Socially Responsible Supply Chain Compliance

What do laws on Wall Street financial reform, child labor, human trafficking, wildlife protection, jobs promotion, and food and product safety all have in common? Despite separate enforcing agencies and very different subject matter, they are all part of an ever-growing body of federal, state and municipal laws that are normally thought of as addressing social and safety concerns but increasingly affect companies’ supply chains. These laws include

• restrictions of certain imports or sales to the government;
• extensive certification, inspection and monitoring requirements; and
• requirements to publicly disclose compliance with the above on company websites or financial statements.

These laws can apply to companies all the way down the supply chain to the providers of parts and material inputs. Companies need to be aware of these new and untraditional supply chain requirements, some of which are still evolving and being implemented. Failure to do so can lead to fines, seizures, lost business, poor public relations, civil and even criminal liability. Below, we briefly highlight several laws that can have unexpected consequences on import and supply chain compliance.

Financial Reform And Ethnic Violence

The main purpose of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) was financial services regulatory reform. A less-known provision of Dodd-Frank is aimed at reducing ethnic violence in the Democratic Republic of the Congo and surrounding countries (DRC countries)[1] by shrinking the market for “conflict minerals”[2] from mines controlled by armed groups. To this end, Congress included a requirement that manufacturers regulated by the Securities and Exchange Commission (SEC) report whether their products contain metals derived from conflict minerals.[3] Specifically, publicly traded companies will be required to furnish in their annual SEC report and disclose on their websites an independently audited Conflict Minerals Report (CMR) describing the due diligence exercised in determining the chain of custody for any conflict minerals, including production and processing facilities.

While the reporting requirements are limited to publicly traded companies, this law will also affect their suppliers – especially in the electronics, automobile and telecommunications sectors – who will need to institute complex supply chain tracing schemes from the finished product back to the mine, smelter or refiner.

The SEC published a proposed rule to implement the conflict minerals provisions in December 2010 and is expected to publish the final rule in the coming months. In the meantime, several cities, U.S. states, and other countries have already enacted similar laws. For example, the Pittsburg Proclamation on Conflict Minerals favors verifiably conflict-free products for municipal procurement and calls on electronic companies to remove conflict minerals from their supply chains. There are similar laws in California, Australia, Canada and the EU.

Child Labor And Human Trafficking

There is a growing body of laws that target supply chains to prevent forced labor, child labor and human trafficking. Historically, the focus of such laws were economic, rather than social. For example, The Trade Act of 1930 prohibited the importation of all products mined or manufactured by forced labor to protect American manufacturers and workers from imports made by Soviet slave labor, unless the imported goods were not produced in the United States sufficiently to meet domestic “consumptive demands.”[4] That law now focuses more on the social aspect of forced labor, by amending the coverage to include child labor.

The U.S. Department of Labor (DOL) maintains two lists of goods from countries that DOL has reason to believe are produced using forced or indentured child labor, and the worst forms of child labor, respectively. By Executive Order, federal contractors who supply the government with products found on the first list[5] must certify that they have made a good faith effort to determine whether forced or indentured child labor was used to produce the items listed. The second list[6] has a broader coverage (of forms of child labor) but does not directly affect importing or sales rights. Instead, the main commercial effect of using products listed on the second list is poor public relations.

At the state level, the California Transparency in Supply Chains Act (TSCA),[7] effective January 1, 2012, requires manufacturers and retailers to post on their websites detailed disclosure statements identifying steps taken to eradicate slavery and human trafficking from their supply chains, including audits of and certifications from suppliers, risk assessments, internal compliance programs and employee training. TSCA only requires companies to disclose the extent of their efforts to address these supply chain risks and does not impose any additional requirements with regard to the implementation of specific policies, procedures or prohibitions. Companies that do not post disclosure statements as required by TSCA, however, risk damage to their reputation, civil actions by the California attorney general and possibly collateral actions brought by private parties or NGOs under such laws as California’s Unfair Business Practices Act. A federal law similar to TSCA is under consideration and could impose such disclosure requirements nationwide by requiring companies to include disclosures in their annual SEC reports and on their websites.

Wildlife Protection

The Lacey Act wildlife protection statute was enacted in 1900 to combat interstate trafficking of protected wildlife, fish and plants. The Act was subsequently amended to apply to transportation across international borders and logging. The 2008 Farm Bill amended the Lacey Act by expanding its protection to a broader range of plants and plant products (including many wood products) and made it unlawful to import, export, transport, sell or purchase in interstate or foreign commerce any plant product “taken, possessed, transported, or sold” in violation of U.S. federal or state law, Indian Tribe law, or any foreign law that protects plants.[8] The Lacey Act also makes it unlawful to import certain plant products without an import declaration that includes the genus and species of each plant product. Violations can result in civil or criminal penalties, including prison and forfeiture of the imported product.

The breadth of companies covered by the new Lacey Act provisions is made clear by the U.S. Fish and Wildlife Service (FWS) raid of Gibson Guitars of Nashville, Tennessee in November 2009. FWS had received information that Gibson was importing illegally harvested rosewood and ebony fingerboard blanks from India, where laws restrict the thickness of wood products that may be exported. FWS agents seized wood, guitars, computers and electronic files. The case is still pending. The U.S. Department of Agriculture’s Animal and Plant Health Inspection Service is currently considering several amendments to these Lacey Act provisions, including revisions related to the declaration requirement, how to deal with composite plant materials and a de minimis exception (e.g., for packaging materials).

“Buy American” And “Made In The U.S.A.”

Many think that “Buy American” laws require federal government purchases to be “made in the U.S.A.” Globalization has made the application of Buy American preferences much more complicated.

There are Buy American laws for federal government procurement as well as transportation funding granted to states and municipalities by the Federal Transit Authority and the Federal Highway Administration.[9] The most recent Buy American law was included in the 2009 American Recovery and Reinvestment Act (the Stimulus Bill) and requires projects funded by the new stimulus package to only use iron, steel and other manufactured goods produced in the United States.[10] These provisions also apply to certain Department of Homeland Security (DHS) purchases related to national security, including clothing, textile products, tents, body armor, parachutes and other equipment. This requirement applies to all DHS-appropriated funds, not just stimulus funds, and will have a significant fiscal impact as it will govern acquisitions by large federal agencies ranging from the U.S. Coast Guard to FEMA.

Buy American laws require contractors to certify that their bids comply with the relevant domestic content requirement. To assure the accuracy of their certifications and prevent violations during contract performance, however, prime contractors typically impose compliance certifications (and even indemnification requirements) well down the subcontract and construction material supply chain. Further, there are significant exceptions and varying thresholds to determine domestic content.[11] For supply chain compliance, the most important exception to Buy American laws is that, for acquisitions covered by the World Trade Organization’s Government Procurement Agreement or U.S. free trade agreements, bids from eligible foreign contractors receive equal consideration to domestic bids. Thus, under this exception, a procurement made under a Buy American provision could actually have 100 percent foreign content.

Food Safety

The Food Safety Modernization Act of 2010 (FMSA) is the most comprehensive food safety law enacted in over 50 years. FSMA is designed to increase consumer safety; however, those who use food products in their supply chain will need to undergo significant steps to ensure compliance. FMSA significantly expands the U.S. Food and Drug Administration’s (FDA) authority to regulate the conditions under which food products are imported, produced, manufactured and marketed, including the following requirements:

• Importers must complete a risk-based foreign supplier verification to confirm the food products they enter into the United States are safe (these rules take effect January 2013).
• The new law provides for 4,000 new FDA inspectors to inspect domestic and foreign facilities periodically.
• FMSA significantly expands the FDA’s access to view and copy any records relating to a food article.

Consumer Product Safety

Although some of the more dire and costly unintended consequences of the Consumer Product Safety Improvement Act of 2008 (CPSIA) have been avoided by subsequent legislation, there are still significant certification, testing and public disclosure requirements for foreign and domestic manufacturers, importers and private labelers of consumer products. Further, the Consumer Product Safety Commission has frequently attempted to expand its jurisdiction to reach “commercial” as well as “consumer” products.

Conclusion

Import compliance today involves an expanding range of issues and expertise that go well beyond traditional customs and trade law into new requirements driven by social and safety concerns. Any business that relies on imported parts or raw materials needs to be aware of these requirements to avoid being shackled by supply chain enforcement actions.