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Front Line: Taking a Deep Dive into Suppliers’ Labor Force

Heightened supply chain visibility will let manufacturers know if their suppliers are using forced labor, which puts them at risk for legal penalties as well as damage to their brand.

Q4 2022
As international trade makes supply chains more complex, one potential pitfall for companies is unknowingly obtaining goods made with forced or slave labor. In recent years governments, including the United States, have stepped up their enforcement in this area, which the U.S. has been regulating since 1890.

According to the International Labor Organization (ILO), more than 28 million people worldwide were in forced labor in 2021, generating $150 billion for those bad actors in the global supply chain. Eighty-six percent of forced labor occurred in the private sector, and 3.3 million of those forced into labor were children.

Even when a U.S. firm does not directly use forced labor, it may still be legally liable for such practices by upstream suppliers. The consequences can include legal penalties and damages to a company's brand.

Supply Chain Visibility
Experts say that one of the major contributing factors to this trend is lack of supply chain visibility — in other words, failure to track upstream suppliers who use forced labor.

According to the ILO, more than 28 million people worldwide were in forced labor in 2021. According to a 2021 McKinsey survey, only 2 percent of companies had some visibility beyond the second tier of their supply chains. Using block chain technology is one way to improve supply chain visibility, says McKinsey. In China, Walmart used a block chain platform to track and trace upstream suppliers to reduce food safety risk. Clothing manufacturer Levi Strauss publishes block-chain-secured data to fully disclose worker conditions at its upstream supplier sites.

In 2021, Congress passed the Uyghur Forced Labor Prevention Act to enforce of the prohibition on the importation of goods into the United States manufactured wholly or in part with forced labor in the People's Republic of China, especially from the Xinjiang Uyghur Autonomous Region, or Xinjiang. The act requires the government to create guidelines to help importers determine what kind of steps they need to take to avoid having goods seized by customs, says Pat Kelly, an international attorney with Minneapolis-based Fredrikson & Byron who represents clients doing cross-border business.

Decreasing Liability
What can companies do to avoid this type of liability risk and loss of goodwill?

Importers need to create published policies and training programs for their logistics and purchasing personnel to make sure they are educated on what their obligations are. When entering into supply or manufacturing agreements, they need to do the proper due diligence to ensure they are complying with the legislation, Kelly says. And they need to obtain acknowledgments from suppliers and distributors that they are familiar with the law and its requirements.

Using block chain technology is one way to improve supply chain visibility, says McKinsey. This guidance from the government is intended to help companies use effective supply chain tracing tools and management measures, Kelly explains, and also to provide evidence to demonstrate that goods originating from foreign countries were not produced using forced labor.

Ensuring that goods were not produced with forced labor “is a pretty tall order in China,” says Kelly, since the government there does not allow people into the region to do due diligence on those factories. It's extremely difficult to get that due diligence done. When reviewing the list, Kelly notes, it's important to not only look at the parent firm, but also its affiliates. “Some companies have a multitude of subsidiaries,” he says.

The U.S. Department of labor provides a list of goods produced by forced or child labor, which is updated daily. Kelly recommends that companies compare their own supplier lists to make sure they are in compliance with the law. He also recommends “ to the extent possible” that companies visit the production manufacturers of goods, inspect their facilities, or hire a third party inspector.

Ensuring that goods were not produced with forced labor “is a pretty tall order in China.” It's also important to have solid contracts and supply agreements that “identify the property party to the agreement and ensure they are not on any of the lists,” Kelly says. You'll also want to include warranties from suppliers that none of the products or raw materials are associated with forced labor and allow for immediate termination of the contract or agreement if it is found the supplier does use forced labor. Contracts should also have clauses that say buyers should not have to pay for any goods tied to forced labor. Kelly also says it's important to develop employee policies regarding forced labor-related goods and make employees aware of these policies. Posted on a company website, these policies can also serve as a warning to suppliers, Kelly adds.

Recouping losses caused by foreign suppliers can be difficult. “Chances of getting a Chinese court to provide you damages are slim to none,” says Kelly. But reporting problem suppliers to U.S. Customs can lead to seizures of goods or a ban on doing business with U.S. companies, and sometimes treaty partners.

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