Noerr | The EU Forced Labour Regulation – Relevance for US companies

Dr. Mansur Pour Rafsendjani, Senior Partner of the German law firm Noerr Partnerschaftsges. mbB in Munich, Germany

European ESG Developments

When the President of the EU Commission, Ursula von der Leyen, took office in 2019, she had a mission: To make the EU the first climate-neutral area in the world by 2050, to cut pollution and restore a healthy balance in nature and ecosystems and to establish fair businesses that respect human rights. It is one of the most ambitious political projects to date following the principle of “Who cares Wins”.

Since then the European legislator has issued multiple ESG[1] laws, such as the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the Corporates Sustainability Financial Regulation (CSRF), the European Deforestation Regulation (EUDR), or the Carbon Border Adjustment Mechanism (CBAM).

Recently, the EU has issued the so-called EU Forced Labour Regulation that creates a legal framework to target products manufactured using forced labor. The regulation was published in the Official Journal of the EU on 12 December 2024.

The Forced Labour Regulation” complements insofar the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG), the EU Supply Chain Directive (CSDDD) and other EU legal acts that protect human rights in the supply chain, such as the EU Regulation on Conflict Minerals.

While the aforementioned regulations oblige certain companies to review their supply chains with regard to environmental and human rights risks and provide for severe financial penalties if these due diligence obligations are breached, the new Forced Labour Regulation aims to keep products manufactured using forced labour off the EU market and prevent them from entering the world.

In future, similar the US Uigur Forced Labour Intervention Act, products made by forced labor will not be allowed to be placed or made available on the EU market or to be exported from the EU market.

 

I.            Products concerned

This prohibition applies to all components of a product as the prohibition applies to products for which forced labor has been used “in whole or in part at any stage of its extraction, harvest, production or manufacture, including in the working or processing related to a product at any stage of its supply chain.” This means that if any component or part of a product involved forced labor at any stage, the entire product is subject to the prohibition from being placed or made available on the EU market or being exported from it.

 

II.          Application to US companies

EU Forced Labour Regulation applies to both EU and non-EU companies. The regulation targets any natural or legal person or association of persons involved in placing or making available products on the EU market or exporting products from it. This means that (i) Non-EU Manufacturers that supply products to the EU market, must comply with the regulation, ensuring that their products or any parts thereof are not made with forced labor. Also (ii) Importers established in the EU that bring in products from outside the EU must ensure these products are not linked to forced labor. Further The regulation applies (iii) to products offered for sale online or through other means of distance sales if the offer is directed at end users within the EU.

Overall, the focus is on the products and their supply chains that impact the EU market, regardless of the geographic location of the company manufacturing or supplying the products.

 

III.         Definition of Forced Labour

“Forced labor,” as defined in the EU regulation, aligns with the definition in Article 2 of the International Labour Organization’s (ILO) Convention No. 29. It encompasses all work or service demanded from any individual under the threat of a penalty, where the individual has not volunteered to perform the work. The definition includes forced child labor and excludes specific circumstances such as, compulsory military service for tasks of a purely military nature, work required as a civic obligation in a fully self-governing country, work performed by persons as a result of a court conviction, provided it is supervised by a public authority and the person is not used by private companies and emergency-related work during situations like war, natural disasters, or other calamities as well as minor communal services for the community’s direct benefit, with prior consultation with community members or their representatives. Forced labor includes also work imposed by state authorities for political coercion, ideological education, economic development mobilization, labor discipline, punishment for strikes, or as a means of racial, social, national, or religious discrimination, as described in ILO Convention No. 105.

 

IV.        Obligations of manufacturers and other economic operators

The regulation outlines on the one hand the obligations and responsibilities of manufacturers, i.e individuals who produce or have products produced and market these products under their own name or trademark and producers, i.e those indvidiuals in the production of agricultural products or raw materials. On the other hand the regulation applies to importers, exporters and distributors/retailers (economic operators).

Overall, the term “economic operator” includes any natural or legal person or association engaged in placing or making available products on the Union market or exporting products from it. This wide definition ensures comprehensive coverage of all parties potentially involved with or responsible for products subjected to forced labor scrutiny.

 

1.          Obligations of Manufacturers

Manufacturers, defined as those who produce or have products produced under their name or trademark, must ensure that forced labor is not used at any stage of their production process (Responsible Production).

Like economic operators, manufacturers must not produce goods using forced labor if these goods are to be placed on the EU market or exported from the EU (Compliance with Prohibitions).

Manufacturers must cooperate with investigations by providing necessary information and allowing inspections if required (Participation in Investigations).

Manufacturers need to maintain oversight of their supply chains to ensure compliance with the regulation, ensuring all suppliers adhere to the same standards against forced labor (Supply Chain Oversight).

 

2.          Obligations of Economic Operators:

Economic operators are prohibited from placing products made with forced labor on the EU market or exporting them from the EU. This applies to any stage of production, including extraction, harvesting, and manufacturing (Prohibition on Forced Labor Products).

Economic operators must further implement due diligence processes to identify, prevent, and mitigate risks of forced labor in their supply chains. This includes following applicable EU and national laws, and international guidelines from organizations such as the ILO and OECD (Due Diligence).

Economic operators must respond to competent authorities’ requests for information on due diligence practices related to forced labor (Information Submission).

If found to be in violation, operators must withdraw affected products from the market. They are responsible for disposing of these products in alignment with environmental laws and priorities, such as recycling (Product Withdrawal and Disposal).

Finally Economic operators are encouraged to engage in dialogue with competent authorities and remediate any instances of forced labor identified within their supply chains (Engagement and Remediation).

 

V.          Sanctions

Both economic operators and manufacturers will be subject to heavy penalties and fines for non-compliance, including financial penalties determined by member states based on factors like the gravity and duration of the non-compliance and cooperation with authorities. The member states will have to issue corresponding national laws and have then to notify the EU commission about it. The experience.

 

VI.        Onus of evidence

In the context of the EU Regulation on prohibiting products made with forced labor, the onus of proof largely rests on the “lead competent authority”. This is the entity responsible for investigating and making decisions regarding potential violations of the regulation within the European Union.

The lead competent authority can either be a national competent authority within a Member State or the European Commission itself, depending on the location of the suspected forced labor. If the suspected forced labor is occurring within a Member State’s territory, the competent authority of that specific Member State becomes the lead competent authority for handling the investigation. If the suspected forced labor is taking place outside of the EU, the European Commission acts as the lead competent authority.

Initially, the lead competent authority must gather and assess relevant information to establish whether products are in violation of the prohibition. However, if evidence of non-compliance or its likelihood is found, economic operators must demonstrate compliance or their efforts to eliminate forced labor from their supply chains.

In essence, while the lead competent authority has the burden to establish whether forced labor is used, economic operators must cooperate by providing comprehensive information, demonstrating their efforts to address potential forced labor risks. In instances of failure to comply with information requests, the authority can proceed based on available facts.

 

VII.      Process of Investigations

The lead competent authority is responsible for initiating investigations into potential violations of the prohibition on products made with forced labor. This occurs when there is a “substantiated concern” regarding a product (Initiating).

Before formally beginning an investigation, the lead competent authority requests information from economic operators, who must provide documentation demonstrating their due diligence efforts to prevent, mitigate, or eliminate forced labor from their supply chains (Preliminary Investigation).

The lead competent authority assesses all gathered information and evidence during the preliminary phase and the investigation itself. If economic operators fail to provide adequate information or if they impede the investigation, the authority may rely on other facts to establish proof of violation (Information Assessment).

In certain situations, especially when there is a risk of forced labor within the EU, competent authorities can perform field inspections. For risks identified outside the EU, the European Commission may carry out inspections, provided it receives consent from the affected parties and notification from the relevant government (Field Inspection).

In coordination with customs authorities, competent authorities can control products entering or leaving the EU market, ensuring that products identified as violating the prohibition are not released for free circulation or export (Customs Control).

If the authority concludes there is a violation, it will take decisive action against the products, including prohibiting their placement on the market and mandating their withdrawal. They can also order the withdrawal and appropriate disposal of such products (Decision Making).

Significance for practice.

Companies – including US companies – that intend to operate in the EU and to offer their products and services on this market (including online) will have to set up an appropriate and effective ESG risk management and have to check not only their own business operations but also those of their supply chains for forced labour. Even though companies are currently complaining about excessive bureaucracy and the EU Commission has announced to streamline the various ESG laws, these regulations, which are aimed at a liveable environment and a fair society, will not disappear.

[1]     The term “ESG” dates back to 2004, when the then UN Secretary General Kofi Annan invited 55 chief executive officers of major financial institutions to participate in an international project to integrate ESG into capital markets. That group produced a study in 2005 titled Who Cares Wins, which set out the business case for embedding ESG factors into investment decisions to improve the sustainability of markets that lead to better outcomes for society.

 

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