The Red Flag Group®
An ambitious step to combat supply chain human rights issues

An ambitious step to combat supply chain human rights issues

An ambitious step to combat supply chain human rights issues

Many of the more serious cases of human rights violations in business take place in the supply chains of corporations across multiple industries – from forced labour on construction sites and human trafficking on product lines to child labour in manufacturing plants. Different countries have therefore enacted laws setting certain human rights standards for companies to follow.

The 2010 California Transparency in Supply Chains Act in the United States and the 2015 Modern Slavery Act in the United Kingdom are two prominent examples. Also in the United States, amendments to the Federal Acquisition Regulation – aiming to eliminate trafficking within the supply chains of government contractors – were passed and became effective on 2 March 2015.

These pieces of legislation are all still very limited in scope, however, and are not comprehensive enough to cope with the various issues surrounding human rights violations in the private sector.

In an attempt to take a bold step forward in tackling human rights violations in the supply chains of the commercial sector, the bill for the United States’ Business Supply Chain Transparency on Trafficking and Slavery Act was introduced in July 2015. The bill is a proposed amendment of Section 13 of the Securities Exchange Act of 1934. In a nutshell, it advocates the requirement of publicly-traded companies to disclose policies and efforts aimed at ridding their supply chains of slavery and human trafficking more broadly and more specifically.

Proposed requirements

The bill proposes that publicly-traded companies with over US$100 million in annual worldwide gross receipts must disclose the works they have voluntarily undertaken relating to the removal of labour abuses from their supply chains. These disclosures must be made on their websites and in yearly reports to the Securities and Exchange Commission.

Affected companies should place easy-to-find links on their websites to a ‘Global Supply Chain Transparency’ page, and on that page various disclosures should be listed under a heading of ‘Policies to Address Forced Labour, Slavery, Human Trafficking, and the Worst Forms of Child Labor’. As also proposed in the bill, various measures and actions conducted by the companies should be published and disclosed publicly, including:

  • policies and corresponding enforcement to identify and eliminate risks of forced labour, slavery and trafficking (i.e. any labour practice or trafficking activity in violation of national and international standards) and child labour in the supply chain
  • policies and corresponding enforcement to prohibit their employees and those associated with their supply chains from engaging in commercial sex acts with minors (it is noteworthy that the bill defined the term ‘supply chain’ to include all labour recruiters, suppliers of products, components parts of products and raw materials used by the company in the manufacturing of its products, whether or not the companies have direct relationships with the suppliers)
  • the engagement of a third-party evaluation on the risks of forced labour, slavery, trafficking and child labour in their supply chains, including a description and explanation of measures taken to eliminate and mitigate the risks, and the results of consultations with labour unions, worker associations or workers
  • the execution of supplier audit programmes, including results of investigations into suppliers’ labour practices, verification of whether suppliers have appropriate systems in place to identify the risks of forced labour, slavery, trafficking and child labour within their own supply chains, and evaluation of those systems if they comply with the company’s own compliance framework and policies
  • policies requiring suppliers to attest that both the materials they manufacture and their recruitment of labourers are carried out in compliance with laws concerning forced labour, slavery, trafficking and child labour
  • records of regular reviews on internal accountability standards, supply-chain management and procurement systems, as well as reporting procedures for employees, suppliers, contractors or other entities in their supply chains who fail to meet the company standards on forced labour, slavery, trafficking and child labour
  • policies on training employees and managers who have direct responsibility for the supply chain on issues relating to forced labour, slavery, trafficking and the worst forms of child labour, especially with respect to mitigating risks within the supply chains
  • policies to ensure that suppliers’ recruitment practices comply with both the company compliance framework combatting exploitative labour practices and the audits of labourer recruiters
  • policies to ensure remedial action (i.e. activities or systems that the company puts in place to address any non-compliance identified through monitoring or verification) is provided to victims where forced labour, slavery, trafficking and child labour are identified in supply chains, including support for programmes designed to prevent such events in the industry or sector where they are identified (the bill notes without elaboration that these systems ‘may’ apply to either individuals adversely impacted by the non-compliant conduct or to address ‘broader systematic processes’).

What does the Business Supply Chain Transparency on Trafficking and Slavery Act mean to the compliance industry?

Although still under consultation, the bill for the Business Supply Chain Transparency on Trafficking and Slavery Act suggests that the United States Government is taking a broader and stronger stance on addressing adverse human rights issues in commercial corporate operations.

The due diligence processes and independent audit programmes that the proposed legislation advises companies to implement show that compliance can be a significant investment. The bill can also be viewed as a clear statement to private companies and corporations that ignorance of third parties engaging in human rights violations is no longer an acceptable excuse – companies now have a clear obligation to manage their suppliers and other third parties.

Yet, while the bill proposes that obligating companies report on whether they maintain and enforce policies to identify and eliminate cited supply-chain risks, some have been critical that the measure does not mandate companies to maintain and enforce such a policy.

Rights violations should be viewed as a potentially huge reputational and operational risk for many companies, particularly those in manufacturing-oriented industries. It is still highly recommended for companies to conduct relevant compliance framework reviews and policy checks to the extent that they are able. Moreover, upon the potential passage of the Act, companies that do not take any action to combat labour abuse will still be obligated to disclose that they adopt no relevant policies. And, in doing so, they could invite negative implications for their reputation.

The bill for the Business Supply Chain Transparency on Trafficking and Slavery Act is indicative of a global trend of the public sector focusing more on preventing human rights violations. Companies are therefore advised to take the first step to enhance their compliance frameworks and implementations. The scopes of compliance programmes need to be wider and more extensive than simply emphasising anti-corruption and anti-bribery issues.