Overview

On July 20, 2020, Republican Senator Josh Hawley of Missouri introduced the Slave-Free Business Certification Act (“the Act”).  If passed, the Act would require every “covered business entity” — defined as any issuer under section 2(a) of the Securities Act of 1933 that has annual, world-wide gross receipts of $500 million — to audit and report on instances of forced labor in their supply chains.  Companies that deliberately violate the Act could be liable for civil damages of up to $100 million, and punitive damages of up to $500 million. 

To date, the most expansive legislation in the US regulating forced labor and trafficking in corporate supply chains is the California Transparency in Supply Chains Act (“CATSCA”).  CATSCA requires certain retailers and manufacturers doing business in California to publicly disclose their efforts to eradicate slavery and human trafficking from their supply chains.  Senator Hawley’s proposed legislation differs from CATSCA in three major respects:  (i) it would be a federal law that would not be limited to corporations doing business in California; (ii) it would impose an obligation on companies to affirmatively audit supply chains and report findings to regulators, and not simply require companies to merely disclose to the public actions they may or may not be taking; and (iii) it would impose substantial fines on companies that fail to comply.

Although the Slave-Free Business Certification Act is unlikely to become law in this Congressional Session, its introduction is evidence of the growing interest in Congress to create legal mechanisms aimed at eradicating forced labor from supply chains.  See, e.g., the Business Supply Chain Transparency on Trafficking and Slavery Act of 2020 (H.R. 6279), and the Uyghur Forced Labor Prevention Act (S. 3471).   It is also evidence of the different political factions whose interests and motives may coalesce in the near future to generate more significant legal obligations in supply chain activities.  Corporations are advised to take note and assess their supply chain responsible sourcing programs and processes now in view of this evolving landscape.

Key Takeaways from the Proposed Act

The Act would require US companies to adopt a robust approach to identifying and remediating instances of forced labor and human trafficking in their supply chains.  The main takeaways from the Act are summarized below.

  • Annual Audits – The Act would require companies to conduct an annualaudit of their supply chains in order to “investigate the presence or use of forced labor by the covered business entity or its suppliers.”  Each audit must include (amongst other things) interviews from a cross-section of the company’s workers and management team, and a review of documentation relevant to assessing a company’s compliance with applicable laws and regulations, such as worker contracts and employment agreements, and age verification procedures.
  • Annual Audit Report – At the conclusion of each annual audit, companies would be required to submit a report to the US Department of Labor that details the audit findings, including details of any instances of actual or suspected forced labor.  The report must also contain, at a minimum:
    • A disclosure of the company’s internal policies that are intended to prevent the use of forced labor in its supply chain.
    • A disclosure of the policies and procedures the company uses in order to:  (i) evaluate and address the risk of forced labor in its supply chain; (ii) ensure that the products being produced in its supply chain have been properly certified as compliant by suppliers and third-party business partners; (iii) maintain internal accountability standards and procedures for those employees or contractors who fail to meet the requirements regarding forced labor; and (iv) provide training to all employees about recognizing and preventing forced labor.
    • A written certification, signed by the company’s CEO, which states that the company has complied with the Act, exercised due diligence to eradicate forced labor from its supply chain, and that to the best of the CEO’s knowledge, the company has found no instances of forced labor or has disclosed every known instance of forced labor.
  • Report of Violations to Congress – Each year, the US Secretary of Labor would be required to submit a report to Congress that identifies all companies that failed to conduct the audits required by the Act, or those companies that have been found to use forced labor in their supply chains.

Implications of the Proposed Act & Looking Ahead

Bipartisan support within Congress for human rights initiatives appears to be growing, particularly with respect to initiatives that seek to hold corporations accountable for human rights violations and labor abuses in their supply chains.  That bipartisan support includes Republicans focused on anti-trafficking and anti-slavery initiatives, and Democrats focused on broader human rights concerns and corporate accountability.  This bipartisan support also reflects general concerns over the escalating trade tensions between China and the United States, and more recent tensions between the two countries stemming from the Covid-19 pandemic.  Recent reports on the prevalence of human rights abuses against the Uyghurs in the Xinjiang Uyghur Autonomous Region (“Xinjiang”) have led to concrete steps taken by the Trump Administration and Congress; these include the Xinjiang Supply Chain Business Advisory, which urges US companies to monitor their activities in China, and the Uyghur Human Rights Policy Act of 2020, which authorizes the President to impose sanctions on persons responsible for human rights violations against Uyghurs, including Chinese government officials. 

Other related trends to eradicate human rights violations from corporate supply chains are developing across federal agencies and courts.  For example, the Department of Commerce recently added eleven Chinese entities implicated in human rights abuses in Xinjiang to the restricted entity list, U.S. Customs and Border Protection has issued several new Withhold Release Orders (WROs) targeting goods suspected of being made with forced labor, and the US Supreme Court is set to review a case that could widen the scope of a corporation’s potential liability under the Alien Tort Statute for human rights violations committed by their suppliers abroad.   

The Slave-Free Business Certification Act’s obligations would include substantial new requirements on corporations to audit supply chains, report findings to regulators, and – significantly – certify that no forced labor exists in their supply chains.  Given the prevalence of forced labor around the world, the requirement that CEOs certify that no such labor exists in supply chains is significant and would put the onus on companies to ensure that appropriate responsible sourcing compliance programs and processes are in place to support management certifications.  While passage of the Slave-Free Business Certification Act or related legislation in this Congress or future sessions is uncertain, its introduction provides insight into the types of expectations and legal obligations corporations will likely be required to meet in the future.  Corporations are advised to assess the efficacy of current responsible sourcing compliance programs (onboarding, auditing, and response to issues that arise) and build out a risk-based supply chain compliance program to address and mitigate liability risk of the developing legal obligations.

Author

Aleesha Fowler is an associate in Baker McKenzie’s North American Litigation Practice Group in New York, New York. She has experience in the areas of white collar criminal defense, internal investigations, regulatory compliance matters, and complex civil litigation. Aleesha focuses her practice on white collar criminal defense, internal investigations, regulatory and compliance matters, and complex civil litigation. She has significant experience representing financial institutions under investigation by the US Department of Justice, the US Securities and Exchange Commission, FINRA, and the OCC. She also has experience advising companies (both domestic and foreign) on their compliance with the US Foreign Corrupt Practices Act.

Photo of Reagan Demas
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.

Author

Author

John Foote advises companies on policy, compliance and enforcement issues, with a particular emphasis on international trade. John’s international trade practice is focused on helping companies navigate the evolving global trade landscape. He provides counsel on US trade policy and priorities, helping companies respond strategically to US trade enforcement actions (such as under Section 301 of the Trade Act of 1974, Section 232 of the Trade Expansion Act of 1962, and the Enforce and Protect Act), and advises on existing, new and renegotiated trade agreements (such as the USMCA). John has particular experience on issues at the intersection of trade and labor, including the U.S. ban on imported goods made with forced labor (19 U.S.C. § 1307), and the Rapid Response Labor Mechanism in the USMCA.