United States: Full Disclosure: An Overview Of Global Supply Chain Regulations

You may have read our recent client alert on the UK Modern Slavery Act and Global Supply Chain Transparency, where we highlighted the extraterritorial safeguards against human trafficking and slavery as well as the corresponding implications for US-based employers.

What you may not know, however, is that although the UK Modern Slavery Act is the latest legislative effort to combat human trafficking and related global supply chains concerns, it is actually one of four regulations that have been proposed and/or enacted in recent years, in the wake of the 2010 California Transparency Supply Chains Act (SB 657).

Local governments are becoming increasingly concerned about the practices and reputations of third-parties that source, manufacture, transport and distribute products that are both used and generated by multinational employers. As such, they are beginning to hold multinational employers accountable not just for their own actions, but also for those of the vendors and contractors they enlist.

In light of these developments, global companies should think critically about the ethical and strategic implications of their internal policies governing supply chain management. Furthermore, when reviewing their internal compliance programs, employers should take careful steps to ensure that the proper controls are in place for assessing, managing and (in some cases) disclosing third-party risks.

A brief overview of the California Transparency Supply Chains Act, as well as the three additional regulations that emerged shortly thereafter can be found below:

California Transparency Supply Chains Act (SB 657)

The California Transparency Supply Chains Act, which was enacted in October 2010 and became effective in January 2012, requires certain employers doing business in California who have annual gross receipts of more than $100 million to disclose on their websites their "efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale." Cal. Civ. Code, § 1714.43, subd. (a)(1). The disclosures, which relate to verification, audits, certification, internal accountability, and training, can be posted in the company's discretion but must be "conspicuous" and "easily understood". The California Department of Justice released a resource guide outlining best practices for compliance, including model disclosures. Notably, the Act only applies to businesses that identify themselves as a retail seller or manufacturer on their California tax return and it does not technically require companies to enhance their compliance programs and/or supply chain practices.

That being said, the practical implications of the Act and the California DOJ's emphasis on providing "depth and context" to customers suggests that the disclosure of any global supply chain practices that present risks related to human trafficking and slavery could potentially result in both reputational and economic consequences for the reporting company.

US Executive Order (13627)

Published on September 25, 2012, US Executive Order 13627 requires government contractors to adhere to specific policies set out by the Federal Acquisition Regulation as part of the long-standing zero-tolerance policy in the US "regarding Government employees and contractor personnel engaging in any form of . . .criminal behavior" related to severe forms of "trafficking of persons". Human trafficking, which is defined in Section 1, includes "sex trafficking in which a commercial sex act is induced by force, fraud, or coercion, or in which the person induced to perform such act has not attained 18 years of age, or the recruitment, harboring, transportation, provision, or obtaining of a person for labor or services, through the use of force, fraud, or coercion, for the purpose of subjection to involuntary servitude, peonage, debt bondage, or slavery."

The Order requires that contractors and subcontractors maintain a compliance plan "that is appropriate for the size and complexity of the contract or subcontract and the nature and scope of the activities performed, including the risk that the contract or subcontract will involve services or supplies susceptible to trafficking". Sec. 2 (a)(2)(A)(i) – (iv). Relevant components of the compliance plan must be posted at the workplace and on the contractor or subcontractor's website and shall include various components that mirror the general disclosure categories provided in the California Transparency Supply Chains Act (see above). For example, participants must publicize their efforts to maintain an awareness program for employees, a process for employees to report – without fear of retaliation – any activity that is inconsistent with the requirements of the order as well as procedures to prevent subcontractors form engaging in trafficking persons, among others.

Directive 2014/95/EU

On October 22, 2014, the European Parliament enacted Directive 2014/95/EU, which requires that public interest entities (including, e.g., credit institutions, insurance companies and companies that are publically traded on an EU member stock exchange) that have an average of 500 employees report information regarding efforts they are making to manage social, environmental and governance-related issues. These "sustainability" disclosures include a non-financial statement on policies, outcomes and risks relating to social matters.

Article 1 of the Directive provides that the non-financial statement must provide information "to the extent necessary for an understanding of the [organization]'s development, performance, position and impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters, including:

  1. a brief description of the [organization]'s business model;
  2. a description of the policies pursued by the [organization] in relation to those matters, including due diligence processes implemented;
  3. the outcome of those policies;
  4. the principal risks related to those matters linked to the [organization]'s operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the [organization] manages those risks; [and]
  5. non-financial key performance indicators relevant to the particular business."

Due to the similarities between the reporting requirements above and those contained in the Modern Slavery Act, employers should make every effort to ensure full compliance.

Business Transparency in Trafficking and Slavery Act (H.R. 3226)

On July 27, 2015, Representative Carolyn Maloney of New York introduced the Business Transparency in Trafficking and Slavery Act, which would amend the Securities and Exchange Act of 1934 to direct the SEC to promulgate regulations related to human trafficking and child labor. According to the Congressional Research Service, the bill would require "any covered issuer of a registered security to include in its mandatory annual report a disclosure of whether the issuer has taken any measures . . . to identify and address conditions of forced labor, slavery, human trafficking, and the worst forms of child labor within the issuer's supply chains." If enacted, this legislation would provide consumers information on products that are free of child labor, forced labor and human trafficking and also would require public disclosures about the production and purchase of raw materials, goods and finished products that have been tainted in the supply chains. Similar to the California Act, the bill would cover those entities that have annual global receipts in excess of $100 million and disclosures would be required on the issuer's website through a conspicuous link labeled "Global Supply Chain Transparency". As of July 2015, the bill has been referred to the House Committee on Financial Services. No subsequent action has been taken at this time.

Full Disclosure: An Overview Of Global Supply Chain Regulations

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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