If State AGs can agree on one thing, it is that human trafficking and forced labor are reprehensible. Through the National Association of Attorneys General, AGs have formed a unified effort to investigate and promote best practices to directly combat human trafficking and forced labor. Moreover, individual AGs have created task forces, expanded services to victims, and filed briefs in key litigation, all aimed at diminishing the market incentives that support trafficking within their states. But trafficking has proven to be a difficult scourge to slay.

California, often a legal innovator, is looking to employ an alternative method to combat trafficking—through mandatory public disclosure. The California Transparency in Supply Chains Act (CTSCA) went into effect in 2012. Mindful of the fact that trafficking often occurs outside the state's jurisdiction, CTSCA offers a novel and potentially effective way to address the problem. Although there have been only a few enforcement efforts thus far, CTSCA and similar state efforts might be en vogue for 2015 and beyond. As the U.S. seeks to establish easier trade through international agreements like the Trans Pacific Partnership, states will want to ensure that the products sold within their borders are still made under conditions that do not provide incentives to those who use trafficked and forced labor.

The Act

CTSCA applies to retailers or manufacturers that are doing business in California and have annual worldwide gross receipts that exceed $100 million.

The first step is to figure out if your business is a "retailer" or "manufacturer." Here, CTSCA looks to a company's self-classification from state tax filings. In fact, the California Tax Code requires the state Franchise Tax Board to send a list of entities it believes to be "retailers" and "manufacturers" under the Act to the California AG annually.

Next, determine if your company is "doing business" in California. CTSCA will apply if the business satisfies one of the following conditions: is organized or domiciled in California; has sales in California that exceed $500,000 or that constitute at least 25 percent of total sales; owns property in California that exceeds $500,000 in value or 25 percent of its total property; or pays compensation in California that exceeds $50,000 or 25 percent of total compensation.

Finally, you will need to determine if your business meets that gross receipts threshold. CTSCA defines "gross receipts" as "the gross amounts realized ... on the sale or exchange of property, the performance of services, or the use of property or capital ... in a transaction that produces business income..." Notably, a business cannot reduce this number by subtracting the cost basis of goods or property sold. The final determination is, however, subject to exceptions listed in Section 25120 of the California Tax Code, which include proceeds from stock sales, damages from litigation, and repayment of loan principal, for example.

Disclosure is the Goal

When it applies, CTSCA does not prohibit transactions with foreign suppliers, even if there is a risk that they are connected to human trafficking or forced labor (although, depending on the knowledge level and the business relationship, other state and federal laws may apply). Instead it seeks to address the problem by providing information to consumers.

CTSCA requires covered entities to post a series of notices on their website informing the public as to how the company addresses human trafficking or forced labor throughout its supply chain. Specifically, a covered entity must disclose whether it engages in the following practices:

  • evaluating supply chains for risks of human trafficking and slavery;
  • auditing suppliers to determine compliance with company standards for anti-trafficking;
  • requiring direct suppliers to certify that their inputs comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business;
  • maintaining internal accountability protocols for employees or contractors; and
  • providing training to employees with responsibility for supply chain management.

CTSCA does not require a specific format for these disclosures. Instead it only requires that the covered entity adequately address each of the five requirements, and provide a link to such disclosures in a prominent location on the company's homepage.

California AG Kamala Harris recently published a Guidebook to help explain how businesses can comply with CTSCA, and the California Department of Justice is sending notices to companies, providing 30 days to demonstrate compliance.

The Guidebook offers advice on how to draft these disclosure statements and indicates the proper scope for various topics. For example, the Guidebook states that "a company must do more than make conclusory statements" that it is in compliance with CTSCA, it must provide information about how it complies. For each of the five areas, the Guidebook provides examples of recommended disclosures, as well as disclosures that likely would be considered inadequate.

At the moment, CTSCA is enforced solely by the AG, and remedies are limited to injunctive relief. If, however, covered entities make false or misleading statements when providing such disclosures, a host of additional laws may come into play, with more severe penalties.

*     *     *     *     *

CTSCA is a bold first step from a state government to address a difficult problem. Given the inclusive nature of the definition of "doing business" in California (e.g., 25 percent of total sales), the Act will likely have a broad application. In addition, as consumers become more aware of CTSCA's requirements, they will likely place greater weight in the accuracy of disclosures. Businesses that best integrate supply chain disclosures may even benefit through connecting with consumers' social consciousness. Moreover, where California goes, other states usually follow. The reporting requirements may be painful in the short term, but in light of AG efforts and public interest, now is probably a good time to get to know your supply chain.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.