The impacts of the regulation on companies are mainly indirect, but they can have severe financial implications. Proactive risk management can make all the difference.
According to a joint report by the International Labor Organization (ILO), the International Organization for Migration (IOM) and the human rights group Walk Free, some 28 million people are affected by forced labor, with numbers trending upwards. The European Union has now responded with a new regulation that bans products made with forced labor from the EU market. This measure mirrors similar efforts in the United States, where the Uyghur Forced Labor Prevention Act (UFLPA) has prohibited the import of goods associated with forced labor in China’s Xinjiang region since 2021.
The regulation adopted by the EU Parliament on April 22, 2024, also known as the "Ban on Forced Labor on the Union Market", bars the production, import and export of goods made with forced labor throughout the EU market. The rules are part of a growing number of regulatory requirements to protect human rights, but they are distinct from other due diligence-related legislation such as the recently adopted EU Corporate Sustainability Due Diligence Directive (CSDDD) or the German Supply Chain Due Diligence Act (LkSG).
In contrast to company-centric due diligence laws, the Regulation on the Prevention of Forced Labor is product-oriented and does not impose any additional obligations on companies. Instead, the main addressees are EU and national authorities. They must ensure that products manufactured with forced labor are not sold, imported or exported on the EU market. The competent authorities are required to assess the risk of forced labor in products. For this purpose, the European Commission will establish a dedicated portal, the “EU Forced Labor Single Portal”. In addition to guidance documents and support services, the portal will provide information on high-risk products and regions.
Based on this data, the competent authorities will evaluate the risk of forced labor. If a potential hazard is identified, further investigations by the authorities are required. These include the collection of relevant information from companies involved in the production, purchase, or distribution of high-risk goods along the supply chain.
Upon request, companies are obliged to provide the competent authorities with detailed statements, in particular on measures taken to combat forced labor. The authorities analyze the information submitted and decide on further steps: If a company already adheres to international guidelines or national laws that effectively counter, prevent or end forced labor, this may reduce the identified risk associated with the products under scrutiny. In such cases, further investigations may be unnecessary.
However, if a company fails to take adequate and effective measures to minimize the risk of forced labor in its business operations or in the supply chain, the competent authority will assume a reasonable suspicion of forced labor and initiate further action, such as interviews or on-site visits. If forced labor is found to occur at any stage along a product's supply chain, the sale, import into and export from the EU market will be prohibited. Affected products must then be donated, recycled, destroyed, or rendered unusable within a reasonable timeframe. Access to the EU market can only be restored once a company has eliminated forced labor from affected supply chains.
The regulation provides for the following main steps:
In case of reasonable suspicion: Thorough investigation in collaboration with the company concerned. Decision on whether a violation exists and, if necessary, prohibition of the product on the EU market.
In the absence of evidence of forced labor: No restrictions on the production, purchase, or distribution of the product.
Even if the regulation does not explicitly stipulate any new due diligence obligations for companies, it does strengthen the relevance of established guidelines and frameworks of international organizations such as the OECD or the UN. At the same time, regulatory regimes such as the forthcoming CSDDD and national requirements are given significantly more weight.
Multinational companies must consider the possibility that certain products may be excluded from the EU market due to the prevalence of forced labor in their supply chains. This rigorous approach should bolster companies’ motivation to fully comply with their due diligence obligations regarding forced labor.
Existing due diligence laws such as the German LkSG impose a “duty of effort” on companies to ensure that human rights are respected in their supply chains. If companies can demonstrate that they have adequately fulfilled their legal due diligence obligations, they cannot be held liable for human rights violations under these laws. However, the new EU regulation on forced labor introduces sanctions for transgressions that ultimately undermine companies’ business models.
The EU regulation goes well beyond the scope of other due diligence laws by targeting all product groups and industries. As a result, companies from third countries can now also be sanctioned if they are active on the EU market or manufacture goods for the EU market.
The ban on products made with forced labor is likely to have a direct bearing on companies’ approach to ESG risk management and could counteract the steady rise in forced labor around the world.
The regulation still needs to be formally adopted by the Council. It will then be published in the Official Journal of the EU and enter into force 20 days later. After a three-year implementation period, the law is expected to apply for the first time in 2027.
Until then, the EU has its work cut out: The aforementioned “EU Forced Labor Single Portal” must be set up to enforce the new rules. It will include guidelines, a risk database, information on product bans and a portal for whistleblowers. In addition, an EU network against products associated with forced labor – the so-called Union Network Against Forced Labor Products – is to be established to improve cooperation between the authorities. It will also provide for measures to strengthen cooperation with third countries and non-governmental organizations to ensure concerted action in the fight against forced labor.
Companies operating in the EU should use this time to implement efficient risk management systems and processes with regards to forced labor, both in their own business operations and in their supply chains.
We have been helping companies for many years to fulfill their due diligence obligations with respect to human rights and environmental standards. Many of our customers already use our platform to manage forced labor risks, for example within the scope of the German LkSG, and are therefore well-equipped to meet tightened EU requirements in the future.
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