Supply Chain

How to Fend Off Risks Related to Human Trafficking

With at least 40 million people worldwide trapped in slavery, companies have legal, operational, and ethical reasons to closely examine all third p...
David McCannJune 24, 2019

The Grant & Eisenhofer ESG Institute, a global policy group, on Monday filed a petition asking U.S. Customs and Border Control to ban U.S. importation of palm oil and its derivatives produced by FGV, a Malaysian producer.

The petition contends that FGV has exploited foreign migrant workers, some of whom are likely victims of human trafficking. Large U.S. companies that source palm oil from FGV mills include Cargill, Mars, Nestle, PepsiCo, and Procter & Gamble.

“Palm oil is a major part of the American economy. Unfortunately, palm oil that FGV produces using forced labor is entering the supply chains of major U.S. companies and is present in their end products,” said Deborah Elman, a Grant & Eisenhofer director.

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It’s merely the latest news related to human trafficking, which traps an estimated 40 million-plus people globally. Governments around the world continue to pass laws designed to curb that scourge, increasingly putting companies on the spot to make sure they’re not inadvertently contributing to the problem.

The latest such measure to take effect was Australia’s Modern Slavery Act on Jan. 1, 2019. Like the four-year-old U.K. Modern Slavery Act, it requires organizations above a revenue threshold to report annually on the risks of modern slavery in their operations and supply chains, the actions they have taken to assess and address those risks, and the effectiveness of their response.

Canada and Switzerland are currently debating similar laws.

The strongest human trafficking law is probably the Devoir de Vigilance (Duty of Vigilance) law in France, passed in 2017. It requires companies to identify risks and maintain a vigilance plan outlining remedial action. It also enables any third party anywhere in the world that is impacted by a French company’s supply chain to bring an action against the parent company in a French court.

A forerunner to all of those laws was the California Transparency in Supply Chains Act, passed in 2010. It requires retailers and large manufacturers doing business in the state to disclose on their websites the extent of their efforts to combat slavery and human trafficking.

“There’s honestly not enough enforcement of these laws, but there’s a growing awareness of the legal risk associated with human trafficking,” says Ben Fouracre, a director in the global investigations and strategic intelligence practice for Berkeley Research Group.

Beyond Legal Risks

Companies, particularly manufacturers, also face operational risk stemming from human trafficking.

While the general public’s perception of the problem is focused in large part on people being forced into sex work, it’s really a much broader issue, encompassing forced labor, child labor, debt bondage, and wages that are insufficient for anything but bare survival.

In a number of instances, allegations of such wrongdoings against companies have triggered labor unrest. Ramifications have included strikes, fines, reputational damage, and even factory closures.

An example was a 2012 strike at a seafood processing factory in Thailand. Burmese and Cambodian workers, housed in tiny barracks processing shrimp for export, refused to work when a daily food allowance (about 65 cents) was taken from them after the Thai government raised the legal minimum wage by over two dollars.

The strike revealed poor toilets and sanitation, insufficient bathroom breaks, and recruiters being paid large fees to source and transport workers to the plant.

Last December, a group of construction workers in Dongguan City, China, struck over unpaid wages and protested on the roofs of their employers’ buildings. In fact, an estimated 80% of the 1,700 worker protests recorded worldwide in 2018 were over unpaid wages, according to Fouracre.

“It’s important to have transparency throughout the supply chain to ensure funds are ultimately not supporting any form of trafficking.”

In May of this year, a report from the Geneva, Switzerland-based Building and Wood Workers’ International (BWI) on construction for the 2020 Summer Olympic Games in Tokyo stated that workers are dealing with dangerous conditions, long working hours, and an inadequate complaints system.

The report also alleged low pay and overwork, and it cited a culture of fear, with workers being required to work up to 28 consecutive days.

Not that human trafficking for the sex trade isn’t a problem that affects companies as well.

For example, children in Japan are coerced into pornography by signing modeling contracts offered by agents working in plain sight on major Tokyo shopping streets.

“They soon realize they cannot escape from these contracts, and the videos are uploaded to the internet and sold through some surprisingly well-known internet-based companies,” says Fouracre, a fair portion of whose work is focused on helping Japanese companies exercise due diligence with respect to human trafficking.

Such operations are often connected to organized crime groups that obtain funding through various underhand means, including through companies that appear perfectly legal but act as fronts for the criminal organizations, Fouracre says. Internet advertising and credit card payments provide a means for these companies to launder proceeds from their illegal activity.

An Issue with Many Tentacles

Any interactions that a company — or its supply chain, or any other third parties the company deals with, including business partners and consultants — has with entities involved in human trafficking activities expose it to the above-mentioned risks. That applies no matter how far down the supply chain such interaction occurs, which poses a steep due diligence challenge for large companies with complex third-party networks.

“Many third-party companies that are far down supply chains are involved in a variety of business sectors,” Fouracre notes. “It’s important to have transparency throughout the chain to ensure funds are ultimately not supporting any form of trafficking.”

Anywhere there is low-cost labor, poor working conditions, or a need for temporary workers may require third-party agents to supply the human resources, and there are limited controls over how these agents operate, especially in emerging markets, he adds.

Emerging markets like India feature extreme poverty. “Many families have nothing,” Fouracre says. “They have no choice but to work for whatever they can get. Those that take advantage of them basically provide them with just enough to eat and survive, but in exchange they take away [their] identity and basically own [them].”

Investors, for their part, are looking for more transparency from companies around trafficking. “Investors are increasingly looking at environmental, social, and governance issues, and along with that comes ethical issues such as human trafficking,” Fouracre says.

But companies too often have a “check-the-box” mentality with respect to investigating third parties, he contends. A company will know where these parties are located, who owns them, and how they do business with the company, “but audits often don’t drill down into day-to-day operations, local management, or the workforce,” he says.

A thorough approach goes beyond looking at books and records by interviewing and observing workers, looking at how the third parties procure resources, how much they pay employees and contractors, and whether collective bargaining agreements are enforced.

Fouracre also advises that company leaders provide training and educational support to their entire workforces to ensure that issues around human trafficking are understood and proactively avoided.

It’s very much a “tone from the top issue,” he adds. “If leadership sets an example of being very ethical and focused on wanting to have a clean operation, that transfers down through the workforce if it’s communicated effectively.”

While protocols and policies may be in place, “the people who actually have to deal with them may not be certain what the intent behind them is and may see them as being problematic and just another piece of administration.”

Today’s advanced data analytics capabilities can help companies do a more effective job of policing the third parties they deal with. However, Fouracre acknowledges that strong and effective due diligence can also pose a risk for a company.

“With ethical and moral obligations there’s always risk,” he says. “If you’re going to have an ethical and moral organization, you potentially may not be as profitable as your competitor that perhaps doesn’t run such an organization.”

Cushioning that impact is the opportunity to win over employees and potential ones by giving them a purpose for staying with or joining the company. “You’ll attract employees who want to work for that type of business,” Fouracre says. “Over the long term, workers, consumers, and investors are moving much more toward expecting a lot of accountability from the companies they’re supporting.”