Forced labor and human rights issues are serious risks in the supply chain. Learn how adequate due diligence can help detect and interdict these activities.
Performing Due Diligence to Detect Forced Labor and Human Rights Issues - Transcript
Chris Sindik: Welcome to the Third Party Risk Perspectives podcast series hosted by Blue Umbrella and AML Rights Source.
We're focused on helping companies manage their third-party risk with technology and due diligence research. This series of podcasts we have tapped our internal subject matter experts to provide their views on core concepts and topics related to building and improving compliance programs.
My name is Chris Sindik. I'm the director of third-party risk and due diligence here at Blue Umbrella. And I'm joined today by a very special guest Eric Ngu. Eric, can you give a quick introduction to yourself?
Eric Ngu: Hi, I'm Eric. I'm an analyst and team leader from Blue Umbrella. I'm involved in research and quality assurance of enhanced due diligence and third-party due diligence. So I'm excited to share some meaningful insights with you all today.
Chris Sindik: Eric, glad to have you join us. You're really at the front lines when it comes to doing research in this area and helping to draft reports and our methodology too when it comes to this topic. So one of our internal experts and, really excited to pick your brain on this.
I think one of the first things to think about is, how important this topic has become in recent years. Are you finding that clients are concerned about the risks of forced labor and human rights?
Eric Ngu: That's a great question. I think clients are more concerned than ever before. We have noticed a significant increase in clients' attention to topics like forced labor and human rights issues. So when we conduct due diligence on companies some of the clients even ask us to dig deeper and provide more detailed information about this risk in the supply chain of the subject entity and its affiliates.
So from my perspective, it's mainly because the growing awareness and the shift towards ethical practices. But we might also learn that forced labor isn't just an ethical issue, it's also a compliance issue and a reputational risk. And frankly, I think it's also a consumer demand because consumers today care very much about where their products come from.
Whether it's a pair of jeans, a smartphone, or even the coffee they drink. So basically, they would like to support brands that do the right thing. And companies are responding to that because they do not wish to be associated with this kind of forced labor issues. So this has become a trend that reflects the importance that companies attach to social responsibilities and sustainable development, and also to maintain their brand image and consumer trust.
Chris Sindik: I think that's a really important topic. There are certainly some laws that come into play with human rights and forced labor, that are important. But one of the things I've often said is that the court of public opinion moves a lot faster than the courts. And those reputational risks can come with a lot of zeros behind them, just as they are with legal risks, too.
And, that brings us to another point that you had brought up. There are certain industries, countries that are maybe a little bit more higher concern. What do you see in there? What are those particular regions, countries, operations, maybe even third party types that are, a higher concern for forced labor and human rights issues?
Eric Ngu: Forced labor risks aren't spread out evenly across the world. They tend to cluster in certain regions or industries. So a big one, of course, is China particularly in Xinjiang. So sometimes we also call it Uyghur issues. So this issue has brought a lot of attention to industries like electronics, mining, cotton, government manufacturing, and agriculture.
So these industry are more prone to human rights issues because they usually involve a large number of workers and often have a complex supply chain structure. So if you look into the cotton industry, Xinjiang produces most of the world's cotton and the cotton industry in Xinjiang has been under scrutiny and has been mentioned frequently by international media and human rights organizations.
These Uyghurs are believed to be held in internment camps, or sometimes we call it detention camps. And the government has been accused of mass re education detention of the Uyghurs. As we can see Western countries have imposed several sanctions or related trade restrictions on Xinjiang's industrial chain and the affiliated companies, although the Chinese government has repeatedly clarified that they are not involved in these forced labor practices.
The same goes for electronics. Many of the components in our devices, like semiconductors, come from supply chains with potential risks associated with Xinjiang forced labor.
But it's not just China. If you look at the other parts of the world, for example, West Africa, according to the latest data from the US Department of Labor, there are approximately 1.56 million children engaged in child labor on cocoa farms in Ghana and Ivory Coast. As you can see, this is actually not a small number. Can you imagine that most of the cocoa farmers, actually earn less than $1 per day? That's definitely below the extreme poverty line.
The same goes for Southeast Asia. The media also reports several forced labor issues in the fishing industry in Southeast Asia. Especially in Myanmar and Cambodia. Some issues that you may know include fraudulent recruitment of fishing crew, that is very huge, and excessive working hours, poor working conditions, lack of adequate trainings, etc.
So these examples show how forced labor can be deeply embedded in the global supply chains. And it makes the company very tricky to identify and address this issue. So, I would say third party due diligence does play a critical role in this kind of situation.
Chris Sindik: Absolutely. I think those are some great examples. It seems like these sort of new laws come out and companies will respond to them. Whether it's cobalt in Africa or various parts of the world, where it becomes a real, focus of the public and people want to do things about it. And one of the things that I've seen too, is that those companies that are sometimes involved in forced labor human rights issues, they know that they're being watched. And it's something that's being scrutinized with them and they can become very complex, their supply chains, where they may be under the microscope, but, there might be layers of ownership or a very complex holding structure or suppliers, subsuppliers and different things like that make it, difficult to uncover too. Just as they're getting more crafty to hide their nefarious deeds, us as researchers and companies need to be one step ahead of the cover some of those risks as well.
What are you seeing in terms of, why companies are caring about this more than ever? It seems like it's a topic that's more popular than it's ever been. In speaking with clients in my role, I'm hearing them, want to have this be more of a focus of research. But again, what are the main drivers of risk in this area?
Eric Ngu: I think there are a few big drivers here, and regulations are a major one. So let's talk about the U. S. Uyghur Forced Labor Prevention Act, or we usually refer it as the UFLPA Act. This law presumes that goods from Xinjiang are made with forced labor unless proven otherwise. Several Xinjiang companies or Chinese companies were identified as quote unquote affiliated with Xinjiang forced labor. They were listed on the UFLPA entity list. The consequences is trade restrictions were imposed against these companies due to their links to forced labor.
So nowadays we can also easily learn about these companies linked to Xinjiang's forced labor by accessing some databases. Jewish World Watch, something like that. We also seen similar pattern before with law like the Dodd Frank Act, to ensure that minerals like tin, tungsten, and gold weren't funding armed groups in the Congo.
The same initiative is now being applied. to forced labor risk. So some other similar laws targeting forced labor risk, include the European Union Conflict Minerals Regulations and the California Transparency and Supply Chain Act. So overall, that's a massive shift. I would say it's got companies scrambling to tighten up their due diligence processes. And it actually put forward higher requirements for corporate compliance because failure to comply to these regulations can lead to sanctions, import restrictions, or other penalties.
It's not just about laws, there's also a lot of media exposure driving this. Investigative reports, documentaries, and even social media posts are putting a spotlight on these issues. A single exposure can easily lead to boycotts or major reputational damage for a brand.
Also, pressure from investors has become a main driver nowadays. So as we know, ESG issues have become huge in recent years. So there's also been a push from stakeholders or investors pushing on companies to uphold their social responsibilities and they want to ensure that The companies they are investing in aren't complicit in human rights abuses. So it's a mix of legal, social, and financial pressures all coming together.
Chris Sindik: It's not just one law that people need to be or companies need to be complying with. It's, a variety too, and they've, grown over time. I think that's a really great point with the investors too. Looking and doing that part of the operational due diligence when they're thinking about partnering with a company. Because it's either sticks or carrots a lot of times the motivator's there, and, there's the very big stick of legal enforcement, but also, the incentive of, working with companies that are certainly doing the right thing and looking at the long term profitability. It might be tempting to go with the absolute cheapest goods that are made with nefarious ways of producing the goods at a low cost, but, it comes at a longer term expense too.
Outside of those reasons, are you finding that there's, other drivers that companies are focusing on these human rights and forced labor risks?
Eric Ngu: Definitely. Compliance is just the tip of the iceberg. Like Chris said, the core is how companies do what is right. That's the core. So because we are talking about real people, men, women, or children who are being exploited. They're working under awful conditions with no freedom or choice or working without reasonable wages, or sometimes facing abuses. It's a humanitarian crisis. Companies, addressing this issue is a chance to stand for something bigger than just profit.
For example, some international brands have started to promote sustainable practices in their supply chains, improve labor conditions, higher wages, and reduce working hours. And that's a good sign. Also some companies started to adopt international frameworks, like the United Nations Guiding Principles on Business and Human Rights to emphasize ethical, not just legal compliance.
So these initiatives not only help protect the employee's rights and interests, but also help to build a reputation for the company's ethical supply chain practices. In the end, third party risk management has become a secret weapon to tackling these challenges. And it actually helps companies to map out their supply chains and identify those hidden risks.
Let's say a company discovers that a contractor or subcontractor in their supply chain has connections with forced labor entities. The company will be able to address this issue immediately and come up with an action plan because they have a well developed framework in place. But beyond that, third party risk management isn't just a compliance tool. It's also a way to drive real change which allows companies to align their practices with their values, protect their reputation, and most importantly make a meaningful impact on the fight against forced labor.
Chris Sindik: Absolutely. And certainly the corporations around the world have a big role to play in the humanitarian crisis that we've been talking about with forced labor and human rights. The previous statistics you gave about 1.5 million children working in the cocoa industry working for a dollar a day, it's heartbreaking to hear these things. Not only is it the government offices and law enforcement that are doing what they can to address this crisis. It's something that, needs to move beyond that. And have companies that don't want this in their supply chain and consumers that don't support it, et cetera.
We all play a part in eliminating human rights issues and the detestable acts for forced labor, too. But, Eric, thank you so much for your views on this. Extremely insightful. I know you're at the front lines with, conducting this type of research and staying up to date on the new laws. Thank you very much for your time.
Eric Ngu: Thank you.