Sweeping new legislation that went into effect in California earlier this year 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. All retail manufacturers/sellers with annual gross worldwide receipts exceeding $100 million that “do business” in California must revamp their risk and compliance procedures to conform to the requirements of the California Transparency in Supply Chains Act.

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 the California law, 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.”1 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.2 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.”3 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

Against this backdrop, 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 Code4 and became effective on January 1, 2012.5 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.”6

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.”7

What Businesses Must Do

According to the Act, all retailer sellers and manufacturers doing business in California that have annual worldwide gross receipts exceeding $100 million are required to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains for tangible goods offered for sale.8 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: (1) it is organized or commercially domiciled in California; (2) sales in California for the applicable tax year exceed the lesser of $500,000 or 25 percent of the company’s total sales; (3) 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; or (4) 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.9

Any company that is subject to the Act must disclose its actions, if any, in five separate categories: (1) 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; (2) 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; (3) 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; (4) maintain internal accountability standards and procedures for employees or contractors failing to meet company standards regarding human trafficking and slavery; and (5) 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.10 The five categories of disclosures mandated by the Act must be posted on a company’s website with a conspicuous link from the homepage.11 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.12

The Act empowers the California Attorney General to bring injunctive relief actions against companies to enforce compliance with the Act.13 It 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, 2011.14 The initial list will be given to the Attorney General by November 30, 2012, and a new list will be submitted each year on November 30.15 Both the first injunction case and the first publication of the list will be significant indicators in the enforcement of the new statute.

Proposed Federal Legislation

On August 1, 2011, the Business Transparency on Trafficking and Slavery Act was introduced in Congress.16 Modelled in part after the California Act, the proposed federal legislation is not limited to retailers and manufacturers. Rather, the proposed law would apply to any publicly-traded or private company currently required to submit annual reports to the Securities and Exchange Commission, as long as the company meets the annual worldwide gross receipts threshold of $100 million.

Creating a Culture of CSR Compliance

The Act adds to the growing pressure on companies to develop risk management and compliance policies that advance responsible corporate citizenship. Many large retail sellers and manufacturers that are organized or domiciled outside of California are likely covered by it, even if the activities that such companies perform in California are relatively small. The Act does not exempt large companies with relatively few California contacts.

Retail sellers and manufacturers must take steps now to create a culture of CSR compliance to ensure their disclosures under the Act are accurate and reflect well on their corporate reputations. Not only does the statute 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 Act requires 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 supply chain 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. Retailers and manufacturers must be proactive in developing appropriate CSR compliance measures to do the right thing and to stay competitive.