Regulatory: The next compliance frontier

Eliminating human trafficking from government contracting

On Sept. 25, President Obama added his signature to a groundbreaking Executive Order designed to eradicate  human trafficking from all federal contracting, regardless of contract amount or nature of services provided. “We’re making clear that American tax dollars must never, ever be used to support the trafficking of human beings,” the president announced. “We will have zero tolerance. We mean what we say. We will enforce it.” Considering that the U.S. government is the world’s largest purchaser of goods and services, and that some 300,000 contractors (not to mention their suppliers and sub-suppliers around the globe) are potentially implicated, the president’s announcement is clearly more pivot than carousel.

The Executive Order’s philosophical precursors

Despite the landmark nature of the president’s announcement, efforts to conscript the business community into the global fight against human trafficking are not new. The much-discussed California Transparency in Supply Chains Act, for example, since January 1, requires an estimated 6,000 large manufacturers and retailers “doing business” in California to publicly detail their efforts to combat trafficking. The pending Business Transparency on Trafficking and Slavery Act, H.R. 2759, for its part, aims to federalize the California Act by making its key provisions applicable to all publicly traded companies with more than $100 million in global receipts. Although these recent pieces of legislation in the main are disclosure regimes, what sets the Executive Order apart is its call to proactive preventative measures, as well as the potentially devastating consequences it threatens to businesses falling short of complete compliance.

Novel expectations

In terms of procedure, the Federal Acquisition Regulatory (FAR) Council, in coordination with various agencies, now has 180 days from September 25 to promulgate detailed rules calibrated to put into action the zero-tolerance objective. The anticipated rules promise to fundamentally alter federal contractors’ compliance calculus. Perhaps most notably, Section 2 of the Executive Order obliges the final rules to require that government contractors and subcontractors, among other things:

  • File annual certifications confirming that neither they nor their employees engaged in any trafficking-related activities. If violations were identified, the contractor must take appropriate remedial and referral action.
  • Prevent trafficking by taking concrete preventive steps to ensure employees do not engage in trafficking-related activities.
  • Develop and maintain detailed compliance plans for contracts exceeding $500 million and involving services to be performed abroad.
  • Cooperate with, and provide access to, enforcement agencies investigating compliance with anti-trafficking and forced-labor laws.
  • Self-Report to the appropriate authorities if they become “aware of” certain trafficking-related activities or of other conduct inconsistent with the Executive Order or applicable laws or regulations. [Note, however, that the Executive Order does not limit the reporting requirement to conduct engaged in by the contractor or subcontractor; the final rules may, therefore, also require reporting on the conduct of third parties.] 

The soon-to-be mandatory self-reporting of a company’s awareness of noncriminal trafficking-related conduct, and the corresponding initiation of potential suspension or debarment actions, will—or, at least, should—leave even the most ardent anti-trafficking advocate surprised.

Potential consequences for noncompliance (or under compliance)

Businesses that do not take the Executive Order’s promised rules seriously do so at their own considerable peril:

  • Debarment: Business death knell for noncompliance (9.406)
  • Imprisonment: “Knowing and willful” false certification is a crime. Consequences include up to five years imprisonment and a $250,000 fine
  • False Claims Act: Government Fraud. Includes qui tam actions encouraging whistleblowers. Typically provides for 15 percent to 25 percent of damages recovered (31 U.S.C. § 3729)
  • Class actions: Deceptive advertising? Consumers complain that they wouldn’t have purchased a product if they knew it was tainted by trafficking (consider recent “cruelty-free” class actions)
  • Advocacy group pressure: Hundreds of advocacy groups worldwide stand ready to target businesses accused of violating anti-trafficking laws and regulations
  • Consumer boycotts: Few consumers want products made that child or trafficked/forced laborers make. Trafficking is today’s consumer hot topic

Compliance requires preparation

Arguments will undoubtedly continue concerning the efficacy of these new requirements. But there can be little debate that the milestone Executive Order will have an immediate and significant impact on the more than 300,000 companies and organizations doing business (and who want to continue doing business) with the U.S. government, as well as on the hundreds of thousands of companies around the world that supply and otherwise provide services to these direct government contractors. Businesses must come to grips with this new regulatory reality or risk severe business disruptions ... or worse.

Contributing Author

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T. Markus Funk

T. Markus Funk is a White Collar Defense and Internal Investigations partner at Perkins Coie, where he co-heads the firm’s Corporate Social Responsibility...

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