As new ESG reporting requirements crop up across North America and the EU, businesses are increasingly exposed to new non-compliance risks and penalties. Two laws in particular — the Uyghur Forced Labor Prevention Act (UFLPA) and the German Supply Chain Due Diligence Act (SCDDA) — present stringent requirements and severe penalties.
While these laws are very different from each other, they are representative of the new challenges manufacturers can expect to contend with going forward. Not only do these laws cast a wide net, but they also send manufacturers a clear message that they need to prepare now to meet requirements under these laws and future regulations.
With the SCDDA in effect, it’s crucial to understand the law’s risks. Read our guide, The Manufacturer’s Guide to SCDDA Risks, to learn about your requirements, risks, and non-compliance penalties.
Human Rights Regulations With Consequences
Both the SCDDA and UFLPA create stringent requirements for manufacturers.
The Uyghur Forced Labor Prevention Act
The UFLPA, which has been in effect since June 2022, creates a rebuttable presumption that all goods sourced from the Xinjiang Uyghur Autonomous Region (XUAR) of China are made with forced labor. That means companies are required to prove otherwise, and if they cannot, these goods will not be allowed to enter the U.S. market. In fact, they will be seized at the border.
Manufacturers have already felt the law’s financial ramifications. Since the law’s enactment, U.S. Customs and Border Protection (CBP) has stopped 2,692 shipments valued at more than $817 million USD.
In 2023 and beyond, the UFLPA’s impact is only expected to expand. In fact, expansion to the list of targeted goods, additions to the UFLPA entity list, and both budgetary and technological enhancements to the CBP’s detection capabilities are just a few of the changes manufacturers could soon be forced to contend with.
The German Supply Chain Due Diligence Act
In short, the SCDDA requires companies based in Germany with more than 3,000 employees to investigate their supply chain for environmental and human rights risks. If found, these risks need to be immediately documented and addressed. In-scope companies must meet nine requirements, including establishing a risk management system, performing regular risk analysis, and reporting on and documenting due diligence activities. In 2024, the number of in-scope companies will increase to include companies with more than 1,000 employees.
Non-compliance carries steep penalties for in-scope companies, including:
- Fines, up to €800,000 or two percent of the average annual global turnover for companies earning over €400 million
- Penalty payments, either recurring or periodic, up to €50,000
- Exclusion from public contracts for up to three years
- Lawsuit risks from non-governmental organizations (NGOs) and trade unions
With the SCDDA now in full force in 2023, it’s vital to make sure manufacturers have a full grasp of their supply chain and the risks that may be hiding within it. That requires a better understanding of the relationship between your tier one suppliers and indirect suppliers and the ability to detect hidden risks in a proactive manner.
Transparency Requirements
What’s clear, both with the SCDDA and the UFLPA, is that deep transparency is key to complying with these laws.
For example, the SCDDA requires the implementation of due diligence with regard to indirect suppliers — more commonly called sub-tier suppliers — where substantiated knowledge of risks exists. That could be several links removed from complex manufacturers’ primary operations.
Similarly, in order to prevent goods from being seized at the border under the UFLPA, or to get them released from customs, companies must be able to prove that the goods are not connected in whole or in part with the XUAR or show significant due diligence that overcomes the presumption of forced labor.
That is easier said than done.
Growing Global Pressure
The SCDDA and the UFLPA are signs of what the future holds for global human rights and forced labor legislation.
The Customs Trade Partnership Against Terrorism
CTPAT is not a new program; it’s been a voluntary government-business initiative since 2001. However, what is new are the security requirements that members and aspiring applicants alike must meet. These new requirements are specifically related to forced labor, and participants have to create social compliance programs that ensure forced labor is not used in the production of goods that are imported into the U.S.
Extensive effort will be necessary to meet these new requirements, and existing CTPAT members should start preparing now to present evidence satisfying them by August 2023.
EU Forced Labor Regulation
The European Commission proposed a new regulation in September 2022 that would prohibit products made with forced labor from being imported or exported into the EU — similar to the UFLPA’s stringent requirements. It also would prohibit products made with forced labor from being made available in the EU market.
The EU Forced Labor Regulation would apply to all levels of production, all regions, and to all products.
This regulation is expected to go into effect in two years, with hard requirements coming into effect in 2025.
Companies will need to prepare now, proactively, so they are not caught off guard and suffer non-compliance penalties, like EU market access loss, and limited supply to essential products.
EU Corporate Sustainability Due Diligence Directive
The Corporate Sustainability Due Diligence Directive (CS3D), which has been strongly debated by the European Council since its proposal in February 2022, would require each member state to enact national legislation that would make it mandatory for companies to conduct due diligence on corporate sustainability topics.
EU Corporate Sustainability Reporting Directive
The upcoming EU Corporate Sustainability Reporting Directive (CSRD), put simply, requires in-scope companies to publish annual reports on their ESG activities. This is an extension of the existing scope and reporting requirements that exist under the EU Non-Financial Reporting Directive. The first batch of in-scope companies will be required to report in compliance with the CSRD on their 2024 financial year in 2025.
Proactively Adapting Your Program
Just to meet the UFLPA and the SCDDA, let alone the other regulations coming down the pike, companies will need a robust ESG solution and compliance program with contributions from across their organization. Not only do you need defensible data to track and action, but you also need the expertise required to understand all these regulations and their individual requirements.
Assent gives you the tools you need to avoid disruption in your supply chain. With our ESG solution and robust platform, you can focus on revenue-generating activities while keeping up to date on the latest regulatory news and tracking and actioning the data you need to show compliance with the UFLPA, SCDDA, and beyond.
If you would like to learn more about how Assent can help you grow better, contact us at info@assent.com.
