Business and Human Rights: Global Developments

Business and Human Rights: Global Developments

June 9, 2021, Covington Alert

Human rights continue to be a growing area of focus for the international business community. Since Covington’s last global update in October 2020, there have been numerous legal and policy developments affecting the business and human rights landscape. This update provides an overview of key developments.

A. Government Action to Date

In our February 2021 alert, we described actions taken by the U.S., Canada, and the UK in January 2021 in response to alleged oppression of Uyghurs and other ethnic minorities in the Xinjiang region and elsewhere in China. Most notable was the issuance by U.S. Customs and Border Protection (“CBP”) of a Withhold Release Order (“WRO”) blocking all imports of cotton and tomatoes originating or processed in Xinjiang.

Since January, there has been a continued escalation of measures by Western countries in response to allegations of human rights abuses in Xinjiang. On March 22, 2021, the U.S., EU, UK, and Canada imposed coordinated sanctions on several individuals alleged to be involved in running internment camps for Uyghurs and other ethnic and religious minorities. The EU, UK, and Canadian governments also imposed sanctions on the Xinjiang Production and Construction Corps (“XPCC”) Public Security Bureau, a state-owned economic and paramilitary organization that reportedly controls a range of activities in Xinjiang. The U.S. government had previously imposed sanctions on XPCC. The Canadian, Dutch, and UK Parliaments have each declared, through non-binding resolutions, that China’s treatment of Uyghurs amounts to “genocide,” and the New Zealand Parliament has stated that “severe human rights abuses” are taking place. Former U.S. Secretary of State Mike Pompeo and current U.S. Secretary of State Antony Blinken have used similar language to describe the situation.

B. China’s Response

China has responded to these measures by imposing sanctions on various government officials, academics, lawyers, and other individuals and entities in the U.S., EU, UK, and Canada. In addition to official countermeasures, Chinese consumers have participated in social media-driven boycotts of certain companies based on historical public statements expressing concern about alleged human rights abuses.

C. Potential Future Measures

In January 2021, the U.S. House of Representatives and the U.S. Senate reintroduced competing versions of the Uyghur Forced Labor Prevention Act (“UFLPA”), which passed the House with overwhelming support in the last Congress. If enacted, the law would create a rebuttable presumption prohibiting the importation of goods produced in the Xinjiang region—the House version would do so for all goods, whereas the Senate would do so for “significant” goods—absent a showing that the goods were not made with forced labor. Given the broad bi-partisan support for the UFLPA, there is a strong possibility that a version of the bill will be passed and signed into law by the Biden-Harris administration.

Trade Controls and Sanctions

A. Import Controls

Enforcement by CBP of the U.S. prohibition of imports produced in reliance on forced labor, found in Section 307 of the U.S. Tariff Act, continues to rise. According to statistics released by CBP, 371 shipments were detained between October 1, 2020 and March 31, 2021 due to the possible use of forced labor, an increase of over 300 percent from the prior release of statistics.

Since our last update, CBP has issued four new WROs: a May 2021 WRO issued against a large Chinese fishing fleet; the January 2021 Xinjiang WRO discussed above; a November 2020 WRO focused on cotton and cotton products produced by XPCC and its subsidiaries and affiliates; and a December 2020 WRO focused on a Malaysian palm oil producer and its subsidiaries and joint ventures. In addition, in March 2021 CBP issued a formal “Finding” reflecting its determination that disposable rubber gloves produced by Malaysian manufacturer Top Glove are being produced with forced labor. This was only the second use of this tool since 1996.

It appears likely that CBP will continue to expand on its use of WROs and other available enforcement tools including Findings, civil penalties, and, potentially, referrals to other law enforcement agencies. Prominent Congressional leaders have confirmed their intention to work with the Biden-Harris administration and other stakeholders to enhance the enforcement of the U.S. forced labor import prohibition, including through the use of WROs. Moreover, CBP’s Office of Trade, which has faced challenges due to insufficient personnel and resources, is expected to receive substantial budget increases. In April 2021, a group of Democrats on the Ways and Means Committee submitted a letter to the House Appropriations homeland security subcommittee asking to increase CBP’s Office of Trade fiscal year 2021 budget by $50 million from 2020 levels, and to allocate half of the increase to forced labor enforcement.

As enforcement in this area grows, U.S. importers will need to continue to implement and enhance supply chain traceability and due diligence processes sufficient to demonstrate to CBP that goods detained pursuant to a WRO or Finding have not been produced with forced labor. Clarity on the evidence required to meet that burden will likely emerge through a combination of CBP decisions and legal challenges by importers. In April 2021, for example, importer Virtus Nutrition LLC launched a challenge in the U.S. Court of International Trade arguing that CBP’s decision to exclude a shipment of palm oil derivatives from Malaysia was “arbitrary and capricious” as it had provided “extensive information” to establish that the goods were not linked to any palm oil producer named in a WRO and did not involve the use of forced labor. CBP rulings in May related to apparel shipments from China suggest that the agency is applying a high evidentiary bar where importers seek to establish that imports do not contain cotton subject to a WRO.

Other countries have also implemented or are considering implementing regulations prohibiting the importation of goods produced in reliance forced labor:

• As we have previously reported, in July 2020 the Canadian government introduced legislation prohibiting the importation of goods that are mined, manufactured or produced wholly or in part by forced labor. Recent press reports suggest that Canadian authorities have not yet actively enforced the prohibition, but that Canada’s Employment and Social Development Department (“ESDC”) is investigating forced labor claims in Malaysia’s palm oil and glove sectors, which could lead to detentions by Canada Border Services Agency (“CBSA”). Guidance issued by CBSA in May 2021 on the enforcement of the forced labor prohibition indicates that CBSA will work “closely with ESDC to identify goods that have been produced by prison or forced labour in order to prevent their entry into Canada.”
• The European Parliament’s March 2021 resolution on corporate due diligence and corporate accountability (discussed further below) called for “measures such as the prohibition of the importation of products related to severe human rights violations such as forced labour or child labour.” As part of its Trade Policy Review, the European Commission is assessing “effective action and enforcement mechanisms to ensure that forced labor does not find a place in the value chains of EU companies,” and the European Commission’s Executive Vice-President Vladis Dombrovskis has stated that the Commission is assessing possible import bans as part of the impact assessment for its anticipated EU human rights and environmental due diligence law (also discussed below).
• The Australian Senate is considering legislation that would prohibit the importation of all goods manufactured in Xinjiang and any other goods produced in China through the use of forced labor. The Customs Amendment (Banning Goods Produced By Uyghur Forced Labour) Bill 2020 was referred to the Senate Foreign Affairs, Defense, and Trade Legislation Committee for an inquiry that closed in February 2021.A report is expected to be issued in June 2021.

B. Export Controls

On May 10, 2021, the Council of the EU formally adopted an updated EU regulation governing the export, transfer, brokering and transit of dual-use items, which establishes stricter export controls on new technologies—such as cyber-surveillance items—that risk being misused in violation of human rights. Cyber-surveillance is broadly defined in the regulation to include items designed to enable the covert surveillance of natural persons by monitoring, extracting, collecting or analyzing data from information and telecommunication systems.

Dual-use items listed in the regulation's annex require authorization from the competent national authorities of EU Member States. Exporters of dual-use items are also required to establish internal compliance programs to comply with the regulation, including through "due diligence measures assessing risks related to the export of the items to end-users and end-uses." In addition, the regulation imposes obligations on exporters of non-listed cyber-surveillance items where the exporter has been informed by a competent authority of the potential use of the items to violate human rights. It requires exporters to notify the competent authorities if they become aware that the technologies they are exporting may be misused in violation of human rights, to enable the authorities to determine whether to require authorization. The revised rules also set a highest-common-denominator standard, requiring authorization for non-listed items “if another Member State requires an authorization for the export of these items on the basis of a national control list of items adopted by that Member State.” The regulation will enter into force in August 2021.

C. Human Rights Sanctions

The EU adopted a human rights sanctions regime in December 2020 that creates a framework for the EU to sanction individuals and entities that are responsible for, involved in, or associated with serious human rights violations. The sanctions can include travel bans for listed individuals and asset freezes for individuals and entities. On March 22, 2021, the EU for the first time used the new regime and imposed sanctions on eleven persons and four entities for “serious human rights violations and abuses.” The sanctions targeted individuals and entities from China, North Korea, Libya, Eritrea, South Sudan, and Russia.

The U.S. continues to use sanctions as a tool for addressing human rights issues. Beyond the Xinjiang-related sanctions described above, in April 2021, the U.S. sanctioned nine state-owned companies in Belarus under the Belarus Sanctions Regulations, citing human rights violations related to the detention of political prisoners in conjunction with the August 2020 Presidential elections. President Biden also issued an Executive Order in June 2021 prohibiting U.S. persons from investing a list of 59 Chinese companies that the EO states use surveillance technology to facilitate repression or serious human rights abuses. Additionally, in February 2021, a bipartisan group of senators introduced the Global Magnitsky Human Rights Accountability Reauthorization Act (S. 93), which would strengthen and permanently reauthorize the Global Magnitsky Act of 2016, which is currently set to expire in December 2022. If passed, the Act would strengthen several provisions of the existing Global Magnitsky regime, including by broadening the scope of the act to include “serious human rights abuses” committed by non-state actors; removing the current requirement that violations occur against only a limited class of victims; and clarifying that the U.S. government should review credible information provided by human rights NGOs in making determinations regarding the imposition of sanctions.

Due Diligence and Transparency Laws

Several jurisdictions continue to advance proposals to implement laws focused on human rights due diligence and disclosures.

A. European Union

Due Diligence Law

In the coming months the European Commission is expected to publish its proposal for a mandatory human rights and environmental due diligence law—originally expected in June 2021, the proposal is currently expected to be published in the Fall of 2021. The Commission has signaled that it aims to propose an ambitious draft, which will likely apply to a wide range of companies doing business in the EU, including entities based outside the EU. The Commission is also under pressure from the European Parliament and other stakeholders to impose obligations to conduct risk-based due diligence on a company’s entire global value chain rather than restricting the obligations to first-tier suppliers, and to ensure that the law is supported by effective enforcement mechanisms.

In a relatively rare move, the European Parliament has adopted a resolution reflecting its substantive recommendations on the content of the law and annexing a proposed draft Directive. While the European Parliament does not have the power of legislative initiative, the European Commission may factor the Parliament’s recommendations into its assessment of what the proposal should include. The European Parliament’s draft is broad in scope and signals that it will support a robust proposal. Notable features of the draft Directive include that it:

• would apply to a range of entities established in, or providing goods or services in, the EU, including large entities, listed entities, and entities operating in high-risk sectors;
• defines due diligence broadly to include obligations to identify, assess, prevent, cease, mitigate, monitor, communicate, account for, address and remediate potential or actual adverse impacts caused by an entity’s own activities or those in its value chains and business relationships;
• proposes a range of obligations in addition to due diligence, including stakeholder engagement, disclosure and reporting obligations, and a requirement to establish grievance mechanisms;
• encourages the Commission to “embrace a holistic approach that considers the risk of corruption together with the risks to human rights and the environment” by including in the scope of the law adverse impacts on the “good governance” of a country, region or territory, such as bribery and corruption, improper involvement in political activities, illegal campaign contributions, and non-compliance with applicable tax legislation;
• proposes a broad civil liability framework, which would require Member States to put in place liability regimes under which subject entities can be held liable for any harm arising out of potential or actual adverse impacts on human rights, the environment, or good governance to which they, or any entity under their control, have contributed, unless they are able to show that they took all due care in line with the Directive;
• would require each Member State to designate competent authorities to supervise compliance with the Directive, and to empower those authorities to impose administrative fines in the event of non-compliance; and
• recommends that Member States impose effective, proportionate, and dissuasive sanctions for infringements of national laws implementing the Directive, such as revenue-based fines, exclusion from public procurement, and the seizure of assets.

Conflict Minerals Regulation

In January 2021, the EU’s Conflict Minerals Regulation entered into force. The Regulation aims to ensure that EU importers, smelters and refiners responsibly source supplies of four minerals—tin, tungsten, tantalum, and gold—that may be mined using forced labor or used to finance armed conflict. Among other things, the regulation requires EU importers of these minerals to implement supply chain due diligence and management systems; carry out risk assessments and independent third party audits; and comply with disclosure and reporting obligations. The Commission has also begun to publish an indicative, non-exhaustive list of Conflict-Affected and High-Risk Areas (see here), which is intended to guide supply chain due diligence efforts pursuant to the Regulation.

B. Germany

In March 2021, the German government adopted a proposal for a new law on mandatory human rights and environmental due diligence in supply chains. If enacted it would require companies that fall within its scope to conduct annual risk assessments with regard to human rights and environmental risks and promptly address identified risks. The obligations are focused on companies’ own operations and on first-tier suppliers; they would only apply to risks involving sub-suppliers where companies become aware of such risks. The law also would require covered companies to establish grievance mechanisms and publish annual reports on their due diligence activities

The proposed German law provides that the German Federal Office for Economic Affairs and Export Control (“BAFA”) would be responsible for enforcement, and that violations of certain provisions may result in significant sanctions including revenue-based fines and exclusion from public tender processes for up to three years. The law would also allow individuals who have suffered serious injuries to authorize NGOs to bring claims for damages before German courts on their behalf.

Media reports suggest that the governing coalition in the German government has reached an agreement to move forward with the proposed law, and that it is likely to be adopted prior to September’s federal elections. The law would if passed enter into force in January 2023 for companies based in Germany with at least 3,000 employees and in January 2024 for those with at least 1,000 employees.

C. The Netherlands

In March 2021, a legislative proposal was introduced in the Dutch Parliament that would establish broad human rights and environmental due diligence obligations. The proposed law would apply to Dutch companies with international operations or activities and to foreign companies that market their products in the Netherlands. It would require subject companies to establish due diligence and grievance mechanisms consistent with the OECD Guidelines and report on their efforts. Sanctions for non-compliance would include administrative fines, cease and desist orders, and potential criminal prosecution. If passed, the law would repeal and replace the existing Child Labor Due Diligence Act (which we previously reported on here), given the overlapping subject matter.

The future of the proposed law is uncertain as the sponsoring parties have lost influence in the March 2021 general election and may have limited clout to get the law enacted. Upcoming coalition negotiations may clarify the law’s prospects.

D. United Kingdom

In our most recent global update, we reported on the UK government’s September 2020 announcement regarding reforms to the transparency reporting obligation under Section 54 of the UK Modern Slavery Act (the “UK MSA”).

As most of the changes proposed by the government last September—such as the introduction of new mandatory reporting criteria, a new single reporting deadline, and a reporting requirement for certain public bodies—require legislative amendments, the government said that it would seek changes when parliamentary time allows. The government has yet to publish a draft bill relating to these amendments, and the proposed reforms were not addressed in the legislative program that was announced on May 11, 2021. However, there have been further developments in the meantime:

• Introduction of Financial Penalties for Non-Compliance: In January 2021, the Foreign Secretary confirmed that the UK government will introduce financial penalties for organizations that fail to meet their statutory obligations to publish transparency statements under the UK MSA. In common with the other reforms outlined above, this change will require legislative amendments, and the precise form of the financial penalty provisions will not become clear until the government publishes its draft bill. However, we expect the bill to follow the gradualist approach set out in the Independent Review of the Modern Slavery Act 2015, which recommended that fines should be preceded by initial warning letters. This would represent a marked departure from the current law, which imposes no penalties for non-compliance with the reporting requirement. At present, the UK government can only compel compliance with the reporting requirement by seeking injunctive relief against non-compliant organizations. This power has never been used in practice.
• Online Registry: In March 2021, the government launched its new online modern slavery registry. The registry provides a platform for commercial organizations to share their modern slavery statements and is intended to enhance transparency by making it easier for consumers, investors and civil society organizations to locate and compare modern slavery statements. Although it is not yet mandatory to submit statements to the registry, the government’s reforms to the UK MSA are expected to require compulsory submission of statements in the future, and many reporting entities have chosen voluntarily to submit their statements for the 2020 and 2021 financial years.
• New Enforcement Body: On June 8, 2021, the Department for Business, Energy & Industrial Strategy announced that the UK government will establish a new consolidated enforcement body for employment rights with responsibility for tackling modern slavery, enforcing the minimum wage, and protecting the rights of UK workers. The government’s response to a public consultation regarding the creation of the enforcement body indicates that it will be given powers to impose financial penalties against organizations that fail to comply with Section 54 of the UK MSA.

E. Canada

In Canada, a third attempt to pass a transparency reporting law was tabled in the Senate in October 2020. Bill S-216, proposing an Act to enact the Modern Slavery Act and to amend the Customs Tariff, would require entities that have ties to Canada, meet specified employee and turnover thresholds, and conduct certain activities (including producing or selling goods, importing goods produced outside Canada into Canada, or controlling an entity that engages in such activities) to report on the steps they have taken to prevent and reduce the risk of forced labor or child labor being used at any step of the production process. The current draft of Bill S-216 sets forth mandatory reporting categories and provides for penalties of up to CAD 250,000 for non-compliance. Bill S-216 further proposes expanding Canada’s forced labor import prohibition (discussed above) to also include child labor. The Bill passed Second Reading in the Senate in March 2021 and has been referred to the Senate Committee on Banking, Trade, and Commerce.

Litigation

A. United States

In December 2020, the U.S. Supreme Court heard arguments on whether the Alien Tort Statute (“ATS”) confers jurisdiction in the U.S. for claims against an American company by a foreign plaintiff for injury that occurred abroad for aiding and abetting alleged human rights abuses through general corporate activity in the U.S. In the past, the Supreme Court has interpreted the ATS narrowly, dismissing claims involving extraterritorial injuries and foreign corporations. A decision on this case is pending.

B. United Kingdom

In the United Kingdom, several recent cases involving human rights-related complaints brought by foreign plaintiffs against UK companies in relation to the conduct of their foreign subsidiaries have been allowed to proceed to trial. The procedural bar that claimants have had to overcome in those cases has been relatively low (i.e., whether there was a “real issue to be tried”), and none of the cases have yet succeeded on the merits. However, the rulings to date have included claimant-friendly observations regarding the extent to which parent entities may owe duties of care in circumstances where, for example, a business operates a vertical organizational structure and entities within a group are centrally managed as a single commercial undertaking.

NGOs and others have questioned whether the future of lawsuits brought against UK-domiciled companies by overseas claimants has to some extent been brought into question by the European Commission’s decision in May to refuse the UK access to the Lugano Convention, which addresses issues such as jurisdiction and the recognition of foreign judgments. Although concerns have been raised about the possibility that English courts may become less willing to accept jurisdiction to hear the kinds of claims discussed in this section if the UK is not party to the Lugano Convention, we do not expect claimants’ representatives to be discouraged from pursuing similar actions before the English courts in the future.

C. France

There has been an increase in claims related to the French duty of vigilance, which requires in-scope companies to identify and prevent adverse human rights impacts in global operations and publish a vigilance plan describing those efforts. Any interested party may send a notice to a company that fails to adopt a plan and file for an injunction to force the company to do so. Injury resulting from failure to comply with the law could result in tort liability. A handful of third party stakeholders, such as NGOs and labor unions, have filed formal compliance notices, and some have raised formal legal challenges regarding a failure to adopt a vigilance plan or the adequacy of a published vigilance plan.

The business and human rights landscape continues to evolve rapidly. We anticipate further policy and legislative shifts in the coming months, particularly as the EU and countries across Europe continue to advance human rights due diligence initiatives and the Biden-Harris administration continues to develop its policies.

Covington is one of the few international law firms with significant cross-border expertise in business and human rights spanning key areas including compliance, policy, litigation, labor and employment, and corporate transactions. Our unique team draws upon attorneys and policy experts across four continents with deep human rights backgrounds. We regularly advise clients on human rights due diligence and related trade regulations, human rights policy developments, modern slavery transparency reporting, emerging best practices for human rights policies and procedures, political risk mitigation, and human rights litigation.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Business and Human Rights practice.