Labour-Intensive Sectors: arising risks (including criminal) for Client Companies

Current context and arising risks for businesses

In today’s landscape of labour-intensive sectors, companies face growing challenges in terms of regulations and operational risk management, requiring immediate attention and a structured approach.

On one hand, we see innovative investigative trends in labour-intensive sectors aimed at reconstructing relationships between clients and suppliers. On the other hand, there’s growing interest—especially at the European level—in social sustainability issues within supplier and sub-supplier chains.

What do these seemingly different phenomena have in common?

Companies are now required to take responsibility not only for their own operations, but also for those of their suppliers, ensuring that human rights, labour standards, and tax compliance are respected at every stage of production.

Recent Investigative Trends

The sectors receiving the most attention are logistics, transportation, security, cleaning, manufacturing, retail, pharmaceuticals, and fashion—precisely those sectors where the business model most commonly adopted by client companies involves outsourcing services and work through contracting arrangements.

These investigations have placed relationships between clients, contractors, and subcontractors under the microscope to identify potential tax irregularities and/or workforce management issues. Client companies have been accused of failing to adequately evaluate and select their business partners by relying on:

• Tax-unreliable suppliers, or

• Suppliers responsible for serious violations in personnel management;

From a tax perspective, these investigations appear to be based on the principle established by a recent European Court of Justice ruling (No. 950/2022), which states that clients operating in “high tax risk” sectors are required to adequately evaluate and select their business counterparts. In cases of omitted or insufficient controls, the Tax Authority appears authorized to challenge VAT deductibility for transactions conducted with entities deemed tax-unreliable.

For companies operating in these sectors, there appears to be a concrete risk of criminal proceedings for tax evasion (under Legislative Decree 74/2000). There’s also frequent use, even during preliminary investigations, of urgent preventive seizure measures on profits resulting from alleged tax evasion, which in some precedents amounts to hundreds of millions of euros.

Beyond these direct consequences, other significant risks emerge, including reputational risk and economic-banking risk (banking operations freeze, credit line interruptions, banking rating impacts).

Investigations conducted in labour-intensive sectors have sometimes revealed serious violations by suppliers of regulations protecting employee working conditions and, in the most serious cases, actual workforce exploitation. In such cases, clients who have relied on suppliers responsible for serious violations expose themselves to serious risks.

Where sufficient evidence of workforce exploitation by suppliers emerges, and anomaly indicators that the client should have intercepted become apparent, the client risks having judicial administration measures applied (under Article 34 of Legislative Decree 159/2011, the so-called Anti-Mafia Code) for having “negligently facilitated” the illegal conduct carried out by their supplier.

This investigative approach, particularly followed by the Milan Public Prosecutor’s Office, essentially blames the client for not adequately verifying the actual business capacity of contractor companies and for not controlling actual working conditions and work environments.

European Transparency and Reporting Obligations for Social Sustainability in Supply Chains

At the supranational level, there’s also growing interest in environmental and social sustainability issues in corporate supply chains.

The Corporate Sustainability Due Diligence Directive (CSDDD), also known as the Supply Chain Act, aims to strengthen the responsibility of companies operating within the EU regarding their value chain. The Directive imposes specific and thorough verification obligations on business counterparts to ensure human rights and regulatory standards are guaranteed throughout the entire supply chain.

In the same vein are standards set by ESG regulations (EU Regulation 2023/2772) and CSRD (EU Directive 2022/2464), which impose specific transparency and reporting obligations on companies, including matters of value chain and supplier selection criteria. These standards require companies to conduct activities aimed at preventing, mitigating, or minimizing negative impacts that could arise from the production chains in which they participate.

The objective pursued with CSRD is to enable access to more detailed, clear, and standardized sustainability information, with evident positive consequences for the financial market in terms of information completeness, transparency, and data comparability.

Impact on Companies and Possible Intervention Strategies

Companies operating in labour-intensive sectors must now take responsibility for both their own operations and those of their suppliers, ensuring human rights, labour standards, and tax compliance throughout the entire production chain. This requires companies to fundamentally review their procurement procedures and supplier selection criteria.

The recommended approach typically involves updating the company’s Organization, Management and Control Model under Legislative Decree 231/2001 through a comprehensive two-phase process. The first phase focuses on conducting thorough due diligence and risk analysis, including reviewing existing supplier registries, analysing current selection procedures, and mapping sector-specific risks while assessing regulatory compliance across all business relationships.

The second phase is focused on implementing robust control and monitoring systems. This involves creating systematic verification processes, establishing supplier rating mechanisms, and defining clear risk indicators that can signal potential problems. Companies must also update their contractual arrangements to include appropriate safeguard clauses and ensure their procurement teams receive proper training on these enhanced procedures. This structured approach helps organizations proactively manage supply chain risks while maintaining compliance with evolving regulatory requirements.