On 14 September 2022, the European Commission issued its legislative proposal to ban the marketing of goods made with forced labour. As drafted, the new rules would apply to both imported goods and goods made in the European Union. The proposal is expected to impact significantly corporate approaches to due diligence and supply chain management in addition to other EU and global measures in force or expected.
The Proposed Regulation:1
- prohibits products made with forced labour from the EU market2 – both imports and products made internally within the EU;
- defines forced labour in reference to standards established by the International Labour Organisation ("ILO");
- applies to economic operators – both natural and legal persons, including associations of persons – that place or make available products internally, or which export products from the EU market;
- encompasses the use of forced labour across the entire supply chain, at any stage in the extraction, harvesting, production or manufacturing of products;
- extends to all products, including their components, regardless of industry or geographic origin.3 Products originating in the EU could therefore also be subject to the prohibition even if there were no forced labour in producing the good in the EU;
- would result in products being suspended or refused circulation within the EU market if forced labour is identified; and
- leaves further enforcement and penalties to the Member States.
Background
As foreshadowed during European Commission President Ursula von der Leyen's 2021 State of the Union speech,4 and following a proposal for a corporate sustainability due diligence directive ("CSDDD") on 23 February 2022 (see our previous alerts here and here), and a non-binding Communication on Decent Work Worldwide5 and a European Parliament resolution recommending a ban on imports of products made with forced labour,6 the Commission has now adopted a legislative proposal for a regulation prohibiting products made with forced labour from the EU market.7
Competent authorities, investigations and decisions
The Proposed Regulation would prohibit economic operators from placing on the EU market products that are made with forced labour, whether they are imported or produced in the EU, or from exporting such products from the EU. This would be a directly effective legal obligation with no need for national implementing laws.
In addition, the Proposed Regulation would require EU Member States to designate competent authorities responsible for its implementation,8 who would adopt enforcement decisions based on investigations carried out according to procedures and timeframes specified in the Proposed Regulation. Investigations would consist of: (i) a preliminary phase to determine whether there is a "substantiated concern" of a violation of the prohibition,9 which would require authorities to request information from economic actors being assessed;10 and (ii) if warranted, a main investigation phase.11 The burden of establishing that forced labour had been used in producing the goods would fall on the competent authorities.12
Competent authorities would be required to focus on economic operators "involved in the steps of the value chain as close as possible to where the risk of forced labour is likely to occur”, and to take into account the size and economic resources of the economic operator, the quantity of products concerned, and the scale of the suspected forced labour.13
If a competent authority determined based on evidence provided by the affected economic operator that, with respect to the product being assessed, the operator had "in a short period of time" (not defined) carried out appropriate due diligence and implemented suitable and effective measures for eradicating the risk of forced labour in its operations and supply chain, then no further investigation would be required.14 By contrast, a "substantiated concern of a violation" of the prohibition on forced labour goods would require further investigation by the competent authority.15 When identifying potential violations of the prohibition on forced labour goods, competent authorities would be required to adopt a risk-based approach.
Competent authorities would be empowered to carry out "all necessary checks and inspections", including in third countries outside the European Economic Area ("EEA"), provided that the economic operator in question consented and the relevant third country government was officially notified and also provided its consent.16 This approach differs substantially from, for example, the authority extended to EU competition officials in conducting dawn raids pursuant to Article 20 Regulation 1/2003 in the EU, where officials may enter premises and access computers and servers without the consent of the investigated party17 and could result in considerable delays in or simply the impossibility of conducting investigations in third countries that depend on the cooperation of investigation targets and third country governments.
If a violation were established, the Proposed Regulation provides that authorities would issue a decision (i) prohibiting the affected product from being placed on or made available in the EU market or exported from the EU, (ii) ordering the product to be withdrawn from the EU market, and (iii) ordering the economic operators subject to the investigation to dispose of the affected product.18 Non-compliance would result in penalties established by national law. Decisions would be subject to review by the competent authorities of other Member States, and appeal to the courts of the Member State concerned.19 Decisions could also be recognised and enforced by the competent authority of another Member State to the extent that decisions related to products with the same identification and from the same supply chain(s) for which forced labour had been found.20
This approach is similar to that set out in a recent Commission proposal for a Regulation addressing deforestation, which would set a ban on the placing or making available of certain deforestation-inducing commodities and derived products on the EU market (see here).21
Customs controls on products entering or leaving the EU market
Products entering or leaving the EU market would be subject to controls enforced by competent customs authorities, which would be informed of decisions adopted by the competent authorities described above, and any amendments to those decisions as a result of requests for review.22 Customs authorities would also rely on decisions to identify products that are at risk of not complying with the prohibition.23 In making their enforcement decisions, customs authorities would be required to adopt a risk-based approach.
The Commission would be empowered to include all products or product groups identified in decisions of the competent authorities based on the Delegated Act (i.e., executive instruments adopted by the Commission to enforce the Proposed Regulation).24 Economic operators would need to be prepared to provide sufficient proof that their products are sufficiently different than those included in the envisioned EU database and covered by the Proposed Regulation once in force.
Customs authorities could also request information from economic operators,25 and economic operators would need to be ready to provide detailed information about their supply chains, processing operations, and existing due diligence and monitoring practices.
High-risk areas or products
The Proposed Regulation does not contemplate any additional measures for high-risk areas or products, contrary for example to another recent EU Commission proposal for a regulation tackling deforestation, which has both a limited geographic and a limited product scope.26
The Proposed Regulation does provide for the inclusion of high risk areas or products on a dedicated EU database.27 However, the inclusion or not of a geographic area or product in the database would not change how the Proposed Regulation would apply to a given product.28 As drafted, the Proposed Regulation would apply to all products from all geographic origins, and there would be no alteration of the burden of proof for high risk products or areas.
Nevertheless, the competent authorities will rely on the database29 of forced labour risk areas or products during the preliminary phase of investigations. As such, the inclusion of a specific category of products in the database would not necessarily lead to additional scrutiny per se, but customs authorities would be charged with taking the information contained on the database into account and determining a risk of violation of the prohibition and using this as grounds to request further information about such products and relevant supply chains.30
The Proposed Regulation states that the database should be developed with "external expertise".31 The Commission would at least have a degree of influence on the content of the database, but it must be developed with information from international organisations and third country authorities.32 The recitals of the Proposed Regulation provide that "the reports from international organisations, in particular the ILO […] should be considered for the identification of risk indicators".33
Discussions with third country authorities have already commenced. The EU-US Trade and Technology Council Inaugural Joint Statement of 29 September 2021 provided that the two parties would "[c]ooperate […] to promote fundamental labour rights, including to combat child and forced labour".34 Additionally, the EU's Trade Commissioner Valdis Dombrovskis released a Trilateral Joint Statement on the ILO's Global Forced Labour Estimates on 15 September 2022, along with the United States Trade Representative and Japan's Trade Minister. In it, the three parties stated that they "share a commitment to explore new policies and initiatives that contribute to the fight against forced labour in global supply chains".35 As a result, it appears likely that the EU would at least have some regard for information provided by US and Japanese authorities when developing the database.
Timing and next steps for the Proposed Regulation
The Proposed Regulation will now follow the EU's ordinary legislative procedure: the European Parliament and the Council of the European Union will adopt amendments and will have reconcile their positions in a final text to be adopted by both institutions. Adoption is likely to take at least one year (and could be longer). Once adopted and published in the Official Journal of the European Union, the Proposed Regulation would enter into force, without the need for further implementing measures at Member State level (save on enforcement and penalties), and according to the current text, would become effective after a 24-month period.
Interplay and differences with the CSDDD proposal and other EU due diligence initiatives
As discussed here and here, the CSDDD and deforestation regulation proposals establish due diligence obligations for EU companies and companies operating in the EU that address forced labour and deforestation risks (among other issues). They require companies to carry out supply chain due diligence and among other things cease relationships with certain suppliers (CSDDD) or stop importing certain commodities and derived products into the EU or placing such products on the EU market (deforestation regulation).
The Proposed Regulation is intended to complement these proposals.36 It will fill the gap in so far as the CSDDD does not include a mechanism to prevent the placing and making available on the EU market of products made with forced labour.37
Under the Proposed Regulation, due diligence is not an obligation imposed on economic operators, but an element that competent authorities should take into account when assessing the likelihood that economic operators violated the prohibition set by the Proposed Regulation.38 It states that this should be assessed "in accordance with applicable Union legislation or Member States legislation setting out due diligence and transparency requirements with respect to forced labour".39
In other words, due diligence would have to be carried out in accordance with the future CSDDD requirements,40 and also in light of guidelines or recommendations of the UN, ILO, OECD or other relevant international organisations.41 This approach is different to the deforestation regulation proposal, which includes a requirement to conduct due diligence, based on standards in that regulation. The aims of both initiatives are the same however: to ban products from the EU market that do not comply with given ESG standards.
Relevant US measures
The US government approach has been to more quickly and aggressively impose trade controls to address forced labour concerns. The United States has for almost a century generally banned the importation of any products mined, produced or manufactured wholly or in part by forced on indentured child labour pursuant to Section 307 of the Tariff Act of 1930 ("Section 307").42 In addition to this general prohibition, the enforcement of which has significantly increased in recent years (see here), the recently enacted Uyghur Forced Labour Prevention Act ("UFLPA"), which modifies Section 307, has garnered significant attention given the substantial effect it is already having on global supply chains. This has resulted because the UFLPA "presumptively" bans all US imports from the Xinjiang Uygur Autonomous Region ("XUAR"), or connected to certain entities affiliated with the region, absent “clear and convincing evidence” that such goods were not produced with forced labour (see here).43 Key provisions of the UFLPA have been in force since June 21, 2022.
The scopes of the Commission's proposal and Section 307 as modified by the UFLPA differ: the Proposed Regulation also applies to products made within the EU. From an enforcement perspective, US Customs and Border Protection ("CBP") has broad authority to detain goods for inspection and to seize or otherwise exclude goods from US commerce. On their faces, the UFLPA and Section 307 by themselves empower CBP only to exclude goods produced with forced labour, not to require that the importer destroy them. Other statutes than the UFLPA and Section 307, however, authorize CBP to penalize importers who attempt or abet an unlawful importation,44 and CBP has said that it might use this authority to penalize those attempting to import goods whose admission into the United States the UFLPA prohibits.
As for enforcement priorities, CBP generally issues orders to withhold release of specific goods from named producers or vessels, and in some cases regions or countries, that may be the product of forced labour ("WROs"), or Findings where CBP obtains conclusive evidence that imported goods were made with forced labour. WROs and Findings affect any goods produced with inputs from parties/regions named in the WROs/Findings that are imported into the United States, including via a third country. Now that the UFLPA is in effect, the risk that CBP will detain, exclude, or seize imported goods with a nexus to the XUAR or entities included on an Entity List, and impose penalties, is especially high for sectors and products that the US government has identified as high-priority for UFLPA enforcement.45 The development of the database required by the Proposed Regulation may lead to a heightened enforcement for those areas identified, similar to those products and industries identified by the US government as key UFLPA enforcement priorities, or targeted by WROs and Findings.46
As described above, the Proposed Regulation's prohibition procedure involves investigatory procedures if there is a "substantiated concern" of a violation, which may target particular products or suppliers.47 The Commission's investigatory procedures may provide the subject of an investigation the opportunity to submit information relevant and necessary to the investigation,48 whereas US regulations do not outline participation by the subject of an investigation before CBP issues a WRO.49 If CBP detains goods pursuant to the UFLPA presumption, however, US law does give the importer 30 days to show why CBP should admit the goods.
US imports subject to enforcement under Section 307 as modified by UFLPA may be detained, excluded, and/or seized by CBP. The Commission's proposal also provides for the suspension or refusal of free circulation or export of a product where found to have violated the regulation. Moreover, both approaches may include penalties in addition to exclusion, with the Commission indicating that Member States shall provide rules for penalties to be "effective, proportionate, and dissuasive,"50 and US regulations allowing for the imposition of civil penalties for those who facilitate unlawful importation.51
Steps to take now
As the legislative process unfolds, there are steps that companies that operate in the EU can take to bring their operations into compliance with the Proposed Regulation, and other global measures that seek to address forced labour and other human rights and labour rights concerns in global supply chains. These include:
- Ensuring that internal controls and oversight measures that apply to the company's operations and supply chain are appropriately scaled and address both known and unknown risks.
- Developing or adapting a policy statement demonstrating a company's commitment to respect human rights and labour rights.
- Ensuring internal tracking or monitoring programs are appropriately scaled to provide ongoing documentation to fulfil due diligence and disclosure or reporting obligations.
- Developing or adapting clauses for agreements about relevant policies and expected procedures (i) with suppliers to ensure compliance with relevant measures and cooperation in providing evidence proving such cooperation (to include flowdown provisions for sub-suppliers); and (ii) with customers to assure them of seller's compliance with relevant measures and cooperation with providing evidence.
- Updating training materials for relevant personnel and suppliers on the company's expectations.
- Evaluating disclosures and reporting in view of regulatory obligations, industry obligations and best practices.
1 There are two legal bases for the Proposed Regulation, i.e. (i) Article 114 of the Treaty on the Functioning of the European Union ("TFEU"), the provision for general harmonization measures intended to create an EU internal market; and (ii) Article 207 TFEU, which provides for the EU common commercial policy and enables an import ban to be put into effect.
2 European Commission, Proposal for a regulation of the European Parliament of the Council on prohibiting products made with forced labour on the Union market, 14 September 2022, COM(2022)453, available here.
3 Proposed Regulation, Recital 16 and Article 2(g).
4 European Commission, 2021 State of the Union Address by President Ursula von der Leyen, available here.
5 European Commission, Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee on decent work worldwide for a global just transition and a sustainable recovery, 23 February 2022, COM(2022) 66 final, available here.
6 European Parliament resolution of 9 June 2022 on a new trade instrument to ban products made by forced labour (2022/2611(RSP)), available here.
7 European Commission, Proposal for a regulation of the European Parliament of the Council on prohibiting products made with forced labour on the Union market, 14 September 2022, COM(2022)453, available here.
8 Proposed Regulation, Article 12(1).
9 Based on submissions by natural or legal persons, or associations, certain risk indicators, information in a Commission database of forced labour risk areas or products, information and previous decisions included on a common information and communication system, or information requested from other competent authorities. Proposed Regulation, Article 4(1).
10 Regarding actions they have taken to identify, prevent, mitigate or bring to an end risks of forced labour in their operations and value chains with respect to the products under assessment, including e.g., due diligence carried out in accordance with any legislation, the Guidelines on Forced Labour issued by the Commission or any guidelines or recommendations such as under the United Nations Guiding Principles on Business and Human Rights ("UNGPs") or guidance issued by the ILO or the Organisation for Economic Co-operation and Development ("OECD"). Proposed Regulation, Article 4(3).
11 Proposed Regulation, Article 5(1).
12 Proposed Regulation, Recital 26.
13 Proposed Regulation, Article 4(2).
14 Proposed Regulation, Article 4(6).
15 Proposed Regulation, Article 5(1).
16 Proposed Regulation, Article 5(6).
17 See Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, available here, Article 20.
18 Proposed Regulation, Article 6(4).
19 Proposed Regulation, Article 8.
20 Proposed Regulation, Article 14(1).
21 European Commission, Proposal for a Regulation of the European Parliament and of the Council on the making available on the Union market as well as export from the Union of certain commodities and products associated with deforestation and forest degradation and repealing Regulation (EU) No 995/2010, 17 November 2021, COM(2021) 706 final, available here. Interestingly, the deforestation regulation proposal is not based on Article 207 TFEU (common commercial policy), while the Proposed Regulation is, and both texts have similar implications for trade.
22 Proposed Regulation, Articles 15(1) and 15(3).
23 Proposed Regulation, Article 15(4) and 22. The exchange of information between customs authorities of entry/exit and other competent authorities will occur within the information and communication system established under Art. 34 Regulation 2019/1020.
24 Proposed Regulation, Articles 11(1) and 16(1&2)
25 Proposed Regulation, Article 16(2) and based on the foreseen Commission Implementing Regulation.
26 As proposed, the deforestation regulation would only apply to certain products from certain precisely defined areas.
27 Proposed Regulation, Article 11(1) (requiring the Commission to produce "an indicative, non-exhaustive, verifiable and regularly updated database of forced labour risks in specific geographic areas or with respect to specific products including with regard to forced labour imposed by state authorities" with external expertise).
28 Proposed Regulation, Article 11(3).
29 Proposed Regulation, Article 11(1).
30 Proposed Regulation, Article 16(2).
31 Proposed Regulation, Article 11(1).
32 Proposed Regulation, Article 11(1).
33 Proposed Regulation, Recital 33.
34 EU-US Trade and Technology Council Inaugural Joint Statement, 29 September 2021, available here, p. 9.
35 European Commission, "Trilateral Joint Statement from the Trade and Labour Ministers of the US, Japan and the EU on the International Labour Organization's Global Forced Labour Estimates", 15 September 2022, available here.
36 Legislative Financial Statement, Regulation proposal, p.44.
37 Regulation proposal, p. 2.
38 Proposed Regulation, Article 4(1)(e).
39 Proposed Regulation, Article 4(1)(e).
40 Proposed Regulation, Article 4(3)(a).
41 Proposed Regulation, Article 4(3)(c).
42 See 19 U.S.C. § 1307.
43 UFLPA, which builds on the foundational authority for regulating imports of goods produced from forced labour found in Section 307, (1) establishes a "rebuttable presumption" that goods produced wholly or in part in the XUAR or by certain identified entities are made with forced labour, and are therefore subject to the import prohibition; and (2) sets a high burden of proof for importers to demonstrate otherwise. The application of a rebuttable presumption in relation to imports into the United States is not new. The Countering America's Adversaries Through Sanctions Act ("CAATSA") also establishes a rebuttable presumption with respect to goods made with North Korean labour and also applies the "clear and convincing" evidence standard to enforce import prohibitions on North Korea. See 22 U.S.C. § 9241(a).
44 See 19 U.S.C. § 1595a.
45 US government authorities have identified four "high-priority sectors" for enforcement: (1) apparel; (2) cotton and cotton products; (3) silica-based products (including polysilicon); and (4) tomatoes and downstream products.
46 In enforcing Section 307, CBP officials consult a variety of sources including congressionally mandated reports prepared by the US Department of Labour, which contain country profiles and lists of goods suspected to have been produced by child or forced labour. See the US Department of Labour's Findings on the Worst Forms of Child Labour (prepared in accordance with the Trade and Development Act of 2000, P.L. 106-200) and List of Goods Produced by Child Labour or Forced Labour (required by the Trafficking Victims Protection Reauthorization Act of 2005, P.L. 109-164).
47 See Article 5.1 of Regulation on Prohibiting Products Made with Forced Labour on the Union Market.
48 See Article 5 of Regulation on Prohibiting Products Made with Forced Labour on the Union Market.
49 See 19 C.F.R. § 12.42 (a)-(d).
50 Article 30.3 of Regulation on Prohibiting Products Made with Forced Labour on the Union Market.
51 19 U.S.C. §§ 1592, 1595a.
Agnieszka Smiatacz (White & Case, Associate, Brussels) contributed to the development of this publication.
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