Deal reached in European Union on products made with forced labour: what does this mean for Malaysia?

"It is appalling that in the 21st century slavery and forced labour still exist in the world. This hideous crime must be eradicated and the first step to achieve this consists in breaking the business model of companies that exploit workers. With this regulation we want to make sure that there is no place for their products on our single market, whether they are manufactured in Europe or abroad".

- Pierre-Yves Dermagne
(Belgian Deputy Prime Minister and Minister for the Economy and Employment)

Earlier in March, negotiators from both the European Parliament and the European Council (a body composed of the heads of state or government of the EU member states, the President of the European Council, and the President of the European Commission) achieved a provisional agreement regarding a new regulation that will prohibit products manufactured through forced labour from entering the EU market. This provisional agreement is part of the legislative process in the European Union in practice.

While the final text of the agreement reached between the European Parliament and the European Council is not available at this stage, it is possible to draw relevant information from the websites of both the European Parliament and the European Council when announcing the deal reached.

What is the content of the deal between the European Parliament and the European Council?

The newly proposed regulation (the “Regulation”) is set to establish a comprehensive framework to enforce this ban, incorporating measures such as conducting investigations, implementing new IT solutions, and fostering collaboration with various authorities and nations.

Database of forced labour risk areas and products

For the purpose of facilitating the Regulation, the European Parliament and European Council have agreed that the European Commission will establish a database containing verifiable and regularly updated information about forced labour risks. This database will among others include reports from international organisations such as the International Labour Organization. As a result, not only will the work of the European Commission and national competent authorities in assessing possible violations become easier; also, there will be more objectivity as international organisations contribute to the database.

Investigations of suspected use of forced labour in supply chains and actions by national authorities/the European Commission

Investigations will be a key aspect under the Regulation. National authorities will conduct investigations into suspected instances of forced labour within companies’ supply chains within the European Union and the European Commission will spearhead such investigations outside the EU territory. Should an investigation confirm the use of forced labour, authorities retain the power to:

  • demand the withdrawal of relevant goods from both physical EU markets and online marketplaces, with border confiscation also on the table;
  • dispose of these goods via protocols of donation, recycling, or destruction; and
  • in case of products deemed strategically or critically important to the EU, withhold such goods until the implicated company eradicates forced labour from its supply chains.

In order to ensure that both national authorities and the European Commission are at all times fully informed about forced labour violations, a system of cross-notification will be established. Thus, whenever national authorities discover newly relevant information about the suspected forced labour in the course of assessing the likelihood of violations of the Regulation, it is their duty to inform:

  • the competent authority of other EU Member States, provided that the suspected forced labour is taking place in the territory of that member state; as well as
  • the European Commission if the suspected forced labour is occurring outside the EU.

Risk-based approach

The deal sets clear criteria to be applied by the EU Commission and national competent authorities when assessing the likelihood of violations of the Regulation. These criteria are:

  • the scale and severity of the suspected forced labour, including whether state-imposed forced labour may be a concern;
  • the quantity or volume of products placed or made available on the European Union market;
  • the share of the parts of the product likely to be made with forced labour in the final product; and
  • the proximity of economic operators to the suspect forced labour risks in their supply chain as well as their leverage to address them.

The European Commission will issue guidelines for economic operators and competent authorities to help them to comply with the requirements of the Regulation. This will include best practices for remediating or even ending different types of forced labour. The European Parliament and the European Council agreed that these guidelines will also include accompanying measures for micro, small and medium-sized enterprises, which can be available through a Forced Labour Single Portal, which will be established.

Fines in case of breaches

The European Parliament made it clear that con-compliant firms risk fines. Information on the extent of these fines is not yet available; however, based on other deals reached between the European Parliament and the European Council, we anticipate that the fines will be calculated as a percentage of a violating company’s annual turnover.

The next steps

It is important to note that the agreed deal does not guarantee that the proposed Regulation will go through. As the European Council indicated, “[t]he deal [between the Council and the Parliament] introduces significant modifications to the original proposal clarifying responsibilities of the Commission and national competent authorities in the investigation and decision-making process.

While generally, such deals reached between the European Council and the European Parliament stand, this isn’t always the case, as could recently be seen when the provisional agreement between the two on the Corporate Sustainability Due Diligence Directive seemed to fall through.

What the Regulation will mean for Malaysia

Forced labour is a big problem in Malaysia

Unfortunately, Malaysia is far from having a good track record when it comes to forced labour and there are repeatedly reports about black sheep in the industry, who exploit foreign workers, in particular. In February 2024, there were – yet again – reports of over 100 migrant workers, who were stranded in Cheras without jobs, after paying recruitment fees of approximately MYR 20,000 each.  

While the government appears to have understood that action needs to be taken, intended measures often take too long to implement or are criticised for not being fully thought through. A recent example of this is was Putrajaya’s decision to terminate the services of Malaysian visa application agencies involved in handling visas for Bangladeshi migrant workers. Such agencies have repeatedly been linked to forced labour in Malaysia by among others charging exorbitant commission fees to foreign workers, who in turn indebt themselves in order to come to Malaysia. Thus, this appears to be one step to improve the situation for foreign workers.

However, in a surprise move, the government then decided to bring forward the time limit to bring in new foreign workers – a decision which has been criticized heavily because it could, in fact, result in Malaysian companies themselves sourcing foreign workers unethically.

As a result of the way many of the foreign workers coming to Malaysia are treated – or often mistreated – arguably, when it comes to ESG, the “S” and forced labour are Malaysia’s biggest problem. This can also be seen from the fact that aside from China, no other country has been listed as often on the U.S. Customs and Border Protection’s Withhold Release Orders and Findings List as Malaysia.

What many Malaysian companies fail to understand is that foreign workers concern almost all of them as the vast majority of security guards in the country is from abroad, typically Nepal. Although the security guards may not be directly employed by every company and are often employed by the building management, this alone may be sufficient to establish a forced labour link. Particular care is thus advised.

Malaysian companies risk disputes and being excluded from global supply chains

Malaysian companies must acknowledge and address forced labour in their own organisations and among their suppliers and service providers to avoid potential lawsuits from foreign purchasers and the risk of being excluded from global supply chains entirely.

Increasingly, foreign purchasers demand contractual assurances that products sourced from abroad are free from forced labour. Many Malaysian companies provide such contractual assurances without even properly understanding yet alone reading them. If as a result a European company were slapped with a fine because it were found to have brought into the European market products manufactured through forced labour, it would certainly look into suing its Malaysian supplier for damages. This, in turn, will likely result in lengthy disputes, with severe financial repercussions for Malaysian companies.

On a more general level, the problem regards not just companies at an individual level, but at a national level: failure by Malaysian companies to eradicate forced labour from their supply chains not only perpetuates human rights violations but also jeopardizes the standing of Malaysian companies in the global marketplace. Increased attention on the topic coupled with increased scrutiny through legislation will only make the situation worse – for the entire country.

Effective risk management is required

For Malaysian companies that take the risk of forced labour in their own organisation as well as among their own suppliers seriously have no choice but to engage in effective risk management. This involves identifying, assessing, and mitigating litigation risk through proactive measures such as compliance programs, legal safeguards and dispute resolution strategies (see the subchapter Effective risk management – the steps every Malaysian company involved in global supply chains should do of the article “The risks for Malaysian companies stemming from ESG disputes in global supply chains: a guide to mitigate the risks” for details).

This article was written by Prof. Dr. Harald Sippel and only contains general information. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. Prof. Dr. Harald Sippel is admitted to the Austrian Bar as Rechtsanwalt and to the Malaysian Bar as a Foreign Lawyer. He regularly provides advice to European and Malaysian companies on matters of ESG.