New European Due Diligence Guidance Published

News / New European Due Diligence Guidance Published

The Financial Action Task Force (FATF) has identified "forced labor" as one of the specified types of crime, and as a result, most countries' national Anti-Money Laundering (AML)/Countering Terrorist Financing (CFT) legislation includes it. On July 12th, the European Commission and the European External Actions Service (EEAS) issued due diligence guidelines for EU firms to control the danger of forced labor in their operations and supply chains. The non-binding guideline aims to give European businesses practical information on how to adopt effective human rights due diligence processes in their supply chains to mitigate forced labor threats and related money laundering (ML) and terrorist financing (TF) risks. It also provided an outline of international guidelines and norms on responsible business conduct and due diligence that are relevant to the fight against forced labor, such as the UN Guiding Principles on Business and Human Rights (UNGPs), the OECD Due Diligence Guidance For Responsible Business Conduct, and the ILO fundamental conventions.

 AML in germany, netherlands, france, spain

New European Due Diligence Guideline Keypoints

The guideline is intended to fulfill one of the cornerstones of the EU's new trade strategy, which is to support sustainable and responsible supply chains. Prior to the Commission's planned legislative proposal on Sustainable Corporate Governance, it advises EU firms to take necessary steps to mitigate forced labor risk in their supply chains. Companies operating throughout all sectors in the EU will be subject to mandatory and actionable human rights and environmental due diligence commitments, including necessities to address child and forced labor problems in supply chains, under the newly proposed legislation announced as part of the Commission's 2021 Work Programme.

The following is a summary of the guidance's particular suggestions for the due diligence process and mitigation actions:

  • Due diligence should be appropriate to the conditions and context of each firm, such as its size, risk profile, and supply chain network specificities.
  • Policies and management systems should be customized, and a zero-tolerance approach for forced labor should be established. These mechanisms should make it clear that reporting concerns or incidents of forced labor will not result in retaliation for suppliers or employees. Key corporate employees should also be educated on what constitutes forced labor.

examination of due diligence types such as CDD, EDD, VDD

When analyzing their operations and supply chains for instances of forced labor, businesses should look for the following red flags:

  1. Legal regimes that prohibit nonviolent strike action, nations with prison labor policies and programs, and countries that have not signed the ILO's core agreements are all risk factors.
  2. The absence of written employment contracts, the existence of informally employed individuals, and the hiring of migrant workers are all risk factors for migration and informality.
  3. Debt risk indicators include the availability of credit and debit schemes for employees, as well as incidents of physical or psychological abuse, aggression, or harassment.

Companies that take measures to address the risk of forced labor may disengage from suppliers or business partners or maintain the relationship while remaining engaged to prevent or reduce the potential impact of forced labor practices in terms of affecting government policy and factory employment prospects. Where the business connection is sustained, the advice includes practical recommendations for responsible disengagement, including providing adequate financial support to suppliers and business partners to complete agreed-upon remedial action plans.

Financial institutions should verify whether they have any links with countries, industries, goods, or businesses identified by the global and local regulatory bodies as part of their AML/CFT monitoring activities.

Sanction Scanner recommends that financial institutions should employ sophisticated compliance programs to recognize better and handle the dangers of forced labor in global supply chains.

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