Canada has become the latest major jurisdiction to address human rights issues in global supply chains, with the introduction of a new law that comes into force in January.
Passed by the Canadian parliament earlier this month, the Fighting Against Forced Labour and Child Labour in Supply Chains Act implements the country’s international commitment to contribute to the fight against labour rights violations.
The act has been hailed by the Canadian government as turning the country from “a laggard to a leader in the global fight against slavery”. It imposes annual reporting requirements on businesses and government entities to lay out the measures they are taking to prevent the risk that forced labour or child labour is used by them or in their supply chains, and comes with new enforcement powers and significant financial penalties for violations.
The new law, part of a growing patchwork of global efforts to reform supply chains, follows similar legislation passed by Australia, France, Germany, the UK and the US, but is far broader in scope. While Germany’s Supply Chain Due Diligence Act, which came into force at the beginning of this year, initially covers companies of at least 3,000 employees, the Canadian legislation applies to a far greater number of businesses. Not only does it cover all entities listed on a Canadian stock exchange, but also applies to any company with activity, assets or a place of business in the country that meets two of the three conditions of C$20mn in assets, C$40mn in revenue or at least 250 employees.
The legislation calls for companies to provide a raft of information on supply chain policies and due diligence processes in a formal report each May, including training provided to employees on forced and child labour as well as the processes they use to measure how effective they are in preventing the use of forced labour in their business activities.
As business leaders prepare for increased regulatory scrutiny of their supply chains, GTR speaks to Clifford Sosnow, co-chair of law firm Fasken’s international trade and investment group, to learn what the change in the Canadian enforcement landscape means for companies engaged in trade.
GTR: What do businesses need to know about the applicability of the act’s reporting requirements?
Sosnow: The act is a significant new piece of legislation with a broad-based focus on sweeping in as many companies as possible. It is really not difficult to meet the criteria for applicability. You only have to have met two of the three criteria in one of the previous two years, and a medium-sized business with a bricks and mortars operation or physical plant will easily hit that threshold. Therefore, thousands of companies are going to be caught up in this net.
Essentially, this legislation pushes the obligation further and further down to the smaller companies, giving them the same responsibilities as large corporates. What’s more, we expect to see more regulation coming from Ottawa that may supersede this legislation, and it’s possible that it may go even further down and remove the filters as to who it might apply to. This is not the endpoint. This legislation is the foundation, and we expect to see additions that could bring greater obligations, even wider scope, and perhaps even greater penalties.
GTR: How onerous are the act’s obligations, and do businesses have adequate visibility over their supply chains to comply with them?
Sosnow: It’s definitely onerous, and it’s a cost, but the reality is that regulation always comes with a compliance cost. We’re working in an environment now where regulators around the world are saying that we really need to stamp this out. The social, moral and ethical costs are too great, so as a business, the cost of non-compliance is going to be greater than any investment required. Once those processes are in place, it just becomes a baked-in cost and something that’s understood as the cost of doing business.
Visibility, however, is an issue, and this is where some of the concerns arise. The Canadian law requires companies to set out their due diligence processes, and the concern that a lot of businesses have is that they know their immediate supplier or buyer, but they may not know who’s behind them.
As a minimum, buyers really do need to go to that tier one supplier, but they also should be thinking about tools they can put in place to understand where those suppliers are getting their products from. Part of that could be certifications and part of that can be their own due diligence in asking the right questions of suppliers. As with money laundering, as with sanctions, as with bribery and corruption, there’s an onus now on companies to start asking questions. There are also now third-party NGOs and service providers who will do audits, and businesses may want to start thinking about engaging them. They are available, and they do have tools, and some of those tools are low or zero cost.
The headline is always that regulators are not asking for perfection. Regulators are asking for reasonable due diligence. And reasonable due diligence is not simply throwing up your hands and saying, ‘I can’t do this, this is too complicated’.
GTR: What advice would you give to businesses ahead of the entry into force of the act?
Sosnow: This is an important issue, and what we say to clients is, you need to spend some think time on this now. Work out how you are going to manage the laws that apply to you, because these laws are not going away – in fact they’re going to become more onerous. There are key questions to ask yourself here. How do you want to structure your supply chains? How do you want to do your due diligence? What are the tools you need? Who do you need to bring into assist? This could be NGOs, trade commissioners, industry associations, for example. All of those tools and resources are available. You also need to think about what your strategy, mindset and internal policies are, and start training employees and implementing due diligence and investigation policies. There’s also the expectation that not only will you do this, but you will, on an annual basis, tell the world this is what you’re doing.
I am seeing clients now asking questions about the law. It’s moved into the conscious space of companies, and that in itself is transformative. This is a legal requirement to continuing to do business that would have been foreign to most companies 10 years ago.
In the space of a relatively short time, there’s been a very rapid evolution of thinking on how companies need to address the issue of forced labour and child labour. It’s not simply a case of the right thing to do as human beings; it’s now a compulsion. There’s a transforming of corporate consciousness, as it was with sanctions, bribery and corruption, and money laundering. These are intersecting circles of governance, and all of them require a different way of thinking about doing business.