EU Continues Combating Human Rights Violations with European Forced Labour Regulation

The European Parliament’s recently adopted European Forced Labor Regulation (the Regulation) aims to ban products made with forced labor from the European market, a crucial step toward the European goal of eliminating all forms of forced labour. If approved, the Regulation stands to make a huge impact on the European economic market with its expanded scope, additional information for disclosure and public database, and heightened investigative process and penalties.

Forced labour continues to be a prominent issue around the world, with approximately 28 million people across all gender and age groups currently impacted.[1] The Regulation on prohibiting products made with forced labour on the Union market is part of the legislation addressing human rights in supply chains, flanking the recently adopted Corporate Due Diligence Directive (CSDDD), among others. Furthermore, the Regulation is in line with the aim of the International Labour Organization and the UN Sustainable Development Goals[2] to eliminate all forms of forced labour.

SCOPE

The Regulation has an extensive scope and applies to all economic operators without taking into consideration their scale, revenue, place of establishment, or legal form. This distinguishes the Regulation from other European legislative acts in respect of environmental, social, and governance (ESG) such as the CSDDD, which provides a threshold for turnover in the EU and company size.

Furthermore, the Regulation has a very broad understanding of the term “product.” It applies to all types of products at any stage of the supply chain, with effect on both the import and export of such product, as well as distance selling such as online sales targeting end users in the EU. In this sense, the Regulation’s scope is different from some other existing laws, including the US Uyghur Forced Labor Prevention Act (UFLPA), which took effect in June 2022 but only targets goods from the Xinjiang region of China.

DISCLOSURE OF INFORMATION

One of the most significant obligations for economic operators importing or exporting products in the EU is the disclosure of additional information to customs authorities. According to the Regulation, the European Commission (the Commission) is empowered to adopt delegated acts identifying the products for which additional information should be provided and adopt implementing acts to specify the details of information to be shared.

Further information would be aimed at disclosing details about the manufacturer of the product and product supplier (e.g., name, trade name or registered trademark, contact details, unique identification number) as well as any other information on the product itself (e.g., name or brand of the product, specific requirements for identification of the product such as serial number). This information will aid the authorities in detecting suspicious products and reconstructing the supply chain.

Supporting the disclosure, the Regulation provides for a publicly available database for documenting risk of forced labour in specific geographic areas or with respect to certain products or economic sectors. However, as this information is anonymous, it will not be traceable to specific economic actors.

INVESTIGATION AND PENALTIES

Any person or association is permitted to submit information on potentially violating products to the Commission or relevant authorities of the member states. In a case of substantiated concern, the authorities will commence an investigation. When enforcing the Regulation, the Commission and authorities of the member states will follow a risk-based approach based on the scale and severity of the suspected forced labour, the quantity or volume of suspected products on the European market, and the share of the part suspected to have been made with forced labour in the final product.

This is notably different from the UFLPA, pursuant to which it should be assumed (rebuttable presumption) that all goods manufactured in Xinjiang are made with forced labour. In other words, in the United States companies must fight the presumption, whereas in Europe the Commission and national authorities must investigate to enforce the Regulation.

Once the investigation is complete and the involvement of forced labour has been detected, the economic operator is prohibited from importing, selling, and exporting the violating products on the European market and ordered to withdraw from the market products already made available or remove the violating content from sales via the internet and dispose of the products.

When deciding on the latter, the authorities should take into consideration a disruption to supply chains of strategic or critical importance to the EU. In such case, the authorities may refrain from imposing an order to dispose of the product and instead order the violating product to be withheld from the European market for a certain period during which time the economic operator should eliminate any forced labour from the supply chain.

While the Regulation does not include a duty to remediate in its final version, financial and nonfinancial compensation by companies is mentioned in the Recitals as a remedial measure for persons affected by forced labour. Therefore, even though not expressively stipulated in the Regulation, an expectation to offer compensation to those affected by forced labour cannot be ruled out.

The Regulation also provides for the possibility of member states laying down certain penalties. It is expected that the member states will make use of this entitlement to apply further pressure on economic operators to comply with the obligations set out in the Regulation.

Pursuant to the Regulation, penalties shall be effective, proportionate, and dissuasive. Competent authorities shall ensure that the penalties referred give due regard to the gravity and duration of the infringement, any relevant previous infringements by the economic operator, and the degree of cooperation with the competent authorities.

A maximum time limit for the duration of investigations is not stipulated by the Regulation. However, the authorities are advised in the Regulation to aim for a decision within nine months from initiating the investigation. Decisions to ban a product from the European market are made publicly available online by the Commission, which could have reputational consequences for the respective economic operator, and a particularly strong impact in highly competitive economic sectors.

NEXT STEPS

The Regulation still must be formally approved by the European Council to have a directly binding effect, which is expected in the second half of 2024. Upon the formal approval, the Regulation will be applicable 36 months from the date of entry into force (expected to be in 2027).

The details for implementation and enforcement of the Regulation are to be established by acts and guidelines of the Commission and member states. It therefore remains to be seen how exactly the obligations imposed on economic operators will materialise. For small and medium-sized enterprises in particular, the expected additional information obligations and potential supply chain investigations will be a major challenge, which the European legislator has recognised and provided support mechanisms through specific guidelines.

CONCLUSION

A ban on products made with forced labour is awaited in the EU, as it now represents the international standard in the area of human rights. The United States, Mexico, and Canada, for example, have already enacted corresponding regulations. It is also the necessary continuation of the regulatory content of the CSDDD.

Nevertheless, the banning of certain products represents a justified but serious intervention in competition and economic life. It is not always easy for companies to maintain an overview of the supply chain. It therefore remains to be seen how the European market will adapt once the different regulations come into force and how companies will distribute the risk of products violating the Regulation throughout their supply chain.

HOW WE CAN HELP

Morgan Lewis lawyers are monitoring these changes and the proposed Regulation’s progress and stand ready to assist companies navigating this evolving landscape.

Morgan Lewis has a multijurisdictional initiative on forced labor issues and years of experience advising clients on the US ban on the importation of products derived from forced labour, including the UFLPA.