Human Trafficking—Is Your Supply Chain Due Diligence Diligent Enough?

By Kristin Casler

featuring T. Markus Funk, Perkins Coie;

Katie Shay, International Corporate Accountability Roundtable --

The International Labour Organization estimates that nearly 21 million people are victims of forced labor. With world-wide attention focused on anti-trafficking efforts, does your company have a due-diligence plan that truly safeguards workers and your business interests?

Some third-party recruiters who supply workers overseas don’t think twice about forging documents, lying and paying bribes. Most likely, the less-than-scrupulous are lying to your compliance team about the legality of the workers they provide.

Skyrocketing prosecutions for Foreign Corrupt Practices Act violations have made anti-corruption compliance a chief priority for companies. Unfortunately, corruption can extend much further down the chain—to the hiring of workers—than many companies are prepared for.

“Although a business may feel a false sense of security because its employees comply—or, at least, are believed to comply—with its own internal codes and regulations, it still has exposure to serious lurking risks through its foreign transaction partners and subsidiaries,” said T. Markus Funk, founding Co-Chair of Perkins Coie’s Supply Chain Compliance Practice and co-author of Child Exploitation and Trafficking: Examining the Global Challenges and U.S. Responses (with U.S. District Judge Virginia Kendall).

State and federal governments recognize this risk and have generated a groundswell of laws and regulations to target it. A landmark executive order from President Obama went into effect March 1 strengthening protections against human trafficking in companies with federal contracts. Enforcement of the California Transparency in Supply Chains Act is imminent. And Congress has considered federal legislation that mirror’s California’s act, the Business Transparency in Trafficking and Slavery Act, which may yet reemerge.

What this means is that companies expecting their compliance teams to address all of these issues in a coordinated fashion cannot continue to pursue one or two narrow areas of subject-matter expertise, or they may be left behind, Funk said.

Human Trafficking Business Model

A relatively small subgroup of foreign transaction partners—distributors, salespersons, agents, suppliers, etc.—typically generate the greatest compliance risk, Funk said. According to third-party manager Hiperos, 9 out of 10 anti-bribery and anti-corruption investigations involve third parties.

Most people envision human trafficking as women from China chained in a shipping container and destined for sex slavery. Such abhorrent activity may be a daily occurrence, but Funk pointed also to more traditional labor trafficking where a job recruiter makes “false promises to a potential ‘recruit’ about money to support his or her family and having a better life in order to lure the person into the recruiter’s web.”

It’s almost as if they follow a manual, said Katie Shay, Legal and Policy Coordinator for International Corporate Accountability Roundtable. The recruiter charges the worker a recruitment fee, travel costs and visa fees. They or the employer confiscates the worker’s travel documents. Then workers are forced to pay high rents for squalid conditions and to reimburse the recruiter for all of the fees.

“If they complain, they are threatened with violence or threats of deportation,” Shay said. “It amounts to debt bondage, and they can never get out.”

Much of this deception is facilitated by paying bribes to officials for documents, border crossings or simply for overlooking obvious schemes.

New Recruiting Strategies

While this type of recruiting has gone on for ages, it is magnified by the increasingly global economy and made easier by the Internet. Recruiters can perpetuate their deception and fraud anonymously without ever having initial direct contact with the worker, Funk said.

“We saw this as an emerging trend when I was the USDOJ Section Chief in Kosovo—and this is a worrying development that, if anything, is on the rise,” Funk said.

Another added twist is the marriage of recruiters and organized crime groups that have trans-national alliances, Funk said. These generally well-organized groups now rely on local contacts to provide safe houses; coordinate transportation; and obtain illegal immigration, residency and identification documents. For the local traffickers, affiliating with such organized criminal groups can also have tangible benefits for the independent traffickers. “Purely local or regional traffickers, in the past at least, simply did not have these business-enhancing capacities,” Funk said.

Who is Minding the Store?

When these recruiters provide laborers to third-party businesses in a U.S. company’s supply chain, whether the company was aware of it or not, the potential financial and reputational damage is long-lasting. Recent media accounts detailed the rampant use of child labor by a large food company’s major cocoa suppliers located in and around Africa’s Ivory Coast. Despite the company’s supplier codes strictly prohibiting such practices, an independent investigation by the Fair Labor Association into the company’s cocoa supply chain, carried out with the company’s support, revealed both forced labor and child labor.

Examples of servitude can also be found closer to home. Shay noted that shady recruiters are out there serving the hotel industry. She also cited the welders and pipefitters who were brought to the United States from India and United Arab Emirates to work under a debt-bondage scheme following Hurricane Katrina.

Shay pointed out that there also are good examples of companies taking a closer look at their supply chains. The Coalition of Immokalee Workers set out in the early 90s to end slave-like conditions for workers on Florida’s tomato fields. Today, farmers guarantee a fair wage and clean living conditions in exchange for their partner retailers—including giants like Walmart, McDonald’s and Subway—paying an extra penny per pound on tomatoes.

Additionally, some “approved” recruitment agencies have formed alliances to reassure end-use companies. Shay cautioned, though, that this does not eliminate the risk, and companies should not let their guard down.

Don’t Just Push Paper

How does a company avoid being one of the “caught on camera” examples?

“No client has ever said, ‘We’re getting all this cheap labor, how do we get around these laws?’” Funk said. “I’ve simply never run into a company like that. While they might have concerns about the substantial obstacles to achieving full compliance with a certain ambitious law, their concerns are not because they disagree with the concept. Businesses simply want to do the right thing—but having laws on the books that set up realistic and achievable objectives is, of course, a necessary precondition to true substantive compliance.”

The reality, however, is that it is almost impossible for companies to comply with every aspect of some of these anti-trafficking laws, Funk said. Does the radio your Chinese factory is manufacturing for you include wiring that was assembled by a child or trafficking victim at yet another factory? It can be a difficult trail to follow.

Meanwhile, a great deal of paper gets pushed in the name of compliance. An attorney drafts a code of conduct that covers every possibility, and the manufacturer signs it. But it doesn’t necessarily mean much. “If you’re willing to hire trafficked labor, you’re not really too worried about lying to an American company in, say, a compliance certification,” Funk said. 

A company might tout these agreements and promise that it is 100-percent free of trafficked workers. Such a claim, however, can come back to haunt a company if it over-promises and then doesn’t deliver, Funk said.

Pure paper policies, in short, are insufficient to meet today’s supply-chain-compliance challenges. “Instead, you actually have to get on the plane—or hire someone else with experience to—and visit that factory,” he said. “That puts you in a far, far better position if you, down the line, have to defend yourself against government or advocacy group allegations.”

A Compliance To-Do List

As compliance professionals and business leaders must recognize, no amount of policy redrafting, training and due diligence can absolutely guarantee a supply chain free of risk.

However, here are some basic steps Funk said every company directly or indirectly engaging in foreign business should consider taking to stay ahead of the game and to identify and avoid supply-chain-risk aggregators:

• Map and assess your supply-chain-risk profile; identify areas of greatest exposure
• Integrate and tailor a clear, concise policy against forced labor, bribery and corruption, and (as appropriate) conflict minerals; align policies with your particular risk profile
• Retain compliance professionals with broader real-world compliance expertise with diverse skill-sets aimed at devising training personnel, conducting basic due diligence, vetting and audits, and leading internal investigations
• Institute focused training programs for employees and managers with direct responsibility over supply-chain management; raise awareness and the ability to root out bad actors
• Maintain clear accountability standards and procedures for transaction partners and employees
• Identify specific company employees responsible for particular suppliers; ideally, these employees will have familiarity with the region in which the suppliers are active
• Consider limited, targeted supplier audits to evaluate supplier compliance with your standards for labor exploitation
• Keep careful track of problems averted and bad actors rooted out
• Operate an anonymous reporting hotline, and know when to escalate to outside counsel

Shay suggested paying employers directly, so you have control. The same is true of entire factories, Funk said. If the company is large enough to be a factory’s sole or major client, the company has leverage to ensure compliance.

Will there come a day when we can close the chapter on human trafficking? Maybe not, Shay said, but in the meantime, companies can enact concrete strategies—not just more paperwork—that can make a great deal of difference in their reputation and their workers’ lives.