Not Preparing for Supply Chain Forced Labor Laws Could Cost Your Company

Under an expanding global legal framework, multinational companies across all sectors are now accountable for every step within each of their supply chains. If goods produced through forced labor enter their supply chains, they risk significant repercussions due to forced labor laws in the United States, Canada, and Mexico. These laws impose obligations on companies to ensure ethical sourcing and transparency—and create penalties for noncompliance. The European Union has its own law, the EU Forced Labor Regulation, on the way.

Here’s a brief overview of current major forced labor laws and their implications for businesses.

• Tariff Act of 1930 (19 U.S.C. § 1307) and the US forced labor ban: Section 307 of the Tariff Act prohibits the importation of goods into the United States that have been mined, produced, or manufactured, wholly or in part, by forced labor, including convict labor, forced child labor, and indentured labor.

• Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act (S-211): Starting May 31, 2024, this law creates reporting requirements for corporations that meet specific criteria related to revenue, assets, and employees. Those reporting obligations include the disclosure of supply chain structures, policies, risk assessments, and remediation measures to curtail forced labor.

• Mexico’s Forced Labor Ban: Mexico’s ban prohibits imports produced with forced labor and empowers its Ministry of Labor and Social Welfare to detain suspect goods. Notably, Mexico’s regulations defer investigations into forced labor to the country of origin.

Companies subject to these laws should have already implemented comprehensive compliance measures to ensure adherence to their strict requirements. But not all companies have.

Let’s consider what they’re risking.

Potential risks of noncompliance with forced labor laws

Failing to comply with forced labor laws makes companies vulnerable to much more than mere financial penalties. Companies that turn a blind eye to the labor practices within their supply chains may find their market access cut off, and their reputations irreparably tarnished.

Here are some of the potential consequences of lax supply chain forced labor risk management.

Civil and criminal penalties and fines

Governments are cracking down on forced labor, and noncompliance may lead to hefty civil penalties and fines.

Canada’s S-211 allows fines of up to $250,000 for companies that fail to comply with the act or knowingly obstruct or make false statements in an annual report. These fines can also be levied against individuals such as company directors, officers, or agents if they participate in violating the act.

In severe cases, individuals who are found to be responsible for or complicit in forced labor practices may be criminally charged, fined, or even imprisoned.

Loss of market access and opportunities

Businesses that violate supply chain forced labor laws may lose access to certain markets or trading partners. Governments and industry associations may impose market restrictions or bans on noncompliant products, limiting market expansion and revenue growth. Noncompliance can also result in disqualification from government contracts and public procurement processes.

Supply chain disruptions

Forced labor violations can cause delays in sourcing, production, and distribution. Detained shipments and increased border scrutiny can also lead to expensive logistical challenges. Finding alternative sources for materials that meet ethical standards can be time-consuming and expensive. Any of these delays may also cause a business to violate its contractual obligations to supply materials or products, further increasing its costs.

Labor issues could cost public trust

Allegations that a company is profiting from forced labor in the supply chain can strain relations with its internal workforce. Employees may lose trust in the company’s commitment to ethical practices, damaging both morale and the overall organizational culture. This can have knock-on effects, such as increased turnover and higher recruitment costs.

Legal costs due to violations

Reactively addressing forced labor violations requires substantial investment in legal and auditing resources, as well as the cost of conducting thorough investigations and implementing corrective actions in dysfunctional supply chains.

Reputational harm

Allegations of forced labor in a supply chain can damage a company’s reputation, erode consumer trust and investor confidence.

Avoid the penalties of noncompliance by proactively managing supply chain forced labor risk

Noncompliance with supply chain forced labor regulation carries financial, legal, and reputational costs. Businesses must prioritize ethical sourcing practices, invest in robust compliance programs, and uphold human rights standards to mitigate these risks effectively.

Proactive efforts to recognize and combat forced labor can help a company avoid these risks and contribute to a sustainable, ethical global supply chain ecosystem.

Request a demo to learn how Sourcemap can help you take control of your supply chain from end to end.