The recent ruling by the U.K. Court of Appeal declared that the U.K. National Crime Agency’s decision not to investigate the importation of cotton produced through the use of Uyghur forced labor in China was unlawful. This verdict could be a watershed moment for companies wishing to do business in the U.K.
This ruling signals an enhanced risk that companies trading in goods that they know, or suspect, are the product of human rights violations, or the financial institutions helping facilitate this type of business, can become the subjects of money laundering investigations and potential civil and criminal liability.
The decision brings the U.K. closer to both the EU positions prohibiting products made through the use of forced labor and directing companies to ensure that they are meeting human rights and environmental obligations as spelled out in the Corporate Sustainability Due Diligence directive, and the U.S. position on this specific issue represented in the Uyghur Forced Labor Prevention Act. It represents a movement in the U.K., EU, and U.S., by governments and individuals, to identify and hold companies responsible for turning a blind eye to the use of forced labor and other human rights violations. In addition to legal risks, companies face reputation and operational setbacks. In the United States for example, companies found to be using forced labor have been .
These decisions and legislation are a wakeup call for companies to prioritize supply chain due diligence. It is essential for companies to know who they are working with, both directly and down the chain, who is producing their goods, and how they are being produced. Furthermore, banks and other financial institutions are now on notice that handling payments and financial transactions of companies who neglect or ignore due diligence efforts, which in turn can open them up to liability for partnering or aiding in the use of forced labor, can potentially expose them to criminal and civil liability for facilitating money laundering by allowing the proceeds of criminal activity to pass through their systems.
Due Diligence in the Supply Chain
Due diligence in the supply chain is not a new issue, however companies in industries like cotton production or the extraction and use of raw materials, routinely struggle to identify and investigate supply chain issues. These recent legal and legislative actions indicate that they can no longer be passive in addressing this issue. Employing a knowledgeable investigative firm with a global footprint and experience in conducting supply chain due diligence, can uniquely situate a company to understand and investigate potential supply chain issues around the world and can confront these issues from multiple angles.
From the business and compliance perspective, companies must be able to confidently answer these key questions:
- Who are your partners, where are they located, and how do they operate their business?
- Do your partners use sub-contractors? If yes, who? Where are these sub-contractors located and how do they operate their business?
- Do the countries where the goods are being produced have a history of human rights violations and the use of forced labor?
To answer these questions, companies must go beyond a cursory review of their supply chain and partners. They must conduct in-depth due diligence to identify entities and individuals in order to protect themselves and their business operations. Partnering with a firm that employs a myriad of strategies to investigate these issues and conduct due diligence—such as performing public records research, deploying personnel to relevant locations to observe where the goods are being produced and by whom, and using technology to track the shipments of goods—can help mitigate any concerns about unauthorized steps in the supply chain and ensure business operations remain secure.
Financial institutions also bear the burden of conducting proper due diligence by monitoring and strengthening their due diligence programs to ensure they are not facilitating financial transactions for companies known to use forced labor. Financial institutions should leverage firms with expertise in sanctions and anti-money laundering processes to ensure the integrity of their financial systems. Utilizing their expertise, they can assist in establishing comprehensive and robust Know Your Customer (KYC) and other due diligence programs and processes to monitor financial transactions passing through their systems and flag any suspicious activity that may relate to companies known to have used forced labor or to have committed or ignored other human rights violations.
From either perspective, it is clear that performing thorough supply chain due diligence is a key step in protecting business operations from a multitude of risk factors, including forced labor and other human rights violations. When setting up these programs, companies and financial institutions must ensure the work is being done effectively and efficiently. Partnering with experienced professionals to monitor and identify issues can allow them to address issues before investigations are opened into these activities. By being pro-active in performing due diligence and conducting investigations to identify violations and report them to relevant authorities, companies and financial institutions will not only protect themselves from liability, but aid the victims of these violations, including the approximately 50 million people living on modern slavery, including 28 million people in forced labor
