complying with the executive order against trafficking in federal Contracts Of the 20.9 million

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1 40 Contract Management March 2014

2 Contract Management March

3 Of the 20.9 million people conservatively estimated by the International Labour Organization to be in forced labor around the world at any given time, 14.2 million, or 68 percent, are victims of exploitation in private sector economic activities such as manufacturing, construction, agriculture, and services. 42 Contract Management March 2014

4 Human trafficking and forced labor is big business. The illicit profit generated globally by trafficked forced laborers is estimated by the International Labour Organization to be $32 billion annually. This is in addition to the $21 billion annual cost of coercion to individual workers in lost wages, illegal deductions, and excessive recruitment fees. Forced labor and human trafficking are crimes in virtually every country in the world and violations of international human rights law. Legislation is increasingly being used to induce companies to do more to rid their global supply chains of these abuses. For example, the California Transparency in Supply Chains Act 2010 applies to an estimated 3,200 manufacturers and retailers with global annual revenues of over $100 million that do business in California and requires companies to disclose actions taken to detect and address the presence of forced labor and human trafficking in their supply chains. As the largest single buyer of goods and services in the world, the U.S. federal government is taking substantive and far-reaching steps to ensure that its procurement dollars are not contributing to forced labor. The Executive Order, Strengthening Protections against Trafficking in Persons in Federal Contracts, signed by President Barack Obama in September 2012, will require federal contractors and subcontractors to take specific proactive preventive measures to detect and eliminate human trafficking and forced labor in their supply chains. The Executive Order is designed to bolster the U.S. government s zero-tolerance approach to trafficking in persons in federal contracts. It amends federal contracting regulations to include stricter prohibitions of trafficking-related activities and, in the case of contracts exceeding $500,000 performed abroad, an obligation to develop and implement detailed and potentially onerous compliance plans. In September 2013, following a public consultation period, the Federal Acquisition Regulation (FAR) Council and the Department of Defense (DOD) issued proposed rules to give effect to the Executive Order. The proposed rules impose a very broad due diligence requirement on both prime and subcontractors. The FAR Council and DOD have solicited comments on the proposed rules, which will likely be finalized early this year. Given the lengthy consultation period prior to the publication of the proposed rules, it is likely the final rules will not be materially different. The proposed FAR rules go significantly beyond the zero tolerance approach to criminal acts such as labor trafficking, forced labor, sex trafficking, and procuring commercial sex during periods of federal contract performance by prohibiting a range of traffickingrelated activities that are omnipresent in global labor supply chains, including: The confiscation, retention, denial of access to, or destruction of employee identification or immigration documents; Fraudulent or misleading information concerning recruitment and selection practices, such as contract substitution; Recruitment or placement fees charged to employees; and Failure to provide specific contract terms in writing in the putative employee s native language prior to departure from their home country. The compliance and enforcement regime envisaged by the Executive Order significantly exceeds preexisting state-level and proposed federal disclosure requirements. Companies who sell goods and services to the federal government will be held directly accountable for the conduct of their subcontractors, suppliers, and agents. They will also be required to self-report on the presence of credible information related to prohibited activities and remedial action plans. The potential penalties for noncompliance will include subcontractor removal, contract termination, and debarment from bidding on future federal contracts. It has even been suggested that noncompliance could potentially result in liability under the False Claims Act and criminal sanctions. The Executive Order should be of interest to every company with a global supply chain. The policy objectives include providing a roadmap for all companies to ensure that consumer dollars are not contributing to forced labor and human trafficking. It is highly likely that the compliance standards applied to federal government contractors will ultimately be expected of all businesses. What Does Compliance Involve? Government contractors and their subcontractors covered by the Executive Order will be required to implement a robust compliance plan with very specific program components to address forced labor and human trafficking. Detecting and preventing these abuses requires a bright light to be shone in all the places where a company manufactures or sources goods, services, or raw materials. Although detecting and proactively preventing situations of forced labor and trafficking will be challenging for many companies, those with well-established compliance plans in areas such as anti-corruption and anti-bribery will see that this risk-based approach is familiar and effective. How Should Companies Prepare For The Emerging And Evolving Forced Labor And Human Trafficking Compliance Regime? 1. Start with a Focused Risk Assessment A tailored risk assessment is the first step in detecting and preventing human trafficking and forced labor in an extended global supply chain. Companies should focus on high-risk countries where top-tier suppliers or subcontractors have operations involving commodities, components, or services associated with human trafficking and forced labor. These abuses are complex and their manifestation is Contract Management March

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6 frequently subtle and hidden particularly where there are subcontractors, business agents, or labor brokers in the supply chain. In order to assess risk and the potential of exposure to human trafficking and forced labor in their supply chain, companies first need to understand the enabling factors or red flags that apply in different regions of the world. These red flags include the following: Migrant labor in a supply chain. This is particularly a problem when labor is sourced through a network of labor brokers who may use sub-brokers or agents in sending countries. Malaysia, among the largest importers of labor in Asia, is one such example. It is estimated to contain between 1.9 and 2.1 migrant workers or 20 percent of the labor force, the overwhelming majority from Indonesia, Nepal, India, and Vietnam. Risk assessments recently conducted by Verité for major global companies uncovered trafficking and forced labor abuses in the manufacture of their products in Malaysia and other countries in Asia. These focused investigations of third-party supplier operations covering sectors as diverse as electronics and food processing, identified numerous violations of codes of conduct and host country laws. Any company sourcing in Malaysia runs an elevated risk of forced labor in their supply chain. Recruitment fees. When migrant workers pay fees to recruitment or labor brokers at different stages of the hiring process, they often find themselves in debt to an unscrupulous broker or employer sometimes before they have started work or even commenced their journey. Frequently, the fees and interest rates charged are fraudulent, excessive, or illegal. Front-loaded worker debt combined with deception about promised terms and conditions of employment, transportation, visa status, accommodation, and repatriation effectively create a bonded or forced labor situation. Private employment agents or labor brokers. Where contractors, subcontractors, or suppliers use third-party agents or brokers to manage the recruitment, selection, and employment of foreign migrant workers, there is an elevated risk of exposure to trafficking-related activities, particularly where there is inadequate due diligence or oversight. The risk arises from the fact that these third parties must interact with foreign government officials to obtain work and travel permits, visas, etc. It is a matter of public record that these agents and brokers pay bribes to an assortment of players in the foreign labor supply chain involved in immigration, border control, and law enforcement. The extremely high correlation between government corruption and trafficking in persons for labor exploitation also creates potential liability under the Foreign Corrupt Practices Act (FCPA). Foreign migrant labor from specific sending countries. The plight of foreign migrant workers employed in the construction and service sectors in the Gulf States is a case in point. Verité has found that migrants in major recruitment regions of India step into forced or bonded labor when they pay recruitment fees well above the legal limit to local agents, in addition to a main agent in Mumbai or Delhi who is recruiting directly for an employer in one of the Gulf States (typically Saudi Arabia, Oman, Qatar, the United Arab Emirates, or Kuwait). Indian migrant workers recruited in this fashion often pay aggregate fees of up to `100,000 (Indian rupees) five times the `20,000 limit prescribed by The Executive Order is designed to bolster the U.S. government's zerotolerance approach to trafficking in persons in federal contracts. Indian law ( Employment (Amendment) Rules 2009, Section 13 ). Workers fund these up-front fees through loans at rates equivalent to 60 percent per annum. On average, an Indian migrant worker can expect to earn the equivalent of $2,540 per annum in construction in the Gulf. It can take these migrant workers over two years to pay back the recruitment fee loan before they start to have disposable income. This constitutes forced or bonded labor. The presence of migrant workers in any sector or country from sending countries such as Bangladesh, Nepal, Indonesia, Vietnam, Thailand, Myanmar, and the Philippines is a major risk factor. Inadequate receiving country legal protections. These inadequate legal protections, coupled with limited or no visibility into contractor supply chains, mean such practices are often shielded from view. Verité s experience over a 15-year period is that the mechanics of the routes into bonded and forced labor are consistent across many sectors, regions, and countries. A credible risk assessment will, at a minimum, involve a focused examination of identified hot spots. Targeted investigations of representative subcontractor or supplier sites in identified high-risk areas or industry sectors will assist companies in assessing the specific nature and extent of the potential compliance exposure in their supply chain. 2. Develop a Detailed Compliance Program Once the nature and scope of potential risk in the supply chain is understood, the next step is to develop and deploy a detailed compliance plan that includes the following: Contract Management March

7 Corporate-level policy commitments, Revised terms and conditions of business, Subcontractor and supplier codes of conduct, Measurable standards, and Reporting mechanisms. In many respects, the structure and components will be similar to those contained in an FCPA compliance program. Corporate policy statements and supplier code of conduct provisions should go beyond general prohibitions of forced labor and traffickingrelated activities and include express provisions that directly address risk enablers such as: Recruitment fees, Document retention, Worker deposits, Contract terms, and Due diligence requirements where private employment agencies and labor brokers are used to recruit, hire, and manage migrant labor. Codes and compliance plans should contain clear benchmarks or standards for suppliers that can be audited and verified. Best practices include prohibiting recruitment fees charged to migrant workers and holding their passports, visas, work permits, or other personal documents. Some sending countries such as Nepal, the Philippines, Bangladesh, India, Vietnam, and Indonesia limit fees that can be charged to migrant workers. 3. Communicate and Train Human trafficking and broker-induced forced labor are hidden and frequently the consequence of insidious pressures and exploitation at each stage of the recruitment and hiring process and at multiple levels in extended supply chains. It follows that companies should seek to communicate and provide training on their policy commitments, codes of conduct, compliance benchmarks or standards, and reporting requirements broadly and deeply in their own organization and across their supply chains. Forced labor and human trafficking are crimes under international human rights law and in most countries around the world. If a case of forced labor or human trafficking is identified in the supply chain, it is essential that the company and its supplier respond immediateand broker-induced forced labor are hidden and frequently the consequence of insidious pressures and exploitation at each stage of the recruitment and hiring process and at multiple levels in extended supply chains. Communication and training initiatives should initially target at-risk countries and business processes identified in the risk assessment phase before rolling out to all operations within the supply base. For example, if a company knows that the recruitment and on-site management of migrant workers at an electronics supplier in Taiwan, Malaysia, or Singapore is outsourced to a private employment firm or broker, then the communication and implementation of the compliance plan in that part of the supply chain should be prioritized. Training programs can be held in person or online. They can be part of a company s existing ethics and compliance program or facilitated in partnership with industry groups or other stakeholders. Effective communication and training programs have proven to be key steps in detecting and preventing egregious abuses in the recruitment of vulnerable migrant workers. 4. Monitor, Audit, and Remediate Monitoring is concerned with identifying gaps in compliance programs and codes of conduct on an ongoing basis and taking prompt and concrete steps to remediate. Social audits are the primary tool used by companies to verify their own and suppliers facilities for compliance with corporate policies and codes and to detect violations. Social auditing, however, provides a limited review of working conditions at a factory or facility level that may not illuminate systemic issues in company supply chains, such as migrant workers vulnerability to human trafficking and broker-induced forced labor before they arrive at the workplace. Periodic assessments of high-risk supply chains including labor brokers and other intermediaries that recruit and manage migrant workers is necessary to detect indicators of forced labor and human trafficking. It also mitigates risk by strengthening policies and codes, audit procedures, and the capacities of frontline auditors. 46 Contract Management March 2014

8 ly and unequivocally. This should involve an immediate investigation, a clear identification of the workers affected, and a full understanding of the nature of the abuse. The company will need to determine the extent and form of the problem before it can institute the protective and preventive measures that will be required to remediate. The immediate corrective action response could involve the repayment of wage garnishments for visas or work permits and reimbursement of excessive recruitment fees, if applicable. Passports or other identity documents that have been withheld should be returned. Migrant workers affected by code of conduct violations should be repatriated at no cost. About the Author DECLAN CROUCHER is a director at Verité, a Massachusetts-based international not-for-profit consulting, training, and research organization that has been a leader in supply chain social responsibility since Verité helps companies detect and prevent forced labor and human trafficking through risk assessments, code of conduct and compliance plan development, communications and training, reporting and internal control mechanisms, investigations, monitoring, and evaluation of program effectiveness. Send comments about this article to cm@ncmahq.org. To prevent future problems, companies should undertake a root cause analysis to ensure that the problems are effectively addressed and the company s risk of recurrence is mitigated. Longer-term responses to findings may include the development or strengthening of codes, standards, and audit processes to proactively screen for these risks going forward. 5. Perform Periodic Program Reviews Topic-specific, risk-based global compliance programs dealing with complex issues such as human trafficking and forced labor can benefit from periodic, credible, and independent reviews by subject matter experts. A company s risk within its supply chain will be influenced by the legal framework in the receiving country and several sending countries, as well as the effectiveness of local country implementation. Third-party reviews can assist companies with understanding the various government regulations, and leverage best practices and the experiences of other companies operating in the industry sector or high-risk countries. Where global compliance is mandated by state or federal regulations, external reviews of programs can help to demonstrate good-faith efforts to implement a compliance program tailored to the company s specific international risk profile. conclusion Supply chain transparency for companies with extended global supply chains can be challenging. Forced labor and human trafficking invariably results from inadequate controls within supplier or subcontractor labor-related business processes. Companies that are effectively addressing the scourge of modern day slavery use a risk-based approach to evaluate the capability and willingness of their suppliers and subcontractors to understand and address the risks. Failure to ask the right questions and ensure accountability throughout the supply chain unnecessarily exposes companies to risk. Only effective due diligence by global businesses can prevent the continuing and largely hidden tragedy faced by millions of workers forced to work in terrible conditions, and to comply with emerging and evolving regulatory regimes. CM Contract Management March