Human trafficking and forced labor Ethical supply chain challenges for multi-national companies www.pwc.com
PwC 2 As US and other Western companies have expanded into new markets in search of business opportunities, they have been increasingly exposed to a range of new ethical risks which require vigilance and enhanced attention. Most recently, multi-national businesses have been particularly focused on battling bribery and corruption across their operations and supply chains. However, these companies must also now take notice of recent wide reaching requirements from several governments aimed at addressing human trafficking and forced labor in corporate supply chains. It is estimated that in excess of 20 million people worldwide are subject to human trafficking, much of which relates to forced/slave labor 1. This forced labor is estimated to generate $150 billion in illegal revenue each year 2. Revenue that is also involved in bribery and corruption, drug trafficking, money laundering, and a variety of other crimes particularly in the developing countries into which US companies have expanded. Lest companies think this does not apply directly to them, there have recently been prominent press reports in the US and EU involving allegations that businesses in the retail, electronics and manufacturing sectors have utilized suppliers who use forced and trafficked labor in their operations. Other similar reports regarding the construction and energy industries have also been published. Some of this occurs via interactions with unscrupulous labor brokers in developing countries who supply illegal laborers to unsuspecting clients. However, given the new requirements discussed in this document, companies cannot turn a blind eye to these issues within their supply chains. The bar was initially set when the California Transparency in Supply Chains Act (the CTSCA ) took effect in 2012. It was then raised last year with the enactment of the UK Modern Slavery Act of 2015 (the Act ) in addition to the release of the Federal Acquisition Regulations amendments on human trafficking (the FAR ) 3 and related rules by various agencies. 4 The bar may be reset again in the not too distant future should the EU and other governments impose similar or additional requirements. In addition to these requirements, President Obama signed a new bill into law on February 26, 2016, which bans the import into the United States of all goods produced by child or forced labor 5. The new law, which went into effect on March 10, 2016, closes a loophole in the U.S. Tariff Act of 1930 that previously allowed these goods to be imported if the products were needed to meet American consumer demand. The legislation is expected to affect imports of 136 goods from 74 countries, including fish, garments, electronics, toys, minerals and precious metals, and building materials, according to the US Department of Labor s Bureau of International Labor Affairs. As a result of the breadth of the requirements and the operations of multi-national organizations, many companies run a high risk of violating them somewhere across their supply chains. As importantly, even inadvertent human trafficking or forced labor in a company s supply chain could appear inconsistent with its business principles and culture. This briefing document summarizes existing human trafficking and forced labor requirements relevant to US companies, how businesses may be affected, and steps that should be considered to address them. As readers will undoubtedly notice, they should begin by leveraging existing ethics & compliance procedures, including those in anti-bribery and anti-corruption and trade sanctions programs. However, it will almost certainly be necessary to expand the breadth and depth of efforts across the supply chain. Given the time and effort required to achieve compliance, companies need to start now in order to meet the various governmental expectations or risk bearing the consequences. 1 Per International Labor Organization estimates 2 Ibid 3 Pursuant to President Barack Obama s 2012 Executive Order 13,627 Strengthening Protections Against Trafficking in Persons in Federal Contracts 4 Including the Department of Defense, the National Aeronautics and Space Administration, and the General Services Administration. 5 The Trade Facilitation and Trade Enforcement Act of 2015
Human trafficking 3 What are the requirements? The California Transparency in Supply Chains Act 1 Who must comply? The CTSCA applies to a retail seller or manufacturer who does business in California and has global gross receipts in excess of $100 million. What must be done 2 by businesses? The CTSCA requires applicable companies to disclose on their websites, accessible by a conspicuous and easily understood homepage link, 3 the steps they have taken to combat human trafficking in their supply chains in five areas. These include, at a minimum: 1. Verifying product supply chains to evaluate and address risks of human trafficking and slavery, including whether the company used a third party verifier. 2. Auditing suppliers to evaluate compliance with company standards for trafficking and slavery in supply chains, including stating whether these are independent and unannounced. 3. Requiring direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business. 4. Maintaining internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking. 5. Providing company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products. What are the consequences of 3 non-compliance? The California Attorney General has exclusive authority to enforce the CTSCA and may file a civil action to compel the disclosure. However, consumer backlash against companies who are not seen to take the law seriously is likely to be a much more severe consequence. 3 If a company subject to the law has no website, it must provide written disclosures within 30 days of receiving a written consumer request for the information.
PwC 4 Federal Acquisition Regulations amendments on human trafficking 1 Who must comply? The FAR amendments apply to new or renewed contracts entered into after the effective date, March 2, 2015, by any organization doing business with the US Government with no de minimis exception. As such, it applies to all 300,000 companies estimated to do business with the US Government and the many thousands who supply goods or services to these direct government contractors basically, the entire supply chain. What must be done 2 by businesses? The rules require US Government contractors and subcontractors to, among other things: Prevent severe forms of trafficking and forced labor by taking concrete preventive steps to ensure employees do not engage in trafficking-related activities. Cooperate with, and provide access to, enforcement agencies investigating compliance with anti-trafficking and forced labor laws. Self-report, upon receipt, any credible information from any source that alleges its employees, its subcontractors, or its subcontractors employees have engaged in conduct that violates the FAR. For contracts for supplies (other than contracts solely for commercially available off the shelf (COTS) items) acquired outside the US, or services to be performed outside the US, with an estimated value over $500,000: - Develop and maintain a detailed compliance plan; - File a certification prior to award that (1) it has implemented an anti-human trafficking compliance plan and procedures to prevent human trafficking violations and (2) has performed due diligence on its agents and subcontractors and taken remedial actions, if necessary; and - File annual certifications confirming the implementation of the compliance plan and, after a due diligence inquiry, that neither it nor its employees engaged in any human trafficking activities or, if a violation is identified, the contractor took appropriate remedial actions. Contractors are also expected to prevent subcontractors, including agents and other intermediaries, at any tier from engaging in trafficking in persons and must monitor, detect, and terminate any subcontractors or subcontractor employees that have engaged in such activities at any tier. Given their extensive supply chains and the often opaque nature of human trafficking, this presents a very real challenge to US Government contractors. Further, the actions of a subcontractor at any level in the supply chain can have a negative impact on contracting for the prime contractor. The good news is that, as with compliance due diligence measures designed to meet other existing legal and regulatory requirements, including anti-bribery/anti-corruption and trade sanctions, the due diligence required for these contracts should be risk-based. However, this requires an adequate risk assessment of the supply chain in order to determine what is appropriate to the size and complexity of a particular contract. That means devoting the necessary time and effort to implement measures beyond simply collecting subcontractor certifications. As a result, government contractors need to proactively assess their current ethics & compliance procedures to determine whether they are fit for purpose given the new requirements and begin making necessary enhancements now. What are the consequences of 3 non-compliance? Consequences for not meeting the bar under the FAR amendments and related rules are potentially severe and include contract suspension or termination, debarment, imprisonment, False Claims Act/qui tam actions, class action lawsuits, and consumer boycotts.
Human trafficking 5 The UK Modern Slavery Act of 2015 1 Who must comply? What must be done 2 by businesses? While not all of the Act is directly relevant for businesses, section 54 entitled Transparency in supply chains etc, which went live on October 29, 2015, will have a direct impact on the corporate sector. This section applies to all public and private companies and partnerships wherever they are incorporated or formed who have a global turnover 4 of over 36 million and carry on a business or part of a business, i.e. provide goods or services, in any part of the UK. This is estimated to include approximately 12,000 businesses. Similar to the CTSCA, all obligated businesses must publish a slavery and human trafficking statement (the statement ) on their websites with a prominent link to it on the homepage. The statement will be retrospective should disclose: The steps a business has taken during the financial year to ensure that slavery and human trafficking is not taking place in its operations and supply chain; or That a business has taken no such steps. The Act states that businesses should publish their statements as soon as reasonably practicable after the end of each financial year. While the Act does not set a deadline for when a statement must be published, businesses should look to publish their statements within six months. In practice, we expect most businesses to publish their statements at the same time as their annual report and accounts. It must be approved by the Board of Directors and signed by a Director in the case of a corporate entity or by designated members, general partners, or partners depending on the form of partnership. While a business would technically fulfil its regulatory requirement by publishing a statement explaining that it had taken no steps, this introduces additional reputational risk. As a result, it is not expected that many companies will take this option. The UK Government has stressed that the contents of the statement are not prescribed and that it is up to each company to decide on the content of its statement. However, the Act describes six areas which are recommended for inclusion including: 1. The business structure and a summary of its operations and supply chains. 3. Due diligence processes in relation to slavery and human trafficking in the business and its supply chains. 5. The effectiveness of the business approaches in ensuring that slavery and human trafficking is not taking place in it or its supply chains measured against performance indicators the business considers appropriate. 2. Any policies relevant to slavery and human trafficking. 4. The parts of the business and its supply chains where there is a risk of slavery and human trafficking taking place, and the steps the business has taken to assess and manage that risk. 6. Training about slavery and human trafficking provided to the business employees. 4 Total turnover will be the total net turnover of the commercial organization, meaning the total amount of revenue derived from all global sources (including subsidiary undertakings), after deduction of trade discounts, value added tax and any other taxes based on the amounts so derived. This is a commonly used and understood definition from the Companies Act for businesses to determine their size for the purposes of complying with that Act.
PwC 6 The UK Modern Slavery Act of 2015 What are the consequences of 3 non-compliance? 4What happens next? The UK Secretary of State could force an organization to disclose the statement through an injunction. However, the UK Government has made it clear that it is hoping that pressure from stakeholders will encourage businesses to comply without it needing to bring civil proceedings in the UK High Court. As a result, similar to the CTSCA, consumer backlash could be a severe consequence for many businesses who fail to comply. Further, if directors of companies fall foul of certain requirements under the Act, it could potentially lead to their organizations being debarred from public contracts opportunities. There are transitional arrangements to allow businesses time to adjust to the new requirements. Those entities whose year-end is on or before March 30, 2016 will not need to publish a statement for their 2015-2016 financial year. However, those entities with a year-end on or after March 31, 2016 should complete and publish their first statements within six months from the date of their next financial year end which for some would be as early as September 2016. While that may sound like plenty of time, being able to make an adequate statement means starting to compose and implement the necessary policies and procedures now. For more details, please contact: Todd Ranta (214) 754 4513 todd.c.ranta@pwc.com Larry Rosipajla (720) 931 7035 larry.a.rosipajla@pwc.com Brent McDaniel (214) 754 7564 brent.d.mcdaniel@pwc.com Shane Owens (214) 754 5314 shane.owens@pwc.com Christoph Hahn (904) 501 8317 christoph.b.hahn@pwc.com 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
PwC 7 How can we help? We have the technical expertise to support you in meeting the requirements of the various human trafficking and forced labor laws and regulations and tackling the risk of human trafficking and forced labor in your supply chains. We understand that these actions need to be relevant to your unique context, and we will draw on our compliance experience with clients across a range of sectors and organizational size and complexity. Specifically, we can: Assess your current compliance program against the various human trafficking and forced labor requirements and assist with necessary enhancements Conduct a supply chain risk assessment to determine higher risk areas for enhanced procedures and assist with these procedures Develop a strategy for and conduct risk-based due diligence of suppliers Conduct supplier audits and assist with necessary remedial efforts, including assisting with identifying and onboarding alternative suppliers if necessary Establish program Key Performance Indicators and execution of ongoing monitoring, including via data analytics and other technology Train employees and suppliers Advise on, draft, or review human trafficking reporting Conduct investigations as incidents arise, assist with remediation and self-reporting, and help manage crisis situations For more details, please contact: Todd Ranta (214) 754 4513 todd.c.ranta@pwc.com Larry Rosipajla (720) 931 7035 larry.a.rosipajla@pwc.com Jeannette Chu (703) 762 7250 jeannette.l.chu@pwc.com Christoph Hahn (904) 501 8317 christoph.b.hahn@pwc.com Brent McDaniel (214) 754 7564 brent.d.mcdaniel@pwc.com Shane Owens (214) 754 5314 shane.owens@pwc.com 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.