Supply Chain Alert: The Risk of Human Trafficking | Corporate Counsel

Many victims of trafficking are conscripted into modern-day slavery through force, fraud or coercion. This takes the form of debt bondage, forced labor and involuntary child labor. Human trafficking is also a supply chain issue, and the companies involved may not even be aware of the violations.

Human trafficking in the supply chain may take many forms. For example, a consumer might stay at a hotel where the sheets were made from cotton harvested by migrant farmers who work with no water and no rest. They may consume a chocolate they found on their pillow, made from cocoa beans picked using child labor. They could order shrimp for dinner which was fished using forced labor, and served in a restaurant where the dishwashers and waiters have had their passports confiscated. During dinner, they might take a call on a cell phone built with materials that were mined by children and assembled by bonded labor.

This is more than an ethical issue; it is a business issue. President Obama noted that human trafficking slavery "ought to concern every business because it distorts markets.” Consumers and investors have an increased awareness of supply chain risk, and an increased aversion to companies perceived as exploiting slave labor. To address these moral and economic issues, the United States and other governments are actively passing legislation addressing labor trafficking and child labor practices, much as they had with conflict minerals a couple of years ago. This legislation includes various state, federal and international laws.

The Legal Landscape and Liabilities

Of course, human trafficking and child labor are illegal in almost every country. But violations of the laws against such practices are commonplace. This is due to a worldwide demand for cheap labor and services, as well as the lack of meaningful law enforcement.

Businesses that rely on lackluster enforcement to avoid liability are taking a huge risk. Enforcement policies are changing, subjecting companies to potential criminal liability. Moreover, newer laws are imposing civil liability based upon a company’s conduct in the supply chain. These laws are requiring public disclosure of efforts taken to address labor trafficking and child labor, similar to the way the Securities and Exchange Commission now requires conflict mineral reporting.

Businesses with $100 million in gross worldwide revenues that are doing business in California are subject to the California Transparency in Supply Chains Act. It was one of the first laws in the United States to address slavery and human trafficking in supply chains. It requires manufacturers and retailers to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains for tangible goods offered for sale. The law doesn't require any action taken in regards to the supply chain.

The proposed federal Business Supply Chain Transparency on Trafficking and Slavery Act of 2014 (H.R. 4842) would require companies to file annual reports with the SEC to disclose their efforts to identify and address specific human rights risks in their supply chains. Companies with annual worldwide gross receipts exceeding $100 million are subject to it. Yet, unlike the California law, it is not limited to manufacturers and retailers. It will apply to any public or private company currently required to submit annual reports to the SEC. The commission will issue regulations requiring companies to disclose whether they have taken any measures to identify and address the risks of forced labor, slavery, human trafficking and the worst forms of child labor throughout their supply chains. The bill also calls on the secretary of labor to publish a list of the companies required to follow the legislation and a "Top 100" list of companies "adhering to supply chain labor standards as established under relevant federal and international guidelines."

The enforcement landscape is rapidly evolving. In January 2015, President Obama issued an executive order titled "Strengthening Protections Against Trafficking in Persons in Federal Contracts." The Federal Acquisition Regulatory (FAR) Council has already scrutinized government contractors and subcontractors for supply chain violations. And now government contractors and subcontractors are required to have compliance plans for prevention, monitoring, and detection of trafficking in persons.

Additionally, the SEC and the U.S. Department of Justice, in a recent Foreign Corrupt Practices Act (FCPA) Guideline, state that corruption includes the concept of human trafficking. Anything that threatens stability and security by facilitating criminal activity within and across borders, such as the illegal trafficking of people, may be considered corruption and subject a company to FCPA liability.

Similar to U.S. efforts to fight slavery and human trafficking, the United Kingdom enacted the UK Slavery Act. It imposes