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Human Trafficking: California and President Obama Lay Out New Requirements for Prevention of Human Trafficking and Forced Labor


December 2012 marks the beginning of a new compliance regime. California Attorney General Kamala Harris heads into the new year with a list of targets provided by the California Franchise Board, which identifies those companies that must be compliant with an anti-human trafficking statute that puts their international supply chains in the domestic crosshairs. In addition, President Obama recently signed an executive order that lays out new requirements for government contractors and their subcontractors to prevent human trafficking and forced labor. If your company finds itself out of compliance under either of these new mandates, you run the risk of injunction, civil claims and perhaps the greatest risk to brand protection: the public government statement that your company is supported through its supply chain by a "slave-based" workforce.

With the increased international focus rightly placed on stopping the tragedies associated with the crime of human trafficking, businesses need to evaluate their own policies to confirm compliance with these laws, but more importantly, to make sure they are not unwittingly drawn into larger media scrutiny of this global problem.

Corporate Social Responsibility

The trend toward corporate social responsibility (CSR) policies that promote good corporate citizenship has greatly accelerated over the past decade. For example, Harvard University's Kennedy School of Government launched a CSR Initiative in 2004 based on the "underlying premise that while governments ultimately bear the responsibility for ensuring public welfare, there is a need to construct a new understanding of the roles, responsibilities and boundaries of the private sector, especially major corporations, and to explore new types of partnership, and new governance and business models for creating public value."

In recent years, a number of large companies have joined the Ethical Trade Initiative (ETI), which has established corporate codes of practice implementing human rights, ethical labor practices and environmental protection standards. Some companies also have agreed to implement the CSR principles of the United Nations Global Compact, which promotes "ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption." In response to real concerns about labor exploitation in the developing world, many companies have felt compelled to develop CSR policies and procedures to police their supply chains to ensure they are not making or selling products that are tainted by human trafficking, slavery and child labor.

California Transparency in Supply Chains Act

In September 2010 California Governor Arnold Schwarzenegger signed into law California Senate Bill 657, the California Transparency in Supply Chains Act of 2010 (the Act), which is codified in California's Civil Code and Revenue and Taxation Code (Cal. Civ. Code §1714.43; Cal. Rev. & Tax Code §19547.5) and became effective on January 1, 2012. (Cal. Civ. Code §1714.43(e)). The stated purpose of the Act is to "provide consumers with information regarding [companies'] efforts to eradicate slavery and human trafficking from their supply chains" and to "educate consumers on how to purchase goods produced by companies that responsibly manage their supply chains." This sweeping new legislation requires qualifying companies to detail and publicly disclose the nature and scope of their corporate compliance efforts to eliminate human trafficking, slavery and child labor from their global supply chains.

Although the Act does not define "trafficking" and "human slavery," the preamble to the Act references the federal Victims of Trafficking and Violence Protection Act of 2000 and the United States Department of Labor report in 2009. Both of these references adopt the United Nations Convention against Transnational Organized Crime definition of "trafficking in persons," as "the recruitment, transportation, transfer, harbouring or receipt of persons, by means of the threat or use of force or other forms of coercion, of abduction, of fraud, of deception, of the abuse of power or of a position of vulnerability or of the giving or receiving of payments or benefits to achieve the consent of a person having control over another person, for the purpose of exploitation."

The Act requires any company that is a retail seller or manufacturer, does business in California and has annual worldwide gross receipts that exceed $100 million, to disclose its efforts to eradicate slavery and human trafficking from the company's direct supply chain for tangible goods offered for sale. A "retail seller" means a business entity with retail trade as its principal business activity code, as reported on the entity's tax return. A "manufacturer" means a business entity with manufacturing as its principal business activity code, as reported on the entity's tax return. A company is deemed to be "doing business in California" if:

It is organized or commercially domiciled in California.
Sales in California for the applicable tax year exceed the lesser of $500,000 or 25 percent of the company's total sales.
The real property and the tangible personal property of the company in California exceeds the lesser of $50,000 or 25 percent of the company's total real property and tangible property.
The amount paid in California by the company for compensation exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the company.
Any company that is subject to the Act must disclose its actions, if any, in five separate categories:

Verify product supply chains to evaluate and address risks of human trafficking and slavery, and disclose if the verification was not conducted by a third party.
Audit suppliers to evaluate their compliance with company standards for human trafficking and slavery in supply chains, and disclose if said audits were not independent and unannounced.
Require direct suppliers to certify that materials used in the product comply with the laws regarding human trafficking and slavery of the country or countries in which they are doing business.
Maintain internal accountability standards and procedures for employees or contractors failing to meet company standards regarding human trafficking and slavery.
Train company employees and managers who have direct responsibility for supply chain management on human trafficking and slavery, particularly on how to mitigate such risks within supply chains.
The five categories of disclosures mandated by the Act must be posted on a company's website with a conspicuous link on the homepage. In the event that a company does not maintain a website, a written disclosure must be provided to a consumer within 30 days of a written request.

The Act empowers the California attorney general to bring injunctive relief actions against companies to enforce compliance with the Act. The Act directs the California Franchise Tax Board to provide the state's attorney general with a list of companies required to disclose based on tax returns filed for taxable years beginning on or after January 1, 2011. The initial list was given to the attorney general on November 30, 2012, and a new list will be submitted each year on November 30.

September 25, 2012 Executive Order: Strengthening Protections Against Trafficking in Persons in Federal Contracts

Signed on the 150th anniversary of the Emancipation Proclamation, President Obama's Executive Order is designed to strengthen compliance with the Trafficking Victims Protection Act of 2000 (TVPA) among companies that contract and subcontract with the federal government. Adopting a zero tolerance policy regarding "trafficking" in persons, the order covers a wide range of unlawful activity such as: the use of forced or coerced labor to perform any part of the work required by a government contract; the recruitment, harboring, transportation, provision or obtaining of a person for labor or services through the use of force, fraud, or coercion for the purpose of subjection to involuntary servitude, peonage, debt bondage or slavery; or the procurement of a "commercial sex act" — which means an act in which anything of value is given in return for sex — or a sex act that is induced by force, fraud, or coercion or in which the person induced to perform such an act has not attained 18 years of age.

This Executive Order imposes enhanced obligations for contractors and subcontractors to act affirmatively to prevent trafficking and forced labor, including a formal compliance program and annual certifications of compliance. More specifically, this order requires companies working for the U.S. government to comply with a series of basic conduct requirements. These include prohibitions against misleading or fraudulent recruitment practices during the recruitment of employees; charging employees recruitment fees; and destroying, confiscating, or otherwise denying access to employee identification documents (passport, driver's license, etc.). It also requires contractors and subcontractors to pay return transportation costs for employees traveling to take expatriate jobs, permit full audits and inspections, and to notify the inspector general of any non-compliance.

For those companies that sell or contract for goods or services outside of the U.S. — valued at $500,000 or more — each must maintain a compliance plan during the term of the contract which includes:

an awareness program for employees regarding human trafficking
a process for reporting potential violations
a recruitment and wage plan that ensures that wages meet applicable host country legal requirements or explains any variance
a housing plan that ensures that the housing meets host country housing and safety standards or explains any variance
procedures to prevent subcontractors from engaging in trafficking in persons, and to monitor, detect and terminate any subcontractors or subcontractor employees that have engaged in these activities
Creating a Culture of CSR Compliance

These new legislative efforts add to the growing pressure on companies to develop risk management and compliance policies that advance responsible corporate citizenship. Many large companies are likely covered by the above mandates, even if the activities that these companies perform in California or the U.S. are relatively small.

Accordingly, companies must take steps now to create a culture of CSR compliance to ensure their procedures are accurate and reflect well on their corporate reputations. Not only do the mandates require specific actions, but the media and the public at large seem unlikely to absolve organizations that have made little effort to investigate their risks in this area. The mandates require disclosure, but inaccurate disclosures will be a separate and distinct problem in their own right, one that could bring civil liability along with government action. This international due diligence needs to be coordinated with other legal and regulatory compliance obligations so that you can maximize the efficiencies from your existing compliance and internal investigation efforts associated with the Foreign Corrupt Practices Act (FCPA) and other anti-corruption statutes. Companies must be proactive in developing appropriate CSR compliance measures to avoid injunctions or civil actions, stay competitive and ensure that their public image is not tarnished by irresponsible corporate citizenship.

For more information on these legal topics, or to learn about the pro bono work Holland & Knight lawyers are doing to help child victims of human trafficking and how your company can help in these efforts, contact the authors of this alert.