Businesses – review new guidance for supply chain reporting due May 2024

On December 20, 2023, Public Safety Canada published a new webpage “Forced Labour in Canadian Supply Chains” . The website provides guidance, resources, and reporting criteria on the fighting Against Forced Labour and Child Labour in Supply Chains Act (the Act), which requires qualifying entities to report annually on their efforts to mitigate and prevent the risk of child labour and forced labour in their business activities and supply chains. The first reporting deadline is 31 May 2024.

The contents of this website provide important clarifications on the application and interpretation of the Act, as well as an additional questionnaire that organizations must submit.

The Act requires certain entities and government institutions to submit an annual report by May 31^st of each year.

An “entity” includes a corporation, trust, partnership or other unincorporated organization that:

• Is listed on a Canadian stock exchange; 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:
  • $20 million or more in assets
  • $40 million or more in revenue
  • An average of 250 or more employees.
    

The new guidance clarifies that the definition “entity” is interpreted broadly, extending to “similar forms of business organizations”, and may include foreign entities operating outside of Canada.

The guidance notes that the expression “doing business in Canada” is not defined in the Act. An organization may have to consider various factors to make this determination. Such factors, which can differ between businesses based on the particular nature of their operations, could include the locations of:

• The production, sale, or distribution of goods
• Employees
• Assets, inventories or bank accounts
• Where deliveries, payments, purchases or contracts are made
• Where assets are acquired.

Based on the guidance, assets may include any property or valuables, as well as intangibles such as goodwill.

The thresholds must be calculated based on consolidated financial statements. The guidance also notes that the asset threshold should be calculated based on gross value (not net value). This means that these calculations include revenue, assets, and employees of any subsidiaries from their Canadian and foreign operations. The revenue, assets and employees of parent companies are excluded.

Organizations that qualify as an “entity” under the Act are required to submit a report if they:

• Produce, sell, or distribute goods in Canada or elsewhere
• Import into Canada goods that are produced outside of Canada, or
• Control an entity that is engaged in the above-mentioned activities.
  

Again, the guidance notes that terms used in the Act are intended to be broadly applied. The test is not subject to any minimum threshold, or any “primary” activity test. The guidance has clarified that services “solely” to support the production, sale, distribution or importation of goods may be excluded, and that “very minor dealings” may also be excluded – but  does not provide further details on what might be considered “minor”.

The meaning of the word “control” may be aligned with applicable accounting standards, but is not necessarily limited to these standards whether the substance of control is directly or indirectly applied through the organizational structure.

Organizations should carefully review the Act and the new guidance, as clarifications may affect previous determinations of applicability.  

The new guidance also describes expectations regarding the report.

The report must include a description of the risks of forced labour and child labour in the reporting entity’s business activities and supply chains, and the due diligence measures taken to prevent or mitigate the risks. The guidance also clarifies certain terms used in the new reporting requirements, including the words structure, activities and supply chains.

The guidance also clarifies that reporting entities should aim to:

• Identify the source countries or regions of origin of each of the goods and services used at each stage of the supply chain, and
• Provide responses that describe the concrete actions that they have taken to address risks of forced labour and child labour, rather than purely aspirational statements.

However, reporting entities are not required to:

• Disclose potentially sensitive commercial information which might expose them to legal risk or compromise the privacy of any persons, or
• Report on specific cases or allegations of forced labour or child labour.

The guidance adds that reporting entities may, but are not required to, provide supplemental information, including links to policies, code of conduct, risk assessment reports, results of an audit or other relevant public disclosures or ESG commitments.

Based on the guidance, a newly-issued component of the reporting process requires reporting entities to complete a mandatory questionnaire in addition to filing a report under the Act by May 31, 2024.  

The questionnaire is unique to Canada. Other jurisdictions with supply chain reporting legislation, including the United Kingdom or Australia, do not require reporting entities to complete a questionnaire alongside submitting their reports.

Although the questionnaire is largely aligned with the reporting requirements in the Act, input from procurement, legal and compliance will likely be required to complete the questionnaire. The responses to each question must be aligned with the report.

The questionnaire consists of a series of mandatory, closed-ended questions that include, among other details, describing:

• How the organization fits within the definition “entity” and the reporting activities
• The sectors or industries that the reporting entity operates in
• Steps taken in the previous financial year to prevent and reduce the risk of forced labour or child labour (with a number of available responses ranging from “mapping supply chains” to “contracting an external assessment of risks of forced labour and/or child labour” to “carrying out a prioritization exercise to focus due diligence efforts on the most severe risks of forced and child labour”)
• Whether the reporting entity has identified parts of its activities and supply chains that carry a risk of forced or child labour
• The types of risks of forced labour or child labour that have been identified
• Sectors and industries that have been identified as having forced labour or child labour risks
• Any remediation measures
• Training on forced labour and/or child labour, including whether training is mandatory, and for whom
• Methods used to assess the entity’s effectiveness in ensuring that forced labour and child labour are not being used in its business and supply chains, including audits, performance indicators, partnering with an external organization or working with suppliers.
  

In each question, reporting entities have the option to select “other” and provide an explanation. The questionnaire also includes open-ended questions for reporting entities to provide more detailed responses.

Businesses subject to the Act face considerable legal, operational and reputational risk associated with the information gathered, assessed and reported under the new reporting rules.

The guidance – and particularly the questionnaire – signals that Canadian businesses are expected to take active steps to assess, prevent and remediate the risk of forced labour and child labour in supply chains. The guidance acknowledges that:

“No sectors or industries involving the production, sale, distribution or importation of goods are assumed to be entirely free of forced labour and child labour risks. The purpose of reporting is not to certify that an entity is “risk-free,” but rather to demonstrate that the entity has taken steps to identify and address risks. The reporting exercise is intended to encourage transparency, not to penalize entities for having identified risks in their activities and supply chains.”

Regardless of this, businesses should keep in mind that importing goods manufactured with forced labour or child labour anywhere in the supply chain is an offence under the Customs Act. The Act also extends the import ban under the Customs Tariff to include child labour and modifies the Customs Tariff to state “Goods mined, manufactured or produced wholly or in part by forced labour or child labour as those terms are defined in section 2 of the Fighting Against Forced Labour and Child Labour in Supply Chains Act” tying the enforcement to The Act.

Reporting entities have only a few months before the deadline for submitting reports and questionnaires. If your business has questions about the Act, the new guidance and how to comply, please contact your KPMG advisor or one of the following professionals.