William Pellerin, a partner in international trade at Canadian law firm McMillan, has sympathy for his fellow trade compliance professionals.
“The sand is shifting fast beneath our feet now,” he said at a recent Canadian Apparel Federation webinar about the country’s “three-pronged approach” to forced and child labor.
In short, supply chain legislation is rippling across the global landscape, and the Great White North is far from immune.
The first prong, the Fighting Against Forced Labour and Child Labour in Supply Chain Act, has no snappy acronym, which is why most people, Pellerin included, prefer to refer to it by its parliamentary designation, S-211, “rather than repeat that mouthful.” Coming into effect on Jan. 1, the law will require companies of a certain size and stature conducting business in Canada to issue an annual report about what they are doing to identify and address forced and child labor in their supply chain.
With the first reports due to be filed and published by the end of May, it’s time to put the “pedal to the metal,” Pellerin said. While there is no diligence standard within this reporting requirement, meaning that companies don’t actually have to do anything to prevent child or forced labor from occurring, S-211 creates a “name-and-shame transparency regime.”
“Of course, no one wants to be in a position to write in their report: ‘We are doing nothing to prevent forced labor in our supply chain.’ That would be a bad strategy,” he said. “Particularly because this will be placed prominently on your company’s website.”
To qualify as an “entity” under the act, businesses must meet two out of three thresholds, whether it’s holding 20 million Canadian dollars ($14.7 million) in assets, making 40 million Canadian dollars ($29.4 million) in revenue or employing 250 or more people. But these qualifiers are by themselves “very, very broad,” Pellerin said, noting that a lot of companies are “getting tripped up here” because they don’t require the business to be incorporated in Canada.
The thresholds are also based on the consolidated financial statements of the parent business, “which will likely knock those three requirements out of the park very quickly,” he said. And because the reports require board signatures, executives could find themselves chasing down John Hancocks from their head offices in the United States, Europe or Japan.
“In some cases, that can be a very bureaucratic undertaking and you have to present it to the board at formal board meetings,” Pellerin added.
His advice: Get things in order now, since failing to file a report or filing a misleading one is a punishable offense that can include fines of up to $250,000. The directors who have to sign off on the report will not want to see it at the last possible minute, and if a problem emerges, “you don’t want to be scrambling on the very last day to be redrafting or adding content before this has to go live.”
Pellerin also recommends that companies integrate the reporting obligations as part of their broader ESG frameworks. And because there are reputational risks, it would behoove them to include “your PR people, your ESG people” and other stakeholders who will want to have a say in this.
The second prong derives from S-211, which includes, at its “very bottom,” the imposition of an import ban on goods made wholly or in part with child labor. There is no de minimis exemption, so if “there’s one fiber made of child labor in your T-shirt, that is technically a good made of child labor,” Pellerin said.
This is not a completely new requirement, he noted, but rather an expansion of a pre-existing forced labor ban that materialized with the passage of the United States-Mexico-Canada Agreement, the North America Free Trade Agreement successor that is known in Canada as the Canada-United States-Mexico Agreement, or CUSMA.
Enforcement by the Canada Border Services Agency (CBSA), which has complained of resourcing issues, has been lax so far. To Pellerin’s knowledge, there has only been one detention under the rule so far, and even that was subsequently released.
“Nonetheless, it is the law of the land,” he said.
The new import ban works as an amendment to the customs tariff, adding child labor to the list of goods that are inadmissible to Canada. With it, the Land of the Maple Leaf becomes the world’s first jurisdiction to prohibit goods made with child labor in its entirety, not just forced child labor.
Pellerin said that child labor is something that everybody wants to avoid, but because the language of the law strips away a lot of the ambiguity that “forced” might entail, the bar is now much lower.
“Again, we’re not in a world where CBSA is enforcing this yet,” he said. “But for low-hanging fruit, I think that come Jan. 1 when this part of the bill comes into force and the prohibition on goods made of child labor enters, I think there’s going to be a lot of questions and you should be prepared to answer them.”
Come Jan. 1 when this part of the bill comes into force and the prohibition on goods made of child labor enters, I think there’s going to be a lot of questions and you should be prepared to answer them.”
William Pellerin, a partner in international trade at McMillan
Child labor isn’t something that taints the “most egregious obscure, distant reaches of our supply chain,” either. A report that the New York Times published in February, for instance, described children sewing “Made in America” tags into J.Crew clothing in Los Angeles and Fruit of the Loom socks in Alabama.
But brands shouldn’t bank on the hope that customs officials won’t come knocking on their doors, not least because they’ll find it hard to sleep at night, Pellerin said. This imposition could “open floodgates,” particularly as new bills are being debated during the fall session.
“Canada does not have what the U.S. has under the UFLPA, for example, this idea of a rebuttable presumption that ‘we’re going to stop anything and you’re going to have to prove us that there is no child labor or forced labor in it,” Pellerin said, using an acronym for the Uyghur Forced Labor Protection Act, which bars from entry any product with a nexus to China’s Xinjiang region. “That has been a nightmare in the United States. And we certainly hope that that system, as it exists in the United States, never comes down.”
Finally, Pellerin named the third prong: the Canadian Ombudsperson for Responsible Enterprise, better known as the CORE, which has been opening investigations into the Canadian subsidiaries of some of fashion’s biggest names over allegations of forced labor, including Nike, Ralph Lauren, and, most recently, Levi Strauss & Co.
The CORE is neither a “creature of statute” nor a “creature of regulation,” he said. Established by the Canadian government in 2019, the organization cannot issue fines but only make recommendations to the minister of international trade, though this could change if momentum to expand its mandate gathers steam.
So far, there have been three strategies for engaging with the CORE, which Pellerin said has a “low threshold” for launching one of its investigations: ignore it entirely, deny the allegations and provide minor participation in its assessments, or fully participate. The sole company to try the last, a mining business (and McMillan client) called GobiMin, was also the only one to avoid a full investigation.
“We worked very closely with the CORE to showcase that the complaint was unfounded and ultimately the CORE’s initial assessment states that GobiMin’s good faith participation in the process and its ability to demonstrate that the complaint was not well-founded was key in not launching that investigation,” he said.
Pellerin said that the CORE could be an “extremely frustrating” organization to deal with, though he didn’t go into his firm’s own experience.
“From what I’ve heard, at least from many others, and from what you can read from the reports themselves, is that in many cases, the CORE has certainly appeared to weigh the evidence of the companies equal to or even lesser than the allegations by the NGOs that are simply flagging third-party reports that have been prepared a few years ago by some agency in Australia,” he said. “There is certainly some concern, with the type of conclusions that have been reached, that in some cases really are not quite correct and don’t bring the whole situation into a lot of credibility.”
Still, Pellerin said that he had “great faith” that the CORE will proceed in a different way with its full investigations and “work and produce strong work that is of the nature that you would expect of a large and capable organization within the government of Canada.
“We’ll see, I guess,” he added.