In October 2015, the UK Modern Slavery Act (MSA) became effective, which requires all companies doing business in the UK with worldwide turnover of at least £36 million (or approximately $51 million as of the date of this alert), regardless of industry, to disclose what they are doing to ensure that slavery and human trafficking are not taking place in their supply chains, including, if applicable, the policies a company has adopted, the due diligence it has performed, the risk assessments it has carried out, and the training it has provided, among other items. This disclosure must be approved by a company’s board of directors and posted on its website. According to guidance released by the UK, companies are required to post their disclosure as soon as reasonably practicable following the end of their financial year, but in any case, not later than six months following the end of their financial year. Companies with a financial year-end between October 29, 2015 and March 30, 2016 will not be required to publish a statement for that financial year; therefore, the first companies that are required to comply with the MSA will be companies with a March 31, 2016 financial year end.

Governance measures adopted and disclosure prepared to comply with the MSA should be coordinated with compliance efforts with respect to existing supply chain-related human trafficking laws and regulations, including (i) the California Transparency in Supply Chains Act (TSCA) and (ii) the recently amended Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS).

  • The California Transparency in Supply Chains Act of 2010 requires every retail seller and manufacturer doing business in California with more than $100 million in annual worldwide gross receipts to disclose via a “conspicuous link” on its website its efforts (if any) to address risks related to slavery and human trafficking in its supply chain, including its verification, auditing, and training measures. Although the TSCA has been in force since 2012, the California Attorney General recently stepped up its enforcement efforts by sending letters to companies, including several of our clients, seeking reports on compliance with this law.
  • The FAR and DFARS amendments, which became effective in March 2015, establish new requirements for certain federal contracts relating to rules implementing President Obama’s Executive Order 13627. The rules are designed to enhance protections against human trafficking and, among other things, impose contracting and notification requirements in connection with all federal contracts and create extensive governance and certification requirements for federal contracts involving supplies and/or services sourced or performed outside of the U.S. with a value in excess of $500,000. The Department of Defense also issued a final rule amending the Defense Federal Acquisition Regulation Supplement that creates similar human trafficking-related compliance obligations for Department of Defense contractors.

UK Modern Slavery Act

The UK Modern Slavery Act requires companies meeting the jurisdictional and financial criteria to do the following:

  • Disclose either (i) what they are doing to ensure that slavery and human trafficking are not taking place in their supply chains or in their own businesses, or (ii) that they are taking no such steps.
  • Although it is not mandatory that a company disclose in any or all of these areas, the statute indicates that the disclosure may include:
    • the organization’s structure, its business and its supply chains;
    • its policies in relation to slavery and human trafficking;
    • its due diligence processes in relation to slavery and human trafficking in its business and supply chains;
    • the parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk;
    • its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate; and
    • the training about slavery and human trafficking available to its staff.

Some of the disclosure categories suggested by the TSCA are used by the MSA, as well – e.g., verification and training – but the MSA also indicates that a company may disclose information regarding its larger governance structure as it relates to combating slavery and human trafficking, a requirement that more closely mirrors the governance mechanisms and disclosure required by the SEC conflict minerals rule.

The MSA, however, differs from the TSCA in a couple important ways:

  • All companies, regardless of industry, with worldwide turnover of at least £36 million (or approximately $51 million as of the date of this alert) doing business in the UK are subject to its requirements. The lower size threshold certainly increases the number of companies subject to the law, but the lack of industry restriction has the effect of including internet, SAAS, fabless semiconductor and life sciences companies within its ambit, companies that have historically been excluded from supply chain regulation and that therefore may not have supply chain compliance systems in place.
  • Whether a company discloses its efforts to ensure slavery and human trafficking are not taking place in its supply chain or in its own organization, or discloses that it has not taken any such steps, the disclosure will need to be approved by the board of directors and signed by a director. Among other things, this means that this disclosure, and the diligence and governance mechanisms it may require, may receive greater strategic consideration than existing supply chain-related legal requirements.

California Transparency in Supply Chains Act of 2010

The California Transparency in Supply Chains Act of 2010 requires every retail seller and manufacturer doing business in California with more than $100 million in annual worldwide gross receipts to disclose via a “conspicuous link” on its website its efforts (if any) to address risks related to slavery and human trafficking in its supply chain, specifically the extent to which it does the following:

  • Verifies. Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery. This disclosure must specify if the verification was not conducted by a third party.
  • Audits. Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains. This disclosure must specify if the verification was not an independent, unannounced audit.
  • Certifies. Requires direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business.
  • Maintains Accountability. Maintains standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
  • Trains. Provides training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products, to company employees and management who have direct responsibility for supply-chain management.

Final Rule Amending the Federal Acquisition Regulation

Requirements for All Federal Contracts

In addition to prohibiting various egregious human-trafficking practices and other conduct set forth in the U.S. government’s policy outlined in the Federal Acquisition Regulation (the “Policy”), the FAR now requires contractors to, among other things:

  • use recruiters that comply with local labor laws of the country in which the recruiting takes place;
  • provide employees with a work document if it is required by law or contract;
  • notify their employees and agents of the Policy as well as the actions that will be taken against employees or agents for violations of the Policy;
  • take appropriate action against employees, agents, or subcontractors that violate the Policy; and
  • notify the appropriate authorities immediately of any credible information it receives from any source (including host country law enforcement) that alleges that its employees, subcontractors (or employees thereof), or agents have engaged in conduct that violates the Policy, and of any actions taken against such persons.

Other Requirements for Certain Federal Contracts

Under the FAR, federal contractors that supply over $500,000 worth of products and services outside the United States, subject to certain exceptions (the “Qualifying Threshold”), must maintain a compliance plan during the performance of the contract. While this compliance plan may be tailored for the size and complexity of the contract and the nature and scope of the activities to be performed thereunder, it must include specific provisions, such as an awareness program to inform contractor employees about the Policy, a recruitment and wage plan, a housing plan, and a means of making available to all workers the hotline number for the Global Human Trafficking Hotline and its email address. In addition, the FAR now includes the following additional requirements:

  • Subcontractors. In cases in which the subcontractor supplies products and services in excess of the Qualifying Threshold, the contractor must require the submission of a certification by the subcontractor covering the items set forth above prior to the award of the subcontract and annually thereafter.
  • Posting. The contractor is required to post the relevant contents of the compliance plan, no later than the initiation of contract performance, at the workplace and on the contractor's website.
  • Certification. Both prior to the awarding of a contract and annually after receiving an award, a contractor must submit a certification to the appropriate authority that: (i) it implemented a compliance plan; and (ii) after having conducted due diligence, either (a) to the best of the contractor's knowledge and belief, neither it nor any of its agents, subcontractors, or their agents is engaged in any prohibited activities; or (b) if abuses relating to any prohibited activities have been found, the contractor or subcontractor has taken the appropriate remedial and referral actions.

Implications for Technology and Life Sciences Companies

For companies that contract with the federal government, regardless of whether the Qualifying Threshold is met, the FAR requires, among other things, the adoption of human trafficking policies and the implementation of monitoring systems. These and other compliance measures, if required, are extensive, rigorous and burdensome. Accordingly, companies should act quickly to assess the applicability of the FAR to their government contracts and install the elements required to be in compliance. A contractor's failure to comply with the requirements ofthe FAR may result in serious consequences, including termination of the contract, suspension of payments or suspension or debarment. In addition, such violations may give rise to criminal liability or liability under the False Claims Act.