The trend of introducing mandatory supply chain due diligence in the EU
Various supply chain due diligence schemes already govern the placing of goods on the EU market, and several more are currently being adopted by the two EU co-legislators, the Council of the EU (consisting of the member states) and the European Parliament (consisting of directly elected representatives). Schemes that are already in force include the Conflict Minerals Regulation (in force from January 2021); the Timber Regulation (in force from March 2013); the Forest Law Enforcement, Governance and Trade (FLEGT) Regulation (in force from December 2005); and the Kimberley Process Certification Scheme for conflict diamonds (in force from December 2002). Others that are at various stages of adoption and will enter into force in the coming years include the Carbon Border Adjustment Mechanism (CBAM) Regulation, the Deforestation-free Regulation, the Forced Labour Regulation, the Batteries Regulation. All of these schemes have one important thing in common: they all require importers to know how the products they place on the EU market were manufactured and to be able to present documentary evidence upon request to demonstrate it. This evidence must be obtained from suppliers or from the suppliers’ own suppliers. We will review each of these various schemes in a series of client alerts. This is the second alert, focusing on the Forced Labour Regulation. See our previous alert on the Due Diligence Directive.
Background
In her State of the Union speech in September 2021, Commission President Ursula von der Leyen announced the Commission’s intention to propose a ban on products in the market that have been made with forced labour. The Commission initially considered including the ban on products made with forced labour in the Due Diligence Directive proposal (DD proposal), which was announced in February 2022, but it eventually decided to work on a separate legal instrument dedicated exclusively to forced labour.
Key elements
In essence, the Forced Labour Regulation prohibits products made with forced labour being placed on the EU market and exported from the EU.
Forced labour: The term ‘forced labour’ is defined by reference to Article 2 of the International Labour Organization (ILO) Convention No. 29 on Forced Labour as “all work or service which is exacted from any person under the threat of a penalty and for which the person has not offered himself or herself voluntarily”. In essence, it refers to situations where people are forced to work through the use of violence or intimidation, or by more indirect means such as manipulated debt, retention of identity papers or threats of denunciation to immigration authorities.
Broad and general scope: The Forced Labour Regulation applies to all industry sectors; all products, regardless of their origin; and all economic operators, regardless of where they are established (i.e., EU and non-EU) and regardless of their size. In other words, the Regulation applies to all products made with forced labour, whether or not they were (i) manufactured in the EU for domestic consumption or export, or (ii) imported from outside the EU.
Thus, the Regulation, once adopted, is expected to have a significant impact on business because of its broad and general application, because it does not target specific sectors or regions (unlike the U.S. Uyghur Forced Labor Prevention Act) and because it is not limited to companies that meet certain criteria in terms of turnover and the number of employees (unlike the DD proposal).
Enforcement by competent authorities of the EU member states: Under the current draft of the Commission’s proposal, competent authorities designated by the member states will play a key role in implementing and enforcing the Forced Labour Regulation. The competent authorities will conduct investigations and adopt decisions following such investigations. Generally, they will also be in charge of enforcement and the imposition of penalties. Decisions issued by the competent authorities must be communicated “without delay” to customs authorities, who will be responsible for identifying the products concerned and carrying out controls for imports and exports at the EU border.
The Commission’s role in enforcement will be limited to supporting member states by issuing guidelines, maintaining a public database and assisting coordination between the 27 competent authorities through a newly established ‘Union Network Against Forced Labour Products’ platform.
Investigations in two phases: Competent authorities will carry out investigations in two phases. In the preliminary phase, they will assess whether there are reasons to suspect that products are likely to have been made with forced labour. The competent authorities will take a risk-based approach based on all information available to them, which includes (i) independent and verifiable information on the risks that forced labour has been used in the production process; (ii) information on market surveillance and compliance of products shared by other member states; (iii) submissions made by third parties, including civil society; and (iv) information on whether a company carries out forced labour due diligence in its operations and supply chains.
In the second phase, if the competent authorities determine that there is a substantiated concern of forced labour, they will initiate an investigation to establish the existence of forced labour. The competent authorities will have to inform companies of the intention to investigate and the possible consequences. Then, companies subject to an investigation will have 15 working days to provide the requested information to the competent authorities. Further, the competent authorities may carry out checks and inspections in third countries as long as the companies under investigation agree and the third country does not object. Interestingly, the enforcement procedures described in the Commission’s draft are a hybrid of how trade defence (trade remedy) investigations and customs enforcement investigations are run in the EU.
Enforcement and penalties: After completing an investigation, the competent authorities will make a decision. If they cannot establish the existence of forced labour, they will terminate the investigation. However, if they find evidence of forced labour, they will prohibit any products made with forced labour from being placed on the EU market or exported from the EU. If the products are already on the EU market, the companies must recall them and dispose of them at their own cost. If companies do not comply with the decision of the competent authorities, they will face penalties under the laws of the member state of the competent authority.
Expected timeline of application: In the Commission’s proposal, the Regulation will apply two years after its entry into force.
Link with the Due Diligence Directive
On 23 February 2022, the Commission presented a legislative proposal for the Due Diligence Directive proposal (DD proposal). In essence, the Due Diligence Directive requires certain companies to meet due diligence obligations with respect to human rights and environment and provides for an enforcement mechanism with possible sanctions and civil liabilities in case of non-compliance.
There are noteworthy differences between the Due Diligence Directive and the Forced Labour Regulation with respect to the due diligence obligation, scope and consequences of violation:
- Due diligence obligation: The Due Diligence Directive imposes due diligence obligations with respect to human rights, labour standards (including forced labour) and the environment. However, the Forced Labour Regulation only focuses on due diligence obligations with respect to forced labour.
- Scope (companies): the Due Diligence Directive applies only to certain EU and non-EU companies that meet thresholds with respect to turnover and number of employees. By contrast, the Forced Labour Regulation has a broader scope because it applies to all industry sectors; all products, regardless of their origin; and all economic operators, regardless of their size or where they are established. Thus, it applies to considerably more companies.
- Consequences of violation: Failure to comply with the Due Diligence Directive will result in penalties and civil liabilities. There is no ban on the products concerned. The consequence of violation is different under the Forced Labour Regulation. If certain products are found to have been made with forced labour, companies will be prohibited from placing the products on the EU market and exporting or re-exporting them from the EU.
At the same time, the Due Diligence Directive and the Forced Labour Regulation are interlinked in practical terms. The draft Forced Labour Regulation specifically provides that if a company subject to an investigation by the competent authorities of a member state can demonstrate that it has fully carried out its obligations under the Due Diligence Directive, the competent authorities will take this into account in their assessment.
Looking ahead
The FL Proposal will go through the ordinary legislative procedure, which requires the European Parliament and the Council of the EU (composed of the member states) to agree on a single text based on the proposal submitted by the Commission. The Parliament and the Council will examine the text of the Commission’s proposal in the coming months. An agreement on the final text of the Forced Labour Regulation is expected in late 2023, at the earliest.
In-depth 2022-383
