Regulation to prohibit products made with forced labour: Further progress in the legislative process

The EU is moving forward with ESG regulation. In the future, the ban on products manufactured using forced labor will prevent products manufactured using forced labor from being placed and made available on the EU market or exported from the EU.

On March 5, the Council and the European Parliament reached a provisional agreement on the content of the regulation, which is an important step towards completing the legislative process. The regulation is expected to enter into force in 2024. Companies should prepare for the requirements as early as possible.

1. Key provisions of the new regulation

Article 3 of the Regulation prohibits the placing on the Union market, making available or exporting from the Union to third countries of products produced by forced labor.

Ban on the sale of products made with forced labor

The marketing ban applies to Union goods and imported products if they were produced using forced labor. Forced labor is defined as any type of work or service that is required of a person under threat of any penalty and for which the person has not made himself or herself available voluntarily.

The ban applies to products in all sectors of the economy that have monetary value and can be the subject of commercial transactions, regardless of whether they are extracted, harvested, produced or manufactured, including the processing of a product at any stage of the supply chain.

The ban applies to all companies placing goods on the EU market, regardless of their size or turnover.

Investigating suspected and proven regulatory violations

If there is a suspicion that forced labor has been used in the manufacture of a product, the national authorities and, in certain cases, the EU Commission first conduct a preliminary investigation. If the suspicion is confirmed at the end of the preliminary investigation, the authorities decide whether to open a full investigation.

Suspected cases outside the EU are investigated by the Commission. In the case of risks on the territory of a Member State, the competent authority of that Member State leads the investigation. If, in the course of assessing the likelihood of a violation of the Regulation, an authority comes across new information about suspected forced labor in another Member State, it must inform the competent authority of that other Member State.

Criteria for assessing the likelihood of infringement

The agreement sets out the criteria to be used by the EU Commission and national authorities in assessing the likelihood of violations:

• The extent and severity of the alleged forced labor, including whether it is state-imposed;
• The quantity or volume of products placed or made available on the Union market;
• The percentage of the final product that is likely to have been produced using forced labor;
• The proximity of the actors involved to the alleged risks of forced labor in their supply chain and their ability to address these risks.

The final decision on whether a product made with forced labor will be banned, withdrawn or removed from the market is made by the authority that conducted the investigation. In accordance with the principle of mutual recognition, the decision will then apply in all other Member States.

2. Due diligence obligations and challenges for companies

In order to avoid violations of the new regulation, companies will have to pay more attention to the possible use of forced labor when monitoring their supply chains.

For companies already implementing due diligence obligations under the LkSG, it makes sense to rely on already established compliance measures and risk criteria.

In cases of suspicion, companies must also be prepared to provide the competent authorities with details of the manufacturing process of a product at very short notice, if necessary. As part of the preliminary assessment, the authorities may ask companies to explain the measures they are taking to identify, prevent, minimize or eliminate the risk of forced labor in their operations and value chains. Continuous monitoring and documentation of high-risk supply chains is also essential in this context.

3. Possible sanctions in the event of violations

Where there are supply risks associated with critical products manufactured using forced labor, the competent authority may order companies to withhold the product until they can demonstrate that forced labor is no longer used in connection with their operations and supply chains.

Where there are reasonable grounds for suspicion, the authorities may also order that the products in question not be placed on the market, that they be withdrawn and destroyed, or, where possible, that the affected part of the product be replaced with a product that has not been produced using forced labor.

Official decisions on suspected cases are published in non-confidential summaries on a public portal set up for this purpose. If a company fails to comply with the decision, the relevant authorities ensure that the content is implemented. In particular, customs authorities may be involved in identifying and stopping affected products at the EU's external borders.

Failure to comply may also result in significant fines of up to 5 percent of annual EU-wide turnover.

4. Course of proceedings

On March 5, 2024, the Council and the Parliament reached a provisional agreement on the European Commission's proposal for a 2022 regulation. Both have yet to formally confirm this agreement. The regulation is expected to enter into force by the end of 2024. It will apply 36 months after its entry into force.

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