The California Transparency in Supply Chains Act: New Guidance and Increased Enforcement Efforts

Watercolor Map of CaliforniaThe State of California has recently stepped up enforcement of the California Transparency in Supply Chains Act, which went into effect on January 1, 2012. The California Department of Justice has also issued new guidance on compliance with the legislation.

In April 2015, the Department of Justice sent out letters to certain retailers and manufacturers regarding compliance with the transparency legislation. The letters requested the companies to provide, within 30 days, either:

  • an explanation as to why the legislation does not apply to them; or
  • a link to a compliant disclosure.

As discussed in previous posts, the legislation applies to retail sellers and manufacturers doing business in California that have annual gross receipts exceeding one hundred million dollars. Companies are required to disclose, on their corporate websites, what actions they are taking, if any, to:

  1. Evaluate and address the risks of human trafficking and slavery in their product supply chains. These disclosures must state if companies are not using third parties to verify the risks in their supply chains.
  2. Require their direct suppliers to certify that the materials incorporated into company products comply with laws regarding slavery and human trafficking in the countries in which they are doing business.
  3. Conduct audits of their suppliers to evaluate compliance with company standards on trafficking and slavery.  These disclosures must state whether independent, unannounced audits are conducted.
  4. Maintain accountability standards and procedures for employees or contractors that fail to meet corporate standards regarding slavery and human trafficking.
  5. Provide employees and managers, who have direct responsibility with supply chain management, with training on the mitigation of human trafficking and slavery risks.

At the same time as the State of California has increased its enforcement efforts, it has also issued new guidance for companies subject to the legislation. The guidance, The California Transparency in Supply Chains Act – A Resource Guide, a copy of which is available here, provides information on model disclosures and best practices with the intent of ensuring that companies can “provide disclosures that comply with the law, as well as enhance consumers’ understanding of [their] anti-trafficking efforts.”

Notably, the new guidance states that “the law does not provide companies discretion to choose which of the five mandated disclosures they will make; companies must disclose the required information as to each of the five categories.”

Both the manner and content of corporate disclosures are addressed in the state’s new guide. For example, the guide states that model disclosures will:

  • Insert a direct link to the disclosure information on the company’s corporate website and the websites of all of the company’s brands; and
  • Devote the entire linked page to the five required disclosures.

With regard to the substantive aspects of the legislation, specifically the requirement that companies disclose to what extent they seek to evaluate and address the risks of human trafficking and slavery in their product supply chains, the guide states that model disclosures will:

  • Describe the general methodology the company uses to verify entities in the product supply chain in assessing those risks, including general information about the frequency of verifications; and
  • Describe whether the company assesses and manages potential risks related to the presence of labor brokers or third-party recruiters in its supply chain.

The State of California’s efforts in recent weeks represent a marked change in its approach to the transparency legislation. Previously, California authorities had remained remarkably quiet with regard to the transparency act, much to the chagrin of the investors and activists who had originally pushed for the legislation’s enactment.

Since the legislation went into effect in 2012, corporate disclosures have varied widely in both form and substance without clear direction from state authorities as to what was expected. It is certain therefore that the new guidance will be scrutinized carefully by both companies subject to the legislation and those pushing for increased corporate disclosure.

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