A new Canadian law designed to combat modern slavery in company supply chains passed in May. The law titled “An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff“ (the Act), takes effect January 1, 2024 and establishes new supply chain reporting requirements for companies operating in Canada. Companies that fail to report adequately face the possibility of heavy fines and directors and officers may face personal liability for their involvement in any offenses committed under the law.
Who has to Report?
Companies are required to file a report under the Act if they meet either of the following criteria:
- Is listed on the stock exchange in Canada; or
- Has a place of business in Canada, does business in Canada or has assets in Canada and meets at least two of the following conditions for at least one of its two most recent financial years:
- Has at least $20 million in assets;
- Has generated at least $40 million in revenue; or
- Employs an average of at least 250 employees.
The extra-jurisdictional nature of this law makes it particularly important. Your company does not have to be based out of Canada or be listed on the Canadian exchange to fall under the scope of the Act. Certain government institutions are also required to report under the Act, but for our purposes we’ll focus on what is required of in-scope companies.
The Act requires in-scope companies to file a report with the Minister of Public Safety and Emergency Preparedness on or before May 31 of each year. That report must contain information related to the steps the company has taken during the previous financial year to prevent and reduce the risk that forced labor or child labor is used:
- At any step in the production of goods by the company; or
- In the production of goods imported into Canda by the company.
Additionally, in-scope companies must report on the following:
- the entity’s structure, activities and supply chains;
- its policies and its due diligence processes in relation to forced labor and child labor;
- the parts of its business and supply chains that carry a risk of forced labor or child labor being used and the steps it has taken to assess and manage that risk;
- any measures taken to remediate any forced labor or child labor;
- any measures taken to remediate the loss of income to the most vulnerable families that results from any measure taken to eliminate the use of forced labor or child labor in its activities and supply chains;
- the training provided to employees on forced labor and child labor; and
- how the entity assesses its effectiveness in ensuring that forced labor and child labor are not being used in its business and supply chains.
In-scope companies must report not only on their Canadian activities but on enterprise wide data. The reporting requirements under the Act are broad and no guidance has been issued by the government as of now. In-Scope companies will be required to file their first reports in May 2024 using 2023 data.
Penalties and Fines
Stiff penalties will be levied on any in-scope company that violates the act by activities including:
- Failing to prepare a report;
- Failing to make a report publicly available;
- Failing to assist in an investigation;
- Obstructing an investigation;
- Failing to comply with a corrective order; or
- Knowingly provides false or misleading information to the minister or their designates.
The penalty for violating the Act is a fine of up to $250,000. Even further, directors and officers that directed, authorized, assented to, acquiesced in or participated in any offense under the law may face personal liability even if the company or the person they directed to violate the act has not been prosecuted or convicted.
What this Means
This is another North American forced labor prevention law that came about as a result of Article 23.6 of the United States-Mexico-Canada Agreement. What I find interesting are the enterprise-wide reporting requirements for companies doing a certain amount of business in Canada. This is very similar to the “in-scope” definition in the EU’s CSRD and may signal the beginning of a trend in ESG disclosure laws.
Canada and the EU seem to be taking a more inclusive approach to their reporting laws focusing on the overall company activities of large multinationals, rather than just activity that occurs within their borders. This approach creates more reporting burdens for companies and emphasizes the need for enterprise-wide data collection and validation. Data controls will be even more important as jurisdictions adopt overlapping reporting requirements to ensure that compliance information is reported uniformly across jurisdictions.
It is worth reiterating that the first year’s report is to be based on 2023 data – meaning you need to be collecting, verifying and analyzing this data right now. History has shown that even determining a company’s supply chain is frequently more difficult and time consuming than expected. Our E&S Validation Guidebook can help you understand the core concepts around ESG data validation and our Checklist: Using Internal Audit in ESG Data Validation can teach you how to leverage your internal audit team to validate ESG data.