EU Adopts Forced Labour Regulation, Banning Products Made by Forced Labor

On November 19, 2024, the European Union’s (EU) Forced Labour Regulation (the “Forced Labour Regulation” or “Regulation”) was formally adopted by the Council of the EU, following a vote by the European Parliament in April 2024. After being signed, it will be published in the Official Journal of the EU and will enter into force on the following day.

Prohibition on products made with forced labor

The Forced Labour Regulation will prohibit products made with forced labor from being imported into, sold (including online) within, or exported from the EU. A “product made with forced labour” is defined broadly and is intended to capture any product for which forced labor has been used in whole or in part at any stage of its supply chain.[1] The Regulation extends to inputs at all stages of the production chain, and applies to all products regardless of sector, origin or importation, except for the provision of transport services. It will also apply to all importers or exporters, regardless of size.

Scope and timing of obligations

The Forced Labour Regulation will apply 36 months following its entry into force, meaning companies have three years to ensure their products are compliant. Under the Regulation, businesses need to ensure they are not producing products using forced labor in order to avoid penalties, and they also need to ensure they have established procedures, monitoring and remediation plans in place to mitigate risk of forced labor.

How will allegations be assessed?

The Forced Labour Regulation includes a detailed risk-based framework for investigating the likelihood of violations. This includes reference to the quantity and volume of products concerned, scale and severity of suspected forced labor and access and resources of the parties concerned. In exceptional situations, field inspections may occur (where feasible).

Unlike the U.S. Uyghur Forced Labor Prevention Act, which includes a rebuttable presumption that goods from the Xinjiang Uyghur Autonomous Region of the People’s Republic of China have been manufactured in whole or in part by forced labor, under the Forced Labour Regulation the burden of proving non-compliance will rest with the relevant customs and border authorities. These authorities will have broad and expansive powers to conduct investigations into suspected forced labor, including requesting evidence from companies to demonstrate their products are free from forced labor.

Requirement for internal monitoring and due diligence

While the Forced Labour Regulation does not impose proactive due diligence or reporting obligations, importers into or exporters from the EU, manufacturers in the EU, retailers/wholesales operating in the EU market and subcontractors/suppliers operating in these supply chains need to ensure their internal monitoring and record-keeping will withstand any information request from authorities. We have set out further guidance on what this might entail below.

Broad powers of authorities

Following an investigation, if the relevant supervisory authority (to be designated by EU member states) determines that a violation has occurred, the products will be blocked from entering the EU market or, if they are already within the EU, they will be required to be withdrawn, donated, recycled or otherwise disposed of. There are no other penalties or consequences imposed on violators, except for failure to comply with a decision, which is enforceable in national courts. The Forced Labour Regulation does not address remediation efforts. While the Regulation does not give rise to a private right of action, NGOs and labor unions may play a role in alerting governmental authorities to evidence of forced labor.

Similarity to other laws across the globe

The Forced Labour Regulation is similar to a number of existing trade-related sanctions and bans that focus on prohibiting the import or circulation of products made with forced labor within certain markets. The Regulation aims to eliminate the unfair competitive advantage enjoyed by parties exploiting forced labor, and disincentivize economic operators from using forced labor in their supply chains. The Forced Labour Regulation also builds upon broader legislative efforts focused on the eradication of forced labor from global supply chains, including through effective monitoring and due diligence obligations.

Existing regulations focused on forced labor and supply chain monitoring include:

• Trade-related bans:
  • The prohibition under Section 307 of the U.S. Tariff Act of 1930, which prohibits the importation into the U.S. market of goods mined, produced or manufactured, wholly or in part, by forced labor;
  • The U.S. Uyghur Forced Labor Prevention Act (“UFLPA”), which establishes a rebuttable presumption that the importation of any goods mined, produced or manufactured, wholly or in part, in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China have been manufactured in whole or in part with forced labor and are not entitled to entry into the U.S.; and
  • Chapter 23 of the U.S.-Mexico-Canada Agreement, which commits the parties to prohibit imports made by forced labor and to cooperate in identifying such goods. In line with that commitment, in 2020, Canada implemented a ban on the importation of goods made by forced labor through amendments to Canada’s Customs Tariff. In 2023, Mexico also published new provisions to ban the import of goods produced by forced labor, including child labor.
• Supply chain due diligence and disclosure laws:
  • The California Transparency in Supply Chains Act 2010, which requires in-scope retail sellers and manufacturers doing business in California to disclose information regarding their efforts to eradicate human trafficking and slavery within their supply chains;
  • The Dutch Child Labor Due Diligence Act, which imposes supply chain due diligence obligations with respect to the use of child labor;
  • The U.K. Modern Slavery Act 2015, Australia’s Modern Slavery Act 2018 and Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act, which each require covered entities to publish a statement or report detailing how they are preventing and addressing modern slavery risks in their supply chains; and
  • The Register of Employers (Cadastro de Empregadores) published by the Government of Brazil, also known as the “Dirty List" (Lista Suja), which covers entities found to be subjecting workers to "conditions analogous to slavery,” pursuant to which certain employers may be required, among other things, to adopt preventive measures.

In addition to the foregoing measures targeted specifically at forced labor and/or child labor issues, the laws into which the EU’s Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive have been or will be transposed all include due diligence and reporting obligations relating to workers’ rights, including matters relating to forced labor and child labor. Companies that will be subject to these laws will want to consider the interplay between the requirements of those laws and the Forced Labour Regulation.

Broader trends

The Forced Labour Regulation is part of a cumulative trend of the EU introducing sustainability regulations. It remains yet to be seen how these new regulations will affect trade relationships and the EU single market, and the lack of clarity makes it difficult for companies to predict how it will apply.

Propelling the Forced Labour Regulation to be adopted quickly and without an impact assessment is the notion that “forced labour requires urgent action,” as described in the Commission’s Explanatory Memorandum for the Regulation. This haste has meant that there is a significant lack of clarity and uncertainty as to how it might affect factors such as competition and European competitiveness (due to the administrative burden for smaller companies to comply, the risk of information sharing or the Forced Labour Regulation’s impact on the ability for European firms to be innovative and cost-competitive).

Particularly in relation to information sharing risk and competition between smaller companies, inspiration could be drawn from the principles in the Commission’s recently released Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements for sustainability agreements, which allows cooperation where otherwise potentially anticompetitive agreements pursue sustainability initiatives. This guidance may assist competitors in verifying whether collaboration arrangements in relation to the Forced Labour Regulation would fall within Article 101 and, if so, benefit from the exemption in Article 101(3).

Next steps

The Forced Labour Regulation calls for the EU Commission to make available guidelines, no later than 18 months from its entry into force, on due diligence in relation to forced labor, among other topics.

While some enterprises are likely to be confident that there is no forced labor present in their own operations, those with operations in certain sectors and regions would be well advised to undertake appropriate due diligence into their supply chains. In particular, because the Forced Labour Regulation will apply to inputs at all levels of production, there is heightened risk for all economic operators, including small and medium enterprises (although the size and economic resources of an entity will be considered prior to the commencement of a formal investigation).

Recommendations and advice

While it is difficult to predict what will be required from a diligence standpoint, the following best practices are advisable to reduce overall cost and organizational pressure when the Forced Labour Regulation begins to apply:

• Audit processes: Companies should conduct thorough audits of their supply chains to ensure that no products are made with forced or child labor. This involves tracing the origins of all products and verifying that all stages of production comply with the Forced Labour Regulation.
• Risk-based approaches to efforts: Firms should prioritize investigations and due diligence efforts based on the scale and severity of forced labor risks. This includes assessing the likelihood of state-imposed forced labor, the ratio of products likely to involve forced labor and the proximity of operations to suspected forced labor incidents.
• Record-keeping: It is essential for businesses to keep detailed records and provide documentary evidence of how products are manufactured or grown. This information must be readily available for inspection by EU authorities and should include data from suppliers and their suppliers.
• Staying informed and cooperating with authorities: Companies need to stay updated on high-risk sectors, regions and products identified by the EU Commission. They should also be prepared to present additional information to EU customs authorities when required and cooperate with investigations, both within the EU and in non-EU countries, as necessary.

Issues to consider for private equity managers

Private equity managers may be indirectly impacted through portfolio companies who are within the scope of the Forced Labour Regulation. Managers may want to implement the following processes to mitigate financial and reputational risk stemming from violations by their portfolio companies:

• Investment diligence: Managers should diligence potential forced labor issues in supply chains of portfolio companies at a pre-investment stage to fully understand the risk the investment may present to the manager during the investment hold period.
• Risk assessment of the portfolio: Managers should consider conducting a portfolio-wide risk assessment to identify any red flags, and have an opportunity to assist affected portfolio companies. This may be particularly relevant and meaningful to the manager if it is considering exiting the investment in the short term.
• Data collection from portfolio companies: Many managers already have data collection processes in place to collect data on various ESG metrics from their portfolio companies. Managers may want to consider reviewing the database to ensure it covers “forced labour” as defined in the Forced Labour Regulation.

If you have any questions or require further guidance on how to identify and mitigate supply chain risk, please reach out to our key contacts below.

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[1]       The Forced Labour Regulation defines “forced labour” to mean forced or compulsory labor, including forced child labor, as defined in the Convention on Forced Labour of the International Labor Organization.