Perspectives in Responsible Sourcing

Labor Cooperatives –Loophole to Evade Labor Laws

Increasingly, UL Responsible Sourcing auditors are finding labor cooperatives in key apparel sourcing countries such as Colombia, Italy, Mexico, and the Philippines; this trend may continue in additional countries as cooperatives become popular worldwide, which poses an increasing reputational risk to companies who have not formulated a comprehensive protocol for dealing with the specific and significant noncompliance issues uncovered at these workplaces.

In addition, the media, NGOs, and governments have begun to publish reports focusing on abusive cooperatives. For example, as part of the free trade agreement signed into effect on October 12, 2011 between the USA and Colombia, President Miguel Santos declared that 100 more inspectors would be hired to target perpetrating labor cooperatives, known by organizations such as the International Labor Rights Forum as a new face in labor exploitation. Companies operating in Colombia should understand the risks associated with their Colombian suppliers in the face of stepped up government enforcement.

The legal intent of cooperatives is to promote power equality through collective ownership; all members have a say in the operation of the business, thus less power is concentrated in the hands of owners and managers. A number of governments are funding cooperatives and have enacted legislation  exempting cooperatives from restrictive labor laws, such as the minimum wage, overtime, and maximum working hours. In Mexico, for example, cooperatives receive government loans to assist in development and are not governed by the Federal Labor Law.

However, cooperatives are often abused for precisely the reason that they are founded; with government aid and the benefit of not falling under the general labor law, individuals establish  cooperatives in order to reap the benefits. Workers join these labor cooperatives because they have little choice or understanding. For example, the Philippines and Colombia are both known to have “anti-union” governments, giving workers few opportunities for improvement, whereas a surge in asylum seekers in Italy is creating a desperate situation for those seeking work, thereby making them especially susceptible to this type of organizational structure.

Thus, major issues exist where “Member Owners” (the organizers) take decision-making powers and “Member Workers” find themselves agreeing to fall outside the scope and benefits of general labor laws.  As a result, it becomes a liability for companies when “Member Workers” in their supply chains are not guaranteed employee benefits, the minimum wage, and other minimum protections. In all countries mentioned above aside from Colombia, cooperatives are exempt from labor law provisions and free to decide on what constitutes “fair and equitable” conditions for their working members. Factories with internal labor cooperatives are not obligated to maintain employment documentation such as: employment contracts, wage registers, time sheets, and training records. In fact, in Italy factory owners do not have the right, due to privacy laws, to monitor employee working conditions for such cooperatives. This creates a heightened risk for brands when the factory does not maintain employment documentation for internal cooperative workers.

Italy has sought to balance the competitive advantage of labor cooperatives’ loose regulations with the need for increased protection of workers from exploitation. This is done on the one hand by administrative requirements for a cooperative’s registration, and on the other by creating substantive collective agreements providing baseline requirements for worker protection. However, this balance still leaves situations where working conditions established in collective agreements can still  have potentially negative exposure for companies.

Cooperatives pose a risk for companies that do not include noncompliance issues particular to cooperatives within their auditing scope. As cooperatives become more prevalent around the world due to their progressive nature and government aid, they become a greater concern. In order to mitigate the risk that cooperatives pose, we can help companies understand and combat their concerns by providing practical solutions during the auditing process. For further information please contact Emily Brennan or Daphne Guelker today.

High Stakes: Labour Migration from Bangladesh

After what seemed like an interminable journey from London with a stop-over in Dubai, I finally arrived at Dhaka airport. As I traipsed to the baggage claim area, I was unceremoniously shoved out of the way by a Bangladeshi man who evidently wanted to get there first. Just as I was about to retort, I saw a horde of passengers rushing off the plane and scrambling towards me. I muttered something about people’s rudeness and moved out of the way. It is only when I reached the baggage carousel that I realized why everyone was in such a hurry. The conveyor belt was loaded with cardboard boxes marked “Kingdom of Saudi Arabia”; they must have belonged to migrant workers who were returning home for the first time in years.   

During my time in Bangladesh working on migration issues, I would learn that there are around 2.6 million Bangladeshi workers in Saudi Arabia, making the country the primary destination for labour migration from Bangladesh. It is also the most significant remittance-sending country with half of the total remittances (over $10 billion) sent to Bangladesh originating from Saudi Arabia. Overall, remittances sent by some 6.2 million overseas workers represent around 10% of Bangladesh’s gross domestic product. Yet, despite the significance of remittances for the country’s economy, labour migration from Bangladesh is still relatively poorly governed with migrants facing considerable challenges both at home and abroad.

I spoke to a worker recently rescued by SHISUK, a local NGO that provides assistance to victims of trafficking, who was approached by a middle man for a job as a sales person in Jordan. After he had paid $4600 to the agent, he was sent instead to Liberia where he stayed for 3 months without a job or an income. This story is not isolated despite the government’s efforts to facilitate labour migration and curb costs for workers by setting up a governmental recruitment agency[1] and a migrant welfare bank to provide loans to migrants for the purpose of recruitment costs.  

One of the biggest challenges in Bangladesh is that many people are unable to reach recruitment agencies directly because they live in remote areas, where they can easily fall prey to unscrupulous middle men and end up in debt bondage. According to local civil society organisations, Bangladeshi workers are among those who pay the highest recruitment fees with many workers paying up to $5000, way above the official limit of $1200. Most workers go through middle men who make false promises about a job abroad and charge exorbitant fees. Some of them sell their land, house and other belongings or take out high interest loans to pay for recruitment costs thinking it a worthwhile investment that they will be able to make up for with the salary they have been promised. However, fraud is not uncommon and workers may find themselves working for a much lower salary than promised or worse, they may find that there is no job waiting for them at all.

 

---

[1] Bangladesh Overseas Employment and Services Limited (BOESL)

 

Conflict Minerals: Taking Stock

On 15 December 2010, the Security and Exchange Commission (SEC) issued the provisional rules for Section 1502 of the Dodd Frank Act on conflict minerals. One year later, the rulemaking body remains at the center of a vivid debate on the merits and requirements of Section 1502 and is still expected to publish its final word on conflict minerals before the end of 2011.

In the meantime, efforts to increase transparency throughout the minerals supply chain have continued. Here are some status updates:

OECD Due Diligence Guidance: The Guidance remains the main reference for the definition of “due diligence” measures companies are expected to implement. It has received significant political support across developing and developed countries. The Guidance has been adopted by the OECD Ministerial Council as well as endorsed by the ICGLR Heads of States and the US Department of State.

At the occasion of the last meetings end of November in Paris, the OECD published two baseline studies on the pilot implementation of the Guidance for the 3Ts in the downstream and upstream supply chain. While participating companies in the downstream supply chain have started taking measures in accordance with the 5-step framework of the Guidance, implementation in the upstream supply chain appears to have been more challenging. However, the pilot projects provide necessary information on areas where further clarification is required for companies to be able to use the OECD Guidance. This becomes particularly important in the event that the SEC refers to or endorses the document in the final rules.

In regards to the specific recommendations for due diligence in the gold supply chain, the OECD is working on finalizing the Gold Supplement to the Guidelines by the end of 2011.

EICC-GeSI Conflict Free Smelter Program: According to the report on the pilot implementation of the OECD Guidance in the downstream supply chain, “all respondents that are relying on third-party audits are using an industry scheme, specifically the CFS program” (p.31). While there certainly remain challenges with the CFS program, EICC-GeSI have improved their communication on the status and requirements of their initiative. Key documents (in particular the audit protocols) are now available online and an update detailing the number of smelters/refineries that are part of the program as well as their status has been added. According to this status update, a total of 91 smelters/refineries are active in the program. Notable here is the absence of tungsten smelters (only 5 participating companies) and gold refineries (only 21 participating companies).

LBMA Gold Guidelines: The absence of gold refineries on the EICC-GeSI’s list of active companies may partly be explained by the fact that the gold supply chain requires a different approach than the 3Ts. Furthermore, various initiatives are under development for gold, covering different aspects of the supply chain: LBMA has developed a Responsible Gold Guidance which is based on the OECD’s 5-step approach. Compliance with the Guidance will become mandatory for all Good Delivery Gold Refineries (61 based in 26 countries) starting January 1^st 2012.

World Gold Council Conflict Free Gold Standard: Providing a standard for large scale gold mines, the WGC addresses the origin of gold. The Conflict Free Gold Standard as well as the Chain of Custody Standard have been published on the WGC’s website and the Council has organized some stakeholder consultations. Unfortunately, there is very little public information available on the status of the WGC’s work. The standards had been published in June 2011 with an initial comment period until 1^st September 2011. According to the WGC’s website, the Standards are being “stress tested”, although no information is provided as to the timeline and/or results of those tests, nor is there any indication as to a date for the publication of a revised or final Standard following the comment period.

Responsible Jewellery Council Chain of Custody Standard: The RJC’s Chain of Custody Standard is applicable to all its Members and therefore covers the entire supply chain for gold, diamonds and platinum. Documents can be accessed online and the Standard has been revised to take into account the requirements of Dodd-Frank for gold. The RJC issued a statement as this blog is written; indicating that only the Chain of Custody Standard for Gold and Platinum is expected to be released in early 2012, whereas the Standard for Diamonds is temporarily suspended.

Before moving on to the in-region sourcing schemes, I believe it is useful to take a step back and put those efforts in context:

In the IFC’s “Ease of Doing Business”-Ranking, the DRC is listed on place 178 out of 183 assessed countries. Looking at the UNDP’s Human Development Index, the picture is even bleaker: out of 187 countries listed, the DRC ranks 187. Its Eastern neighbors are hardly doing better: Burundi ranks 185, Rwanda 166 and Uganda 161. As a comparison, Haiti is ranked 158. The BBC points to the Foreign Policy’s ranking of failed States, where the DRC occupies place 4, just after Somalia, Chad and Sudan. Here also, the country scores worse than for example Afghanistan or North Korea.

These are not circumstances in which one can expect miracles. Furthermore, the situation in the DRC is tense as vote counting is still ongoing for the country’s presidential elections. Allegations of irregularities have been plentiful and four of the main opposition candidates have called for the elections to be cancelled. Whichever way the end results will turn out between the incumbent President Kabila and his key opponent Tshisekedi, the announcement may easily lead to violent clashes.

With this in mind, progress of in-region sourcing schemes is considerable. Some recent developments include:

The ICGLR’s Steering Committee for the Regional Initiative on the Illegal Exploitation of Natural Resources (RINR) has adopted the Certification Manual, thereby establishing the legal and political framework necessary for ICGLR Member States to start implementing their regional certification scheme. Efforts are underway to start issuing ICGLR regional certificates and the DRC’s mine inspectors have started visiting mine sites in the Kivus.

BGR is implementing their “Certified Trading Chain” Standard in Rwanda and is increasing its presence in the region, including a project to support the ICGLR in the implementation of the regional certification mechanism. Baseline audits are expected to take place in the Kivus in January 2012.

ITRI continues to work in Katanga Province and has not yet been able to take up operations in the Kivus, reportedly because of the worsened security situation. In addition, more funds would be required for the iTSCi tag-and-bag scheme to be implemented in other provinces. According to the OECD pilot project in the upstream supply chain, “due to the requirements imposed on smelters under the CFS program, the introduction of iTSCi in the region has become an absolute precondition for the trade to resume. The financial cost of the iTSCI system, however, is considerable. The price iTSCI currently charges in Katanga and Rwanda is USD 500/T of minerals” (p.17). The study further points to the difficulty of upstream companies “outsourcing” their responsibility for due diligence to iTSCi (p.12).

To end this article, let’s consider one striking example of the changing dynamics in the region: the return by Rwanda of 70’000kgs of untagged minerals to the DRC. While this might be seen as a symbolic gesture, it is difficult to understate the importance of this event. Two years ago, Rwanda would have denied that any Congolese minerals transit its country. Not only do Governments in the region now publicly recognize the problem, they are actively and visibly trying to find a solution. There will be no miracles, but small steps towards increased transparency.