Legal Risks in Global Supply Logistics (II)

Coronavirus and the economic downturn: compliance considerations within supply chain logistics

In the first article in this series (Legal Risks in Global Supply Logistics (I)), we discussed the impact of COVID-19 on global supply logistics. The article explored two types of associated legal risks which are highlighted by the coronavirus, namely contract risk and bribery and corruption risk. In this article, we will consider another risk that is common in global supply chains - forced labor as a compliance risk.

Compliance risk - forced labor

It is important for companies and their supply chains to comply with international laws and regulations as well as those of the countries in which they operate. This can help them avoid reputational damage as well as financial and legal penalties.

A typical compliance risk in global supply logistics faced by many companies is modern slavery, with laborers, especially in developing countries, being forced to work under unethical and illegal conditions. Currently, much production is outsourced to these countries as part of cost-cutting measures, adding to the risk. The COVID-19 pandemic has highlighted the risks to workforce continuity presented by complex supply chains which rely on forced labor, as poor and overcrowded working conditions exponentially increase the rate of virus transmission.[1] This may cause factories to be shut down, leading to disruption to multiple stages of the supply chain, causing financial and reputational damage, as well as legal consequences.

There are many examples which demonstrate to us the importance of a transparent supply chain in addressing compliance risks. For instance, in the Rana Plaza accident in 2013, over 1,000 factory workers died as a result of a garment factory collapsing. One of the retailers, Primark, paid out millions of dollars in compensation to victims under the auspices of a compensation scheme backed by the International Labor Organization, a UN agency.

In the chocolate manufacturing industry, popular brand names  have been brought to court by class actions for allegedly selling cocoa which is farmed by children and slaves in West Africa, while claiming it to be “ethically” or “sustainably” sourced.

From these examples, we can see that companies using forced labor in their supply chains could find themselves breaching laws prohibiting the importation of goods made with forced labor or which mandate disclosure of forced labor supply chain risks. In addition, a popular brand in the consumer sector was suggested to be “in breach of international [labor] regulations outlined by the...International Labour Organisation, which clearly stipulates that children’s education must not be compromised.”[2]

Many companies have taken concrete steps to comply with laws and regulations regarding forced labor, reducing their exposure to legal action as well as enhancing brand reputation and sales. Adidas has received praise for training tanneries in Asia on how to deal with forced labor risks and taking steps to address risks at hide suppliers in South America. Meanwhile, Nike has also been complimented for leading the industry in disclosing information related to the workforce in its supply chains.[3] Not only are the commendable actions of these companies in compliant with applicable laws and regulations, they could also enhance brand reputation and sales.

Almost all of the companies mentioned above, which were accused of being non-compliant with laws and standards due to their involvement in forced labor, have a presence in Hong Kong and Singapore. They either possess retail shops or having their products available for sale in these territories. In addition, a modern slavery bill was introduced in Hong Kong in 2019 by a private member. If passed, it would, inter alia, “[require] companies in Hong Kong to report on steps taken to identify instances of human trafficking and forced labor in supply chains.”[4] Moreover, in Singapore, low-skilled temporary migrants from neighboring countries are employed to work in factories, construction sites and agricultural supply chains, where it has been said that the recruitment and labor hire industry involving multi-billions of dollars is full of significant abuses.[5] Therefore, the issue of forced labor is not one which is foreign to us and companies in these areas should be wary of the consequences of non-compliance in their supply chains and are reminded to review their supply chain ecosystems.

[1] https://www.responsible-investor.com/articles/covid-19-demonstrates-the-need-to-address-esg-risks-in-supply-chains

[2] https://www.greenqueen.com.hk/nespresso-starbucks-coffee-beans-supplied-by-child-labour-farms-investigation/

[3] https://hk.fashionnetwork.com/news/Shoe-brands-urged-to-tackle-forced-labor-at-tanneries-and-ranches,842829.html

[4] https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/May-2019-Review-of-ESG-Guide/Responses-(December-2019)/cp201905r_091.pdf

[5] https://www.elevatelimited.com/blog/top-trends-in-apac/