Background
On 14 September 2022, the European Commission presented its proposal for a Forced Labour Regulation (see our previous client alert), as part of a suite of regulatory changes aimed at cross-border supply chains.
In November 2023, the European Parliament adopted its position on the Commission’s proposal and the Council of the EU adopted its General Approach in January 2024. Following intensive inter-institutional negotiations, the Council of the EU and the European Parliament (as EU co-legislators) reached a provisional agreement on the text of the Forced Labour Regulation on 5 March 2024. It was adopted by the Parliament on 23 April 2024 and will be formally endorsed by the Council in the coming weeks.
Key elements of the agreement
The Forced Labour Regulation prohibits products made with forced labour (including child labour) from being placed on the EU market or exported from the EU. It establishes a framework for enforcement of the ban through investigations, new digital tools and cooperation amongst Member States and their national competent authorities.
Broadest scope.
The Forced Labour Regulation is not sector-specific and covers all products and all companies (regardless of their size), preventing them from making such products available in the EU or exporting them from the EU.
Investigations by the national competent authorities in EU Member States.
The competent authorities designated by the Member States will be charged with implementing and enforcing the new rules. They will be responsible for conducting investigations into suspected use of forced labour and taking the final decision at the conclusion of the investigation.
Investigations outside the EU by the Commission.
In exceptional circumstances and where the risk of forced labour is located outside the EU, the Regulation gives the Commission the power to undertake investigations in non-EU countries, if it is able to secure the agreement of the operators concerned and the government of the third country has been notified and does not object.
Enforcement and penalties.
Where evidence of forced labour is found, the final decision on non-compliant goods will be taken by the authority leading the investigation. It can order the withdrawal or disposal of non-compliant goods from the EU market or online marketplaces or order confiscation of the goods at the border. Such a decision will be applicable across all EU Member States.
Non-compliant products subject to enforcement measures must be donated to charitable or public interest purposes (only if goods are perishable), recycled or destroyed at the expense of the company concerned. If a violation affects only a replaceable part of a product, an order to dispose will only apply to that part. However, companies that then eliminate forced labour from their value chain may subsequently be allowed to place those products into the EU market.
Failure to comply with the ban on forced labour will also give rise to penalties that are to be set by Member States. For certain goods which are of strategic importance to the EU, the authority can decide to withhold the goods until the company eliminates the forced labour found in its supply chain.
High-risk sectors, regions and products.
The Commission is set to establish a database of economic sectors and geographical areas that present a risk of state-imposed forced labour. The list does not create a rebuttable presumption of forced labour being present in the identified sectors and regions, but being included on the list can serve as one of the criteria in the decision whether to open an investigation.
The aim is for the national competent authorities to adopt a risk-based approach in their assessment of potential non-compliance that will prioritise investigations based on scale and severity; likelihood of state-imposed forced labour; ratio of products or parts likely to involve forced labour; proximity of a company’s operation to suspected forced labour; and leverage of the company to mitigate or end forced labour.
Alongside the list of sectors and areas, the Commission will also identify specific products or product groups that will be subject to heightened scrutiny by authorities. For those products, importers and exporters will be required to present additional information to EU customs authorities (e.g., manufacturer’s or supplier’s information).
New digital tools for industry support, enforcement and cooperation.
To improve transparency and enforcement of the new framework, the Forced Labour Single Portal, which is to be established by the Commission, will include guidelines, information on bans (including any withdrawal of a ban and the result of reviews), geographical risk areas, and a sector and products database, as well as a whistleblower portal.
Additionally, the cooperation between national authorities will be supported by a new Union Network Against Forced Labour Products. The latest version of the Forced Labour Regulation that was adopted also foresees cooperation with non-EU countries in the context of existing dialogues (e.g., a trade and sustainable development (TSD) chapter in trade agreements and a Generalised system of preferences (GSP)). This cooperation would include information exchange on risk areas or products and sharing best practices among countries.
The framework established by the Forced Labour Regulation will reinforce the current tools available to the EU to combat forced labour, such as the Single Entry Point complaint procedure system launched in 2020, which enables EU civil society organisations and businesses to alert the EU to alleged breaches of market access and sustainability commitments. This complaint mechanism has already resulted in Peru and Brussels agreeing on concrete steps to be taken to fight child labour and forced labour. More recently, several NGOs submitted a complaint to the Single Entry Point system (EU level) regarding alleged violations of workers’ rights in Vietnam under the sustainability chapter of the EU-Vietnam Free Trade Agreement.
Link with the Corporate Sustainability Due Diligence Directive
On 24 May 2024, the Council of the EU gave its final stamp of approval to the text of the Corporate Sustainability Due Diligence Directive (CS3D). (See our previous client alert.) The CS3D is the most recent supply chain due diligence mechanism approved in the EU. It requires in-scope companies to meet due diligence obligations on human rights (including forced labour) and environmental risks.
There are noteworthy differences of approach between the CS3D and the Forced Labour Regulation with respect to the due diligence, scope of application and consequences of violation:
- Due diligence obligation: The CS3D imposes due diligence requirements with respect to human rights, labour standards (including forced labour) and environment regulations. The Forced Labour Regulation (as the name suggests) only focuses on forced labour.
- Scope (companies): The CS3D applies only to EU and non-EU businesses that meet certain turnover thresholds and (in the case of EU businesses) number of employees. By contrast, the Forced Labour Regulation applies to all industry sectors; all products, regardless of their origin or value threshold; and all economic operators, regardless of their size or where they are established.
- Consequences of violation: Failure to comply with the CS3D may result in penalties and civil liabilities and requires mitigation measures to be taken in order for goods to cross EU borders, but there is no direct ban per se on market entry or circulation of products. The consequence of violation is different under the Forced Labour Regulation. If products are found to have been made with forced labour, companies will be prohibited from placing the products on the EU market or exporting or re-exporting them from the EU.
Although complying with the CS3D will, to a large extent, result in compliance with the Forced Labour Regulation, the CS3D expressly provides that where there is a conflict with another EU act that provides more extensive or more specific obligations on the matter (for example, the Forced Labour Regulation, when it comes into force), the provisions of that law will prevail to the extent of the conflict with the specific obligations. Thus, companies will need to consider both human rights and the environment (under the Directive) as well as forced labour (under the Regulation) when establishing and implementing compliance policies and conducting due diligence in the context of their operations and transactions.
Supply chain measures as a trend
The draft text on the Forced Labour Regulation will need to be endorsed formally by the Council and adopted. It will enter into force 20 days after its publication in the Official Journal of the EU and will start applying 36 months from its entry into force, which is likely to be no earlier than mid-2027.
The Forced Labour Regulation is one of the latest mandatory supply chain due diligence schemes adopted by the EU. In addition to CS3D, various existing supply chain due diligence schemes govern the placing of goods on the EU market. 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 (in force from February 2012), 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 have been recently adopted or have come into effect include the Carbon Border Adjustment Mechanism (CBAM) Regulation, the Deforestation-free Regulation (which will replace the Timber Regulation from 30 December 2024), and the Batteries Regulation.
All of these schemes have one important thing in common: they all require importers and exporter to know how the products they use or place on the EU market are manufactured or grown and be able to present documentary evidence upon request to demonstrate it. This evidence must be obtained from suppliers or from the suppliers’ own suppliers. With the ever-broadening scope these requirements, entities affected by multiple schemes may find economies of scale and operational optimisation are required to meaningfully address supply chain due diligence.
Client Alert 2024-126
