Human Rights Due Diligence in the Supply Chain: Canada’s Advisory on Doing Business With China

Traditionally considered under the purview of voluntary Corporate Social Responsibility (“CSR”), Environmental, Social and Governance (“ESG”) norms or “soft law”, addressing human rights concerns when doing business abroad is quickly becoming a legal imperative for companies engaged in supply chain management across all industries and sectors, including retail and consumer products, technology, financial services, mining, oil and gas, and manufacturing.

Following the recent global regulatory focus on supply chain risks and related compliance strategies, Global Affairs Canada (“GAC”) and the Canadian Trade Commission Service have issued several measures (the “Measures”), along with a related advisory (the “Advisory”) to Canadian businesses designed to address human rights violations in global sourcing. The Measures and the Advisory specifically address ongoing reports of human rights violations in Xinjiang, and set out the Government of Canada’s compliance expectations with respect to Canadian entities doing business with that region in China.

Canada’s Increasing Use of Human Rights Measures

It is important to consider the new Measures and Advisory in the context of the global movement among Canada’s allies towards recognizing and attempting to respond to human rights violations by imposing greater expectations and obligations on companies doing business abroad. In particular, reports of human trafficking, forced labour and child labour have prompted various jurisdictions to adopt modern slavery laws and policies.

In Canada, there have been several key developments in this area:

  • Economic sanctions: Canada has enacted new authorities under the Special Economic Measures Act (“SEMA”) and the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) (“Magnitsky Law”) allowing the government to impose economic sanctions against parties involved in or facilitating gross violations of human rights or acts of significant corruption. These measures prohibit engaging in activities directly or indirectly involving listed parties from Saudi Arabia, Russia, Myanmar (Burma), Venezuela, South Sudan, Nicaragua, and most recently, Belarus. Significantly, no economic sanctions measures have been taken against China or Chinese companies or officials to date.
  • Export and technology transfer controls: Effective September 1, 2019, mandatory criteria must be considered when deciding whether to issue an export or brokering permit under the Export and Import Permits Act, including whether the controlled goods or technology could be used to commit or facilitate a serious violation of international human rights law or humanitarian law, serious acts of gender-based violence, or violence against women and children. Further, in response to human rights concerns, last year GAC’s Export Controls Operations Division issued restrictive policies regarding exports and transfers to Turkey, Hong Kong and China (see Canada Changes its Export Policy Toward Hong Kong - Are Economic Sanctions Next?).
  • Restrictions on dealing with products made from forced labour: The Customs Tariff was amended effective July 1, 2020, as part of the implementation of the United States-Mexico-Canada Agreement, to prohibit the importation goods from any country that are produced wholly or in part by forced labour. Previously, the prohibition only applied to products of prison labour. The Customs Act imposes additional prohibitions and reporting requirements regarding any such goods that have been imported into Canada in violation of this measure. These measures are enforced by the Canada Border Services Agency (“CBSA”).
  • New Modern Slavery Act: An Act to enact the Modern Slavery Act and amend Customs Tariff was re-introduced in the Canadian Senate and passed the first reading on October 29, 2020. Bill S-216 imposes an obligation to publicly report on an annual basis the measures taken to prevent and reduce the risk that forced labour or child labour is used in any step of the production of (i) goods in Canada or elsewhere, or, (ii) of goods imported into Canada. In addition, it introduces a prohibition on importation of goods produced in whole or part by child or forced labour.
  • Nevsun Resources Ltd. v. Araya: Last year for the first time in Canadian law, the Supreme Court of Canada held that Canadian private businesses can be held liable in Canada for violations of customary international law committed by their subsidiaries abroad. However, it still remains unclear how these claims would be brought and decided in Canadian courts.

The Xinjiang Advisory and Measures

Xinjiang Integrity Declaration

Canadian companies that are (a) sourcing directly or indirectly from Xinjiang or from entities relying on Uyghur labour, (b) established in Xinjiang, or (c) seeking to engage in the Xinjiang market, will be required to sign a Xinjiang integrity declaration (the “Declaration”) when engaging with the Trade Commissioner Service. The Declaration requires companies to confirm that they are not knowingly sourcing from suppliers implicated in forced labour or other human rights violations. Additionally, the Declaration requires companies to confirm they are conducting due diligence on their suppliers in China.

Responsible Conduct

The Government of Canada expects companies to take extra care in ensuring their supply chains comply with the prohibition on the importation of goods produced, in whole or in part, by forced labour. GAC notes that it will continue discussions with businesses and organizations to ensure awareness is raised around risks. The Advisory also highlights the expectation that Canadian companies active in the global markets will respect human rights and operate in a socially responsible manner by adopting voluntary best practices and by following internationally recognized guidelines.

Export Control

The Advisory notes the 2019 changes to the Export and Import Permit Act discussed above, emphasizing that permits will not be issued for the transfer of controlled goods and technologies where there is a substantial risk that they could be used to commit or to facilitate serious violations of international humanitarian law, international human rights law, or serious acts of gender-based violence. The Advisory and Measures also note that all export permit applications will be extensively reviewed to determine whether the goods, services, or technologies could be used in connection with human rights violations.

Due Diligence

The Government of Canada is urging businesses with links to China to thoroughly examine their supply chains to ensure that they do not support human right violations in Xinjiang and China. The Advisory provides guidance on potential indicators of forced labour and other human rights violations, including lack of transparency on the origins of goods, internment terminology, Xinjiang government incentives and factory locations.

Those in certain high-technology fields are expected to exercise the highest level of due diligence on the end-users of their products, as they may be used to arbitrarily track Uyghurs and other minorities in Xinjiang.

The Government of Canada advises that third-party audits are important, but may not be sufficient. Businesses are encouraged to work with the relevant industry groups and non-governmental organizations to prevent human rights abuses in their supply chains.

Takeaways

Potential human rights violations in supply chains have implications that extend well beyond compliance issues, and touch on environmental, social and governance concerns. Today, there is heightened pressure from the market, consumers, and investors, to ensure supply chains are ethical and free of human rights violations, such as forced labour.

The Government of Canada has noted that the risks of human rights violation in the supply chain are not limited to Xinjiang or China, although the recent Advisory and Measures focus on the heightened risks of doing business in these regions. Accordingly, Canadian businesses should take steps to actively monitor their supply chains and conduct risk-based due diligence.

These steps are increasingly important for companies to take in light of the heightened legal and reputational implications. Unlike in the United States, Canada currently does not maintain a whistleblowing program aimed at detecting prison and forced labour incidents and detaining implicated goods. Further, the CBSA does not yet maintain any public list of foreign vendors whose goods may be detained at the border as being manufactured by prison or forced labour, similar to the United States Customs and Border Protection’s list. Therefore, in Canada, compliance due diligence and supply chain reviews to detect prison and forced labour lie solely on businesses.

Companies are well-advised to seek support from their external advisors on how to best create, administer and review supply chain compliance strategies. McCarthy Tétrault offers a full suite of services in this regard, including a Supply Chain Stabilization Solution tailored to individual client needs. For further information, see: https://www.mccarthy.ca/en/services/mtdivisions-client-solutions/covid-19-client-solutions/supply-chain-stabilization-solutions

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