Tue, Jul 2, 2019

Breaking Down the Dutch Child Labor Due Diligence Act

New legislation adopted by the Dutch Senate will make it a legal obligation for companies to perform supply chain due diligence. The aim of the legislation (available here in Dutch) is to compel organizations to prohibit their goods and services from being produced utilizing child labor and to institute swift corrective actions if such activity is discovered. This compliance obligation goes beyond just Dutch companies, it also includes foreign companies doing business in the Netherlands, and as such they may face potentially serious penalties for their actions.

Who is Impacted by the Dutch Child Labor Due Diligence Act?

The Dutch Child Labor Due Diligence Act (the Act) applies to all companies that sell or supply goods or services to Dutch consumers, no matter where the company is based or registered, with no exemptions for legal form or size. The Act defines consumers as the natural person or legal entity using, consuming, or purchasing goods or services. Companies that fail to exercise child labor due diligence are subject to potential financial and legal enforcement actions, including multiple years of imprisonment.

The Act has a tentative enforcement date of January 1, 2020. However, members of the Dutch Parliament indicated during their May 14 vote that they do not anticipate the Act will go into effect until 2022. In the meantime, the government is preparing a General Administrative Order (GAO) to identify the regulating body that will enforce the Act and detail companies’ specific obligations to adhere to the statute.

While the effective date is set for 2020, the Act contains a transitional provision which gives companies five years to reduce or remedy any potential offending supply commitments entered into prior to the effective date of the Act. This provision seeks to ensure that companies avoid supply chain child labor risks at all costs, while balancing the obvious inherent reputational risks associated with poor or nonexistent child labor due diligence practices.

How Does the Act Define Child Labor?

This new legislation defines child labor as any form of work conducted by persons under the age of 18. The Act takes into account Article 3 of the Worst Forms of Child Labour Convention, of 1999, and its references to the exploitation of children involvement in slavery, trafficking, and prostitution. The statute also takes into consideration The Minimum Age Convention, of 1973, and the its specific details relating to “what kind of light work “ is permitted, as long as it does not interfere with school or vocational training attendance, or with the health, safety, or morals of a child.

What Are the Expectations for Due Diligence?

The legislation includes a due diligence mandate for companies, which exceeds the scope of other corporate modern slavery legislation. Companies must determine if there is a reasonable suspicion that the goods or services supplied have been produced using child labor. The statute calls for companies to perform due diligence via reasonably known and accessible sources to determine if child labor is being used, along with a plan of action to prohibit the activity.

As of this moment, there are no explicit definitions for terms such as “reasonable suspicion” or specifications for the quality of a company’s vetting process. As previously mentioned, the Dutch Parliament is preparing a GAO that outlines the requisite details associated with these elements of the legislation. In sum, the law appears to require companies to take a risk-based approach to child labor due diligence and subsequent remediation that results in the cessation of child labor within the supply chain.

What Are the Reporting Requirements?

Companies impacted by the Act as currently defined must submit a declaration statement to the to-be-determined regulatory body affirming that they have exercised an appropriate level of supply chain due diligence in order to prevent child labor. As of this time, there are no specific requirements or details as it relates to the declaration statements and specifically its form and content as described in the GAO.

Dutch and “permanent establishment companies”, as defined by the Act and registered with the Netherlands trade register, will be mandated to submit their due diligence declaration to the regulator within six months of the effective date of the legislation.

Unregistered companies–defined as foreign companies that do not have a permanent establishment in the Netherlands–will also be given six months from the Act’s effective date to submit the required documentation demonstrating compliance with the statute. An exception for these foreign entities is that they are not required to conduct child labor due diligence if they sold goods or services to Dutch consumers less than twice in a calendar year. This rule implies that the Act will focus on foreign companies doing business with Dutch consumers consistently over time–not infrequently or a single business transaction. While on its face it is seemingly inconsequential, this biannual requirement could present a significant loophole for companies seeking to do business in the Netherlands.

How Will the Act Be Enforced?

The complete Act will include the assignment of a regulator to oversee its implementation and compliance. As the Act currently stands, violations or non-compliance will be brought to the attention of the designated regulator; the regulator will not proactively assess companies for compliance.

For the regulatory authority to become aware and involved, tangible evidence that a company’s products or services were produced using child labor must be presented by an individual or legal entity. Subsequently, a complaint will be filed with the offending company first, mandating that the company must resolve the issue presented. The regulator would then mediate this matter after a company responds to the complaint, or if the company chooses to not address the issue within six months of the initial complaint being presented.

If the designated regulator determines that a company is in violation of the Dutch Child Labor Due Diligence Act, the regulator will provide the company with a legally binding course of action. Failure to follow the instructions or complete them within the allotted timeline may result in fines - or additional penalties for the offending company.

Fines for failing to file a declaration start at €4,100 and penalties increase exponentially for companies found to have inadequate due diligence or lack of an appropriate plan of action to detect and prevent the use of child labor. Companies failing to comply can be subject to fines of up to €750,000, or 10 percent of its total worldwide revenue (whichever is the greatest) and if two fines for breaches of this act are levied on a company within five years, the responsible company director is liable for up to two years of imprisonment.

Business Implications of Child Labor Due Diligence Laws

Upon the Act coming into force, multinationals doing business in the Netherlands will need to be focused on supply chain child labor violations, as well as next steps associated with this illicit conduct. Aside from the enforcement actions imposed by the new due diligence law, companies seen using child labor within their supply chain face legal and reputational risks that will be much more damaging.

The Dutch Child Labor Due Diligence Act is a first-of-its-kind legislation that has incredible potential to be an effective means of combating child labor in the supply chains of global organizations. As a result of this statute, it will be interesting to see how the Dutch Government will raise awareness and educate the public on the impact and requirements of this anti-child labor initiative.

Awareness and education are especially important because the “supplier chain whistle blowing” system in place serves as the first line of defense for child labor violations. This raises the question: without the availability of relevant supplier chain information or an active Dutch public, does the Act risk becoming unused and forgotten? Another consequence of the Act will revolve around what the regulators corrective actions will entail–will companies whose supply chains use child labor be allowed to simply cut ties with the third party, or will they be required to help the children involved in this prohibited conduct?

This law further enforces the global trend of governments requiring companies to conduct third party and, more specifically, supply chain due diligence. Therefore—whether you have dealings in the Netherlands or not—you should consider how this, and similar legislation in other countries, may impact your compliance program and its regulatory requirements. At a minimum, your organization should ensure that they monitor the Dutch Child Labor Due Diligence Act, as it moves toward implementation in order to assess your supply chain for potential risk, violations and/or deficiencies.

Contact Kroll to learn more about how our Compliance Risk and Diligence services can assist you.

This article details what we know about the Dutch Child Labor Due Diligence Act as of June 2019.

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