure that they maintain ethical sourcing practices. We believe that the best practices below can help companies protect against enforcement and mitigate regulatory risks, but also be incorporated into their ESG programs.
ESG policies prohibiting forced labor: Your company may have a corporate social responsibility (CSR) program, but the CSR programs of the past have been replaced by more holistic and comprehensive ESG programs. Companies must ensure that their ESG policies and code of conduct are transparent, comprehensive and clearly prohibit forced labor. The best ESG programs implement the core labor standards of the International Labor Organization which include: (1) freedom of association, (2) collective bargaining, (3) discrimination in employment, ( 4) child labor, (5) forced labor, (6) work safety and health, (7) wages and (8) working hours. Make sure your program includes a supplier code of conduct that addresses ethical and sustainable sourcing.
Supplier relations: When monitoring your suppliers, make sure forced labor is part of your due diligence. Make sure that your contracts with your suppliers and subcontractors include explicit terms and conditions that prohibit the use of forced labor, a time frame for taking corrective action if forced labor is identified, and the consequences that may arise if any action is taken. corrective measures are not taken. Since your existing contracts don’t include such language, consider adding it when you renegotiate or make sure your suppliers agree to abide by your policies and code of conduct.
Supply chain assessments: If you work in an industry under intense scrutiny or if your supply chain is particularly exposed to the risks of forced labor, consider conducting a supply chain audit or assessment with the help of a third party . Audits may consist of on-site visits; interviews with workers and management; assessment of labor brokers and recruiters; and presentation of the final report and results. A full third-party audit and on-site visits with overseas suppliers may not always be feasible, but a lighter assessment involving questionnaires, high-level interviews and document review might also prove useful. to provide high level information and understanding of gaps and areas for improvement. Consider ranking vendors based on these ratings, so your sales teams can be empowered to work with the highest rated vendors.
Training (internal and external): Train relevant internal and external stakeholders on forced labor issues and take the opportunity to discuss your company’s values and commitment to ethical sourcing. Employees with compliance responsibilities and those responsible for sourcing products from international vendors and suppliers should be trained on how to spot problems and identify red flags. Keep records of these trainings and update them as regulations and risks change. In addition, the company should consider training other stakeholders involved in the supply chain, such as salespeople or agents; suppliers at various levels of the supply chain; and labor brokers, recruiters and employment agencies.
Map your supply chain: Consider a supply chain mapping exercise to identify your suppliers and subcontractors and, if possible, assess your supply chain at the raw material level. This exercise, while certainly a challenge for companies with complex supply chains, will help you assess risks and focus your compliance efforts where they are needed most. From our experience, it appears that CBP expects importers to be able to trace the level of raw materials. If you are faced with regulatory investigations, the exercise can prove invaluable.
Access to recordings: Often, when faced with a government investigation, you have to prove a refusal – to demonstrate that your imports are not produced by forced labor. In addition to making sure that all of your compliance steps, as outlined above, are well documented and organized, make sure that you can access your suppliers’ records as needed. Your suppliers and potentially their suppliers will likely ask you for labor / employment and global trade information (including how workers are hired, whether recruiters or brokers are involved, and employment contracts). Make sure that your agreements include provisions regarding access to certain records and that there is an agreement between the parties regarding the provision of information upon request.
Monitoring and continuous improvement: The most effective and successful compliance programs are those that continually evolve to address new risks and address stakeholder concerns. This requires self-assessment, monitoring and the implementation of necessary improvements. Sometimes this can mean diverting resources from low risk areas to higher risk areas. And when it comes to ESG considerations, we will continue to see heightened awareness in some areas that require more attention and effort from companies.
Ultimately, we believe that centering your supply chain and broader compliance efforts around your ESG values and commitments will empower your employees, reduce your risks, and reap both business and societal benefits.
Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 265