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Following the European Commission’s proposed regulation to prohibit products made with forced labour, the European Parliament and the Council have presented their amendments to the draft regulation, marking a significant step forward in the legislative process.
The amendments emphasize i.a. tighter investigative procedures and increased responsibilities for companies.
The regulation, if adopted, would not only impose stringent obligations on companies but also necessitate comprehensive supply chain mapping to mitigate the risk of forced labor, impacting businesses across various sectors, including SMEs.
In September 2022, the European Commission (the “Commission”) proposed a regulation prohibiting products made with forced labour on the EU market[1] (the “Regulation”). The proposed Regulation covers products produced in the EU for domestic consumption and for export as well as imported goods.
Since our last newsletter introducing the proposal[2], the European Parliament (the “Parliament”) has adopted its position on 8 November 2023[3], and on 26 January 2024, the Council of the European Union (the “Council”) formalized its mandate for negotiations[4].
Adopted during the Parliament’s November I plenary session of 2023, the report, that now constitutes the Parliament’s position, presents a series of amendments to the Commission’s proposal.
The Parliament’s report further aligns the definition of forced labour with the standards of the International Labour Organisation by specifying that: “Forced labour includes work and services, which is performed or provided along the supply chain, and is exacted from any person under the threat of a penalty and for which the person has not offered himself or herself voluntarily.”
The Commission’s proposal suggested a two-tier investigative process based on a risk-based approach, tasking the competent authority with carrying out a preliminary investigation on whether there is a “substantiated concern” that a product has been made with forced labour. If such concern is found to be present, an investigation, in which all available information will be examined, will be launched. The Parliament proposes to strengthen the Commission’s role in the investigation by adding that the Commission also has the power to initiate a preliminary investigation and to monitor the procedure alongside the Member State authorities.
Moreover, the Parliament suggests tightening up the investigative system by placing the burden of proof on the relevant company in certain situations. The Commission’s proposal included a responsibility for the Commission to issue guidelines on risk indicators of forced labour. The Parliament extends this by tasking the Commission with creating a list of geographical areas and economic sectors at high risk of using forced labour. For products produced in the listed areas, the company bears the burden of proof.
To further ensure a more efficient exchange of information, the Parliament suggests that the Commission sets up a dedicated centralised mechanism for the submission of information and provides guidance to companies, including support tools benefitting in particular SMEs and economic operators falling outside the scope of the proposed CSDDD[5].
If an investigation concludes with a finding of forced labour in the production of a product, the competent authority may ban its placement and export on the EU market. Products already available on the EU market must be withdrawn and disposed of. The Parliament adds that perishable products must be donated to charitable organisations by the economic operators involved in the supply chain, and non-perishable ones be recycled, with disposal as a last resort. Re-entry of products withdrawn from the EU market requires proof of ceased use of forced labour in the company’s operations and supply chain.
Recently, the Council also agreed its negotiating mandate relating to the draft Regulation.
According to the Council negotiating mandate, the Regulation should cover distance selling, including online selling. To determine if an offer for sale is targeted at EU end-users, relevant factors such as geographical delivery areas, languages available, payment methods, and use of currency should be considered in a case-by-case analysis.
The Council mandate also strengthens the role of the Commission in the investigative phases and foresees an essential collaboration between the competent national authorities and the Commission to ensure that the enforcement and implementation of the proposed Regulation align with the requirements of the proposed CSDDD and the Whistleblower Directive[6].
To reduce the administrative burden and streamline case allocation, the Commission will assess whether the relevant products are of “Union interest” based on relevant, verifiable and credible information. If products fall within “Union interest”, the Commission will automatically take over the preliminary investigative phase. In other cases, the competent national authority will carry out the preliminary investigation.
“Union interest” is assumed to exist when at least one of the following criteria are met:
In cross-border investigations, the Council mandate simplifies the coordination by designating a lead competent authority responsible for launching the preliminary investigative phase and for the continuity of the investigation. The investigation should be carried out with greater involvement of the Union Network against Forced Labour Products (the “Network”) to ensure transparency and a streamlined Union approach.
The creation of the Network, which will coordinate the measures taken by competent national authorities and the Commission, was introduced in the Commission’s proposal. The Council’s mandate also anticipates the establishment of the Network, and its position formalises the administrative cooperation between the competent authorities and the Commission to ensure the Network’s active participation in all phases from a preliminary investigation to the possible banning of a product.
The Council mandate also foresees the establishment of a forced labour single portal that provides easily accessible and relevant information and tools, a database and guidelines, and easy access to decision-related information. The mandate accentuates that SMEs can have limited resources to ensure that their products are free from forced labour for which reason the Commission should issue guidelines and other tools to help SMEs to comply with the requirements of the prohibition.
The mandate clarifies that the procedure for field inspections should be considered a last resort measure. Such inspections should be based on a risk-based approach and carried out in full respect of national sovereignty.
If an inspection in a third country is deemed necessary, the Commission must initiate contact with the country either at its own initiative, in cases of “Union interest”, or at the request of a competent authority. The Commission should request the third country government to inspect the suspected case of forced labour. If the request is rejected, the refusal may be considered a case of non-cooperation. Thus, the Commission must make a decision based on other relevant evidence.
Once an investigation is finalised, the Commission will be responsible for preparing the final decision via an implementing act to be adopted in accordance with the examination procedure. A summary of the decision will be available on the forced labour single portal.
Interinstitutional negotiations on the final text have already begun, although it is still not clear whether they will be able to finalise the Regulation before the Parliament elections in June. Once the Regulation is formally adopted, the main obligations imposed will apply 24 months (or 36 months, as per the Council mandate) from its entry into force. The Commission will then be required to issue guidelines and offer other tools to relevant companies and in particular to SMEs.
If the Regulation is adopted, it will increase companies’ obligations to map their supply chains to ensure that forced labour does not occur. To ensure full visibility of their entire supply chain, companies must obtain detailed information on the producers, manufacturers and suppliers of products and components.
Mapping the supply chain will be particularly necessary for companies operating in high-risk areas and sectors if the Parliament’s amendment on placing the burden of proof on the companies in certain situations is included in the final text.
No specific industries and no businesses, including SMEs, making products available on the EU market or exporting products from the EU are exempted from the Regulation. However, competent authorities may consider the size and resources of the economic operators before initiating a formal investigation. SMEs would also benefit from additional support tools.
Companies failing to comply with the decision of a Member State would face penalties under national law, which should be “effective, proportionate and dissuasive”.
Gorrissen Federspiel closely follows the development of the draft Regulation and we can assist with advice on the mapping of supply chains as well as required due diligence processes. If you have any questions, please contact a member of our Compliance & Sustainability team.
[1] https://single-market-economy.ec.europa.eu/document/785da6ff-abe3-43f7-a693-1185c96e930e_en
[2] https://gorrissenfederspiel.com/en/new-proposal-to-prohibit-products-on-the-eu-market-made-with-forced-labour/
[3] https://www.europarl.europa.eu/doceo/document/A-9-2023-0306_EN.html#_section1
[4] https://data.consilium.europa.eu/doc/document/ST-5903-2024-INIT/en/pdf
[5] Corporate Sustainability Due Diligence Directive
[6] Directive (EU) 2019/1937 of the European Parliament and of the Council of 23 October 2019 on the protection of persons who report breaches of Union law