On March 9, New York Governor Andrew Cuomo announced that in response to the hand sanitizer shortages caused by the spread of the novel coronavirus, New York State will purchase hand sanitizer from a company that employs prison labor.  According to Cuomo, the goal is to make 100,000 gallons of hand sanitizer a week.  This hand sanitizer will reportedly be provided to state schools and prisons. The announcement has been met with criticism from politicians and activists who found it “ironic” and “demeaning” that prisoners, who for the most part are prohibited from using hand sanitizer, will be producing it.

The International Labor Organization describes prison labor as a limited exception to forced labor, provided it is carried out under the supervision of a public authority and does not place the convicted person at the disposal of any private individuals or organizations.  Interestingly, US law prohibits the importation and interstate transportation of goods made, in whole or in part, by prison labor.  However, exceptions exist – including an exception for products made in US prisons.  Therefore, unlike non-US prison made goods, goods produced by American prisoners are not prohibited from entering the stream of commerce.  Any prison-made goods must be clearly marked as such to comply with US law.

Nevertheless, the growing trend among companies is to adopt policies prohibiting the use of prison labor in their supply chains.  Public opinion regarding convict-made goods has generally shifted over the years to support this trend.  Investors, civil society organizations and other stakeholders typically do not distinguish between foreign and US prison labor, and some view both as an exploitative social practice.  In addition to doubts about the voluntary nature of convict labor, a number of civil society organizations reported that prisoners often work in poor conditions and receive reduced wages, especially in non-US and private prisons.  Some large, US-listed companies have suffered significant reputational damage from news stories linking the production of their goods to prison labor.  In the past several years, a number of pension funds divested investments from private prison companies citing concerns about human rights abuses and health and safety violations.  As a result, the reputational impact of selling goods made with prison labor – separate from the legal risk if convict-made goods are imported from outside the US – could potentially be significant. 

However, eliminating prison labor from a company’s supply chain is not a simple task.  Increasingly complex global supply chains, as well as the company’s and direct supplier’s lack of visibility into the production conditions and facilities of sub-suppliers down the supply chain, make determining whether goods are produced in whole or part by prison labor challenging.  Moreover, many countries allow or even require inmates in those countries to work.  For example, China’s Criminal Code provides that anyone who is able must work while in detention to reform through labor.  Similarly, Malaysia’s Prison Act requires prisoners to work while in prison unless specifically exempted for health reasons.  Lack of regulations around the world requiring disclosure of the use of prison labor by suppliers adds to this challenge.  

Therefore, to comply with US law and limit exposure to reputational risks, companies should proactively implement responsible sourcing due diligence programs targeting their supply chains to minimize the risk of both prison labor and other exploitative practices in supply chains that extend outside the US. 

In addition to targeting instances of prison labor, responsible sourcing due diligence programs typically aim to identify instances of forced labor, child labor, worker’s health and safety violations, and other human rights violations.  In light of the limitations of remote diligence practices in identifying potential supplier violations, insight into suppliers’ sourcing practices is best gained through risk-based audits and monitoring.  Audit and due diligence efforts are notably more effective where they take into account input by the variety of corporate functions with supplier touchpoints.  Such functions typically include Legal/Compliance, Finance, Internal Audit, and Procurement, as well as Health/Safety and Quality functions.  A risk-based approach to supplier auditing is required to appropriate manage limited resources, and best practice is to categorize suppliers based on risk taking into account their location, industry, and significance to the company’s business.  Higher risk suppliers should be subject to more frequent and comprehensive audits, often with the involvement of an independent third party with regional and/or subject matter expertise.  Finally, it is important to ensure that suppliers are aware of a company’s policy on prison labor so that they can adjust their practices accordingly. 

However, companies should keep in mind that any proactive engagement with its suppliers and sub-suppliers should be balanced against liability exposure.  Where a company is viewed as directing or controlling supplier activity, the risk of liability under laws regulating labor practices and other supplier acts elevates.  The higher the level of supplier engagement (e.g., directive interactions during contract negotiations and supplier audits), the more likely that a company’s actions would rise to a level that could trigger a duty of care to supply chain workers.  Striking the appropriate balance between supplier engagement and the need to maintain arms-length relationships with suppliers to reduce liability risk can be challenging.  This is particularly the case in light of external pressures from investors, civil society organizations, and other stakeholders for companies to do everything in their power to ensure their business, including the business of their suppliers, is conducted ethically and does not include exploitative practices.

Author

Maria Piontkovska advises clients on reducing anti-corruption compliance risks stemming from operating business in emerging markets and handles internal investigations and related interactions with law enforcement authorities. Her practice focuses on global corporate compliance and investigations, as well as white collar criminal matters. She represents domestic and international corporate clients in a broad range of compliance matters, including criminal investigations, before the US Department of Justice, the US Securities and Exchange Commission, and other government agencies.

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Author

Reagan Demas has significant experience working on behalf of companies and investors in emerging markets and high risk jurisdictions. He has managed major legal compliance investigations for a variety of Fortune 500 companies and negotiated settlements before the US Department of Justice, US Securities and Exchange Commission, and other federal and state regulatory entities, obtaining declinations in a number of matters. He has also conducted risk assessments and due diligence in a variety of legal compliance matters for companies across industries, and has worked on the ground evaluating partnerships, investments and other business opportunities worldwide. Reagan has written and spoken extensively on corruption, business ethics, human rights-related legal obligations and emerging regulatory regimes.