The much anticipated proposal for a Regulation prohibiting products made with forced labor on the EU market was published by the European Commission (“Commission”) on 14 September 2022, one year after the initiative was first announced by Commission President Ursula von der Leyen in her 2021 State of the Union speech. The proposed forced labor instrument has the potential to significantly impact the supply chains of not only EU companies, but also of any non-EU company that sells products into the EU. The instrument would apply to any company that exports products from the EU or that sells products on the EU market, irrespective of where those companies are based, to which products they are selling, and to which countries and suppliers they source from.
This post provides an overview of the key elements of the proposed Regulation.
The EU prides itself on pursuing an open, sustainable, and assertive trade policy, and the promotion of responsible and sustainable value chains is one of the pillars of that trade strategy. In that framework, the Commission and the European External Action Service published in July 2021 non-binding guidance on due diligence for EU businesses to address the risk of forced labor in their operations and supply chains.
As voluntary mechanisms were perceived as insufficient, Commission President von der Leyen announced a proposed ban on products in the EU market that have been made with forced labor in her 2021 State of the Union speech.
In February of this year, the Commission issued a Communication on “decent work worldwide for a global just transition and a sustainable recovery,” outlining the various EU instruments in this field. The Commission recalled that, in line with President von der Leyen’s announcement, it was preparing a new legislative initiative to prohibit the placing on the EU market of products made by forced labor.
Also in February 2022, the Commission issued its proposal for a Due Diligence Directive, which, if adopted, will require companies within its scope to conduct mandatory due diligence in their own operations and their value chains with respect to, inter alia, forced labor (see also below about the relationship with the proposed forced labor instrument). In addition, the Corporate Sustainability Reporting Directive, proposed by the Commission in April 2021, would, if adopted, widen the scope of companies subject to a requirement to report information on human rights issues under the Non-Financial Reporting Directive. Of note, the Commission’s proposed Corporate Sustainability Reporting Directive explicitly specifies that the information to be disclosed on human rights should include information about forced labor in companies’ value chains where relevant.
In June 2022, the European Parliament (“Parliament”) adopted a resolution on “a new trade instrument to ban products made by forced labor” (see also below, on next steps).
The proposed Regulation lays down rules prohibiting economic operators from making available on the EU market, or exporting from the EU market, products made with forced labor. “Making available” is defined broadly as covering “any supply of a product for distribution, consumption or use on the Union market in the course of a commercial activity, whether in return for payment or free of charge.” Where products are offered for sale online or through other means of distance sales, the making available on the market is deemed to take place when the offer for sale is targeted at users in the Union – meaning that non-EU companies selling goods to the EU market would also be subject to the Regulation. The provision of services is not as such covered by the prohibition, but the placing on the EU market of products made with reliance on forced labor services would be prohibited under the proposed Regulation.
The proposed Regulation has a broad scope. Importantly, the prohibition is not targeted at specific companies, sectors, or regions, but would apply to all industry sectors, all products (irrespective of their origin), and all economic operators. The scope of the prohibition therefore also differs from other, somewhat related, EU proposals. Specifically, the proposed forced labor instrument does not provide for limitations similar to those in the aforementioned proposed Due Diligence Directive, which applies to companies depending on their size and, in some instances, the sectors covered.
This being said, it is likely that EU Member States (who will be responsible for enforcement, as explained below) will focus their enforcement efforts on certain products and/or areas in accordance with guidelines on risk indicators that will be provided by the Commission and the database of forced labor risk areas or products, still to be set up by the Commission. For now, the Commission has indicated that textiles, mining, and agriculture are among the sectors where forced labor has frequently been reported.
In addition, as further addressed below, the proposed Regulation would explicitly require the competent EU Member State authorities to consider the size and economic resources of the relevant economic operators in deciding whether to initiate an investigation into violations of the proposed Regulation. This would, in practice, mean that small and medium-sized enterprises (SMEs), while covered by the proposed Regulation, are probably less likely to be targeted by enforcement action.
As regards the notion of “forced labor,” the proposal refers to the definition in Article 2 of the Convention Concerning Forced or Compulsory Labor, namely “all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily.” As further explained below, it will be up to the competent EU Member State authority to determine whether economic operators have made available or exported a product made with forced labor in violation of the proposed Regulation. The prohibition would apply in relation to forced labor used at any stage of the production, harvest, or extraction of a product, including work or processing related to a product at any stage of its supply chain.
EU Member States would be responsible for the implementation and enforcement of the proposed Regulation and would have to designate a competent authority for this purpose. At the same time, the proposed Regulation foresees a role for the Commission, such as issuing guidelines to facilitate the implementation of the ban, assisting in the coordination among EU Member States through a newly established “Union Network Against Forced Labor Products,” and maintaining a publicly available database of forced labor risks areas and products.
In order to identify violations of the proposed Regulation, the competent EU Member State authorities would initiate investigations, which would be carried out in two phases. First, in the preliminary phase, the authorities would assess whether, based on available, objective, and verifiable information, they consider that there is a “substantiated concern” to suspect that products were likely made with forced labor. If the competent authority determines that such a substantiated concern exists, it would proceed to the investigation phase to establish whether a violation has indeed occurred. Importantly, the burden would in principle be on the competent authority to establish that forced labor has been used, on the basis of the information gathered during the investigation (see below, however, as regards the possibility to find a violation on the basis of “facts available”). The investigated economic operators would have the opportunity to provide submissions and evidence in their defense throughout the investigation.
In both phases of the investigation, the competent authorities would have to make their assessment on the basis of all available relevant information, including the following non-exhaustive list of five categories of information:
- submissions to the competent authority made by natural or legal persons or any association not having legal personality;
- the risk indicators and other information that would be included in future Guidelines to be issued by the Commission;
- information contained in a publicly available database of forced labor risks to be established and maintained by the Commission;
- information and decisions encoded in the information and communication system set up in the Market Surveillance Regulation, including any past cases of compliance or non-compliance of an economic operator with the prohibition of the proposed Regulation; and
- information requested by the competent authority from other relevant authorities, where necessary, on whether the economic operators under assessment are subject to and carry out due diligence in relation to forced labor in accordance with applicable EU or EU Member State legislation.
Moreover, in carrying out their investigation, the competent authorities would have to follow a “risk-based” approach, meaning that they would have to focus their enforcement efforts where they would likely be most effective, according to the Commission. In this regard, the proposed Regulation would explicitly require competent authorities to:
- prioritize in their assessment economic operators involved in the steps of the value chain as close as possible to where the risk of forced labor is likely to occur; and
- consider the size and economic resources of the economic operators, the quantity of products concerned, and the scale of suspected forced labor.
2. Participation of economic operators
As mentioned above, economic operators targeted by an investigation would have the right to submit documents and evidence in their defense within a time limit set by the competent authority. The competent authority would also be empowered to request that economic operators submit certain information that it considers relevant and necessary for the investigation. It would also be able to carry out checks and inspections, including investigations in third countries, provided that the economic operator has given its consent.
Importantly, a failure by the economic operator to cooperate would entitle the competent authority to establish that a violation has been committed on the basis of “any other facts available,” which could possibly lead to a less favorable outcome for the economic operator. This is similar to the approach the Commission already takes in the context of trade defense investigations in cases of non-cooperation.
3. Consequences of violation
Should a competent authority establish, pursuant to its investigation, that an economic operator violated the Regulation, the authority would have to adopt a decision prohibiting the product from being made available on the EU market or exported from the EU. If the product is already on the market, the competent authority would also order the economic operator to withdraw and dispose of it, in accordance with the relevant national legislation. After such a decision has been issued, the economic operator has the right to request a review within 15 working days of the date of receipt of the decision, or, in the case of animals, plants, and perishable goods, within 5 working days.
If an economic operator fails to comply with the decision of a competent authority, it would also face penalties under national law.
Relationship with the Proposed Due Diligence Directive
Earlier this year, the Commission put forward a proposal for a Directive on Corporate Sustainability Due Diligence (see our blog post about that proposal). The proposed Due Diligence Directive would require companies within its scope to conduct mandatory due diligence in their own operations and value chains with respect to human rights (including forced labor), environmental, and climate-change concerns.
The two proposals differ in scope, as the proposed forced labor Regulation would apply across the board, whereas the proposed Due Diligence Directive would apply only to companies that meet certain size thresholds (measured in terms of turnover and, in certain cases, number of employees).
The consequences of the identification of forced labor issues differ under the two proposals. Under the proposed Due Diligence Directive, companies are required to, inter alia, take appropriate measures to eliminate adverse human rights impacts (including forced labor issues) from their supply chains. Failure to comply with this or other obligations under the proposed Due Diligence Directive would result in penalties. Companies would also be liable for damages if they fail to comply with their due diligence obligations related to the prevention and mitigation of potential adverse impacts and if they do not bring actual adverse impacts to an end and minimize their extent. There would not be, however, be any immediate consequences for the placing and making available of the products produced by the companies in question. The proposed forced labor Regulation, by contrast, focuses on exactly that: forced labor issues in the value chain of products would result in a prohibition to export, or place on the EU market, the products in question.
This being said, both proposals are evidently related. For those companies that fall under the scope of the proposed Due Diligence Directive, compliance with that Directive would be particularly relevant in the context of the proposed forced labor instrument. Whether an economic operator has carried out due diligence in line with the requirements of the Due Diligence Directive would be considered when assessing whether there is a well-founded suspicion that its products are made with forced labor. As explained above, one of the categories of information that the competent authority must assess in determining whether there is a “substantiated concern” that a violation has occurred is information on whether the economic operator is carrying out due diligence in accordance with applicable EU legislation. The proposed forced labor Regulation would therefore make it even more important for companies to understand and correctly implement the due diligence obligations set out in the Due Diligence Directive.
The proposed Regulation would also explicitly require the competent authority, before it initiates an investigation, to request information from economic operators about any due diligence actions they undertake in their operations and value chains. This would concern not only companies that would fall under the scope of the Due Diligence Directive, but also other companies that would have to disclose to the authorities any due diligence actions they undertake in relation for forced labor. The authorities would then have to take such information into account in determining whether there is a “substantiated concern” that a violation exists. Due diligence in relation to forced labor issues would also thus be highly relevant for companies that are not subject to the proposed Due Diligence Directive. In this respect, the Commission would issue guidelines advising companies on how to carry out forced labor due diligence and how to detect forced labor in their supply chains.
The Commission is inviting stakeholders to provide feedback on the proposed Regulation. This feedback period will last for eight weeks and therefore be open until at least 14 November 2022, and will continue to be extended to account for time that the proposal is not available in all EU languages. The feedback received will be summarized for the Council of the EU (“Council”) and the Parliament.
The Council and the Parliament will then have to adopt their respective positions on the proposal before they start negotiations on the final text. Important aspects of the proposal might still be amended during those negotiations.
Of note, the Parliament has already expressed its views on the topic in a resolution adopted in June 2022 calling for the Commission to propose a “new trade instrument to ban products made by forced labor.” The Commission’s proposal has not followed all of the Parliament’s recommendations, however. For instance, while the Parliament envisaged that both the Commission (particularly the Chief Trade Enforcement Officer) and national authorities would be competent to launch investigations, the Commission’s proposal reserves this role exclusively for the competent EU Member State authorities. Some members of the Parliament (“MEPs”) have already raised doubts about giving this responsibility exclusively to the Member States, including Parliament rapporteur on the file Bernd Lange, who suggested that the EU should have a greater role in the proposed Regulation’s implementation. This is in line with a wider push for a greater involvement of the EU in enforcing trade-related restrictions in other areas (for instance, the enforcement of EU sanctions).
The Commission’s proposal further appears to not include an obligation for the responsible companies to provide remediation to the affected workers, which was included in the Parliament’s resolution. NGOs have expressed concerns about this omission.
Another potentially controversial aspect of the proposal appears to be the period before the proposed Regulation would become applicable. As currently phrased, the proposed Regulation would apply 24 months after its entry into force (the entry into force date being one day following the publication of the Regulation in the Official Journal of the European Union). This means that the ban would, based on the current proposal, be applicable in 2025 at the earliest (assuming it is adopted in 2023). This long transition period has already been criticized by one MEP, and it is possible that the Parliament will try to push for an earlier date of applicability during the negotiations.