Defense Management: Industry Practices Can Help Military	 
Exchanges Better Assure That Their Goods Are Not Made by Child or
Forced Labor (31-JAN-02, GAO-02-256).				 
                                                                 
The military exchanges operate retail stores similar to 	 
department stores in more than 1,500 locations worldwide. The	 
exchanges stock merchandise from many sources, including	 
name-brand companies, brokers and importers, and overseas firms. 
Reports of worker rights abuses, such as child labor and forced  
overtime, and antilabor practices have led human rights groups	 
and the press to scrutinize working conditions in overseas	 
factories. GAO found that the military exchanges are not as	 
proactive as private sector companies in determining working	 
conditions at the overseas factories that manufacture their	 
private label merchandise. Moreover, the exchanges have not	 
sought to verify that overseas factories comply with labor laws  
and regulations. A single industrywide standard for working	 
conditions at overseas factories was not considered practical by 
the 10 retailers GAO contacted. However, these retailers have	 
taken the following three steps to ensure that goods are not	 
produced by child or forced labor: (1) developing workplace codes
of conduct that reflect their expectations of suppliers; (2)	 
disseminating information on fair and safe labor conditions and  
educating their employees, suppliers, and factory workers on	 
them; and (3) using their own employees or contractors to	 
regularly inspect factories to ensure that their codes of conduct
are upheld.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-256 					        
    ACCNO:   A02722						        
  TITLE:     Defense Management: Industry Practices Can Help Military 
Exchanges Better Assure That Their Goods Are Not Made by Child or
Forced Labor							 
     DATE:   01/31/2002 
  SUBJECT:   Best practices					 
	     Child abuse					 
	     Labor law						 
	     Manufacturing industry				 
	     Occupational health standards			 
	     Occupational safety				 
	     Post exchanges					 
	     Safety standards					 
	     Working conditions 				 

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GAO-02-256
     
United States General Accounting Office

GAO

Report to Congressional Requesters

January 2002

DEFENSE MANAGEMENT

Industry Practices Can Help Military Exchanges Better Assure That Their
Goods Are Not Made by Child or Forced Labor

GAO-02-256

Contents

Letter

Results in Brief
Background
Military Exchanges' Efforts to Identify Working Conditions in

Overseas Factories Not As Proactive As Some Private Sector Retailers'
Efforts

Single Industry Standard Not Considered Practical, but Industry Practices
and Other Assistance Could Be Useful to Military Exchanges

Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

                                     1

                                    3 5

                                     9

13 18 19 20

Appendix I Scope and Methodology

Appendix II Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories 25

Government Agencies 25 Nongovernmental Organizations 30 Industry
Associations 35

Appendix III Examples of Web Sites With Codes of Conduct

Appendix IV Comments From the Department of Defense

            Appendix V GAO Contacts and Staff Acknowledgments 41

Tables

Table 1: Number of Retail Locations and Reported Annual Revenues and
Earnings for Military Exchanges 7 Table 2: Private Label Merchandise of the
Military Exchanges 8

Table 3: Number of Factories by Country or Territory That

Produced AAFES' Private Label Apparel in Fiscal

Year 2000 11 Table 4: Retailers' Web Sites With Codes of Conduct 37

Abbreviations

AAFES Army and Air Force Exchange Service DOD Department of Defense

United States General Accounting Office Washington, DC 20548

January 31, 2002

Congressional Requesters

The military exchanges operate retail stores similar to department stores at
1,552 locations worldwide, selling apparel, footwear, household appliances,
jewelry, cosmetics, food, and other merchandise. Their mission is to (1)
provide quality merchandise and services for active duty military personnel
and certain other persons affiliated with U.S. armed forces at uniformly low
cost and (2) generate reasonable earnings for the support of the Department
of Defense's morale, welfare, and recreation programs. With sales of $9
billion a year, the military exchanges, as a group, are comparable to some
of the largest general retail chains in the nation. The military exchanges
sell name brand items (such as Nike, Levi's, and Liz Claiborne), as well as
apparel and other merchandise under their own private labels.1

Like leading retailers in the private sector, the exchanges do not
manufacture the merchandise they sell but, instead, rely on independent
suppliers, including national name brand companies, brokers and importers,
and overseas companies. With globalization, U.S. businesses have increased
their reliance on the latter-importers and overseas companies-and, at the
same time, have encountered a growing number of allegations that overseas
factories manufacture merchandise under sweatshop conditions. In various
countries, there are reports of worker rights abuses (such as child labor,
forced overtime work, and workplace health and safety hazards) and of
antilabor practices. Such issues have led human rights organizations and the
news media to scrutinize working conditions at overseas factories. Because
of this situation, you requested that we examine the overseas buying
practices of the Army and Air Force Exchange. On June 20 and 21, 2001, we
briefed the staff of Representatives Cynthia McKinney and Sherrod Brown and
the Morale, Welfare, and Recreation oversight panel of the House Armed
Services Committee,

1 Private label merchandise includes products carrying the exchange's own
name or a name created exclusively for that exchange.

respectively, on the progress of our work.2 As a result of our briefings,
the House Armed Services Committee Report for the Fiscal Year 2002 National
Defense Authorization Act directed the Secretary of Defense to ensure that
the military exchanges implement a program to assure that their private
label merchandise is not produced by child or forced labor.

As agreed with your office, we continued with our work to identify industry
practices that might provide a framework for or prove beneficial to the
Navy, Marine Corps, and Army and Air Force exchanges in establishing their
program. In this report, we (1) compare military exchanges with the private
sector in terms of the methods used to identify working conditions at the
overseas factories used by their private label suppliers and (2) address
whether a single industry standard exists to promote adequate working
conditions at such factories, identify the steps the private sector has
taken to promote adequate working conditions at overseas factories that
could serve as a framework for the exchanges' efforts, and identify
assistance available to the exchanges to initiate steps similar to those of
the private sector.

In conducting this review, we analyzed 10 leading private sector companies'
efforts to identify working conditions in overseas factories. We chose seven
of the companies from the National Retail Federation's list of the 2001 Top
100 Retailers (in terms of sales) in the United States.3 The retailers and
their ranking on the Federation's list are Federated Department Stores, Inc.
(15); JCPenney (8); Kohl's (36); Kmart (5); The Neiman Marcus Group, Inc.
(64); Sears, Roebuck and Co. (4); and Wal-Mart (1). The remaining three
companies-The Walt Disney Company, Levi Strauss & Co., and Liz Claiborne,
Inc.-were chosen on the basis of recommendations from government agencies,
nongovernmental organizations, and industry associations as being among the
leaders in efforts to address working conditions in overseas factories.4 In
addition, we interviewed officials and reviewed documents from the
Departments of

2 Specifically, we noted that the Army and Air Force Exchange (1) has not
had a program to address the working conditions and rights for employees of
overseas suppliers of its merchandise, (2) recognized that it needed to
develop a program that provides visibility of worker rights and working
conditions for employees of its overseas suppliers, and (3) was interested
in identifying industry practices that it might apply to its operations.

3 The National Retail Federation is the world's largest retail trade
association.

4 These three companies generally refer to themselves as "manufacturers" or
"licensing" companies, but they also operate retail stores. Therefore, in
this report, we refer to the 10 companies we contacted as "retailers."

Results in Brief

State and Labor, the Office of the United States Trade Representative, and
the International Labor Organization,5 which provided perspective on
government and industrywide efforts to address working conditions in
overseas factories. We also interviewed industry associations and labor and
human rights groups. We did not independently evaluate the private sector
programs to determine their effectiveness or to independently verify
specific allegations of worker rights abuses. Instead, our results rely on
independent analyses (such as reports from the State and Labor Departments
and the International Labor Organization), interviews with industry
associations and labor and human rights groups, and statements made by and
documentation provided by the retailers' officials. More information on the
scope and methodology of our work is presented in appendix I.

The military exchanges' methods for identifying working conditions in
overseas factories that manufacture their private label merchandise are not
as proactive as the methods employed by companies in the private sector,
which generally know the identity of their overseas suppliers and have
knowledge of the conditions under which their products are manufactured. The
methods taken by retailers in the private sector to assess working
conditions vary in scope and rigor, and they are evolving; nevertheless,
leading retailers-either from a sense of social responsibility, pressure
from outside groups, or a desire to protect the reputation of their
companies' product lines-are far more proactive than the military exchanges
in identifying working conditions in overseas factories. Specifically, the
retailers we contacted identified the name and location of the factories
making their private label merchandise, used information on human rights
issues to assess the risks of doing business with the factories, questioned
suppliers about factory working conditions, and visited the factories to
identify working conditions first-hand. Conversely, only the Army and Air
Force Exchange knew the identity of the factories that manufactured its
private label merchandise, and none of the exchanges knew the nature of the
working conditions in these factories. Instead, they assumed that their
suppliers and other government agencies ensured good working conditions. At
the same time, they have not taken steps to verify that overseas factories
have complied with labor

5 The International Labor Organization is a United Nations specialized
agency that seeks to promote social justice and internationally recognized
human and labor rights.

laws and regulations or otherwise acted to determine the status of employee
working conditions.

A single industrywide standard for working conditions at overseas factories
was not considered practical by the 10 retailers we contacted, whose
officials told us that each company must address different needs, depending
on the size of its operations, the various locations where its merchandise
is produced, and the labor laws that apply in different countries. However,
in the past few years, these retailers have taken three key steps that they
believe helped to better assure that their merchandise is not manufactured
in sweatshop conditions, especially not by child or forced labor. The three
steps could serve as a framework to guide the exchanges' efforts to develop
a program to assure that their goods are not manufactured by child or forced
labor and assistance is available to help the exchanges initiate similar
action. First, retailers have developed workplace codes of conduct that
reflect their values and expectations of suppliers. The codes include
provisions to foster fair and safe labor conditions, such as prohibitions
against the use of forced labor and child labor. Second, retailers
implemented the provisions in their codes of conduct by disseminating
information on them and by providing training for their own employees and
suppliers and, in some instances, for factory workers. For example, most
retailers posted information on workers rights and workplace standards in
the factories in the workers' native language and posted their codes of
conduct on their Internet Web sites. Third, various retailers used their own
employees, contractors, or a combination of both to regularly inspect
factories and to make sure their codes of conduct are upheld. The government
agencies we contacted, such as the Departments of State and Labor, expressed
a willingness to assist the exchanges in shaping a program that meets the
congressional direction to assure that private label exchange merchandise is
not produced by child or forced labor. In addition, the International Labor
Organization offered to provide advisory services, technical assistance, and
training programs to help the military exchanges define and implement best
labor practices throughout their supply chain.

Our report recommends a framework that the Department of Defense and its
exchange services should adopt as they move to implement the congressionally
directed program to assure that the exchanges' private label merchandise is
not produced by child or forced labor. In written comments on a draft of
this report, the Department concurred with our conclusions and
recommendations.

Background

Protections for workers in the United States were enacted in the Fair Labor
Standards Act of 1938, which established three basic rights in American
labor law: a minimum wage for industrial workers that applied throughout the
United States; the principle of the 40-hour week, with time-and-a-half pay
for overtime; and a minimum working age for most occupations. Since 1938,
the act has been amended several times, but the essentials remain. For many
years, the act (combined with federal and state legislation regarding worker
health and safety) was thought to have played a major role in eliminating
sweatshops in the United States. However, we reported on the "widespread
existence" of sweatshops within the United States in the 1980s and 1990s.6
Subsequent to our work, in August 1995, the Department of Labor and the
California Department of Industrial Relations raided a garment factory in El
Monte, California, and found sweatshop working conditions-workers were
confined behind razor wire fences and forced to work 20 hours a day for 70
cents an hour. Leading retailers were found to have sold clothes made at
this factory. According to the National Retail Federation, an industry trade
association, the El Monte raid provoked a public outcry and galvanized the
U.S. government's efforts against sweatshops.

Concern in the United States about sweatshops has spread from its shores to
the overseas factories that supply goods for U.S. businesses and the
military exchanges. With globalization, certain labor-intensive activities,
such as clothing assembly, have migrated to low-wage countries that not only
provide needed employment in those countries but also provide an opportunity
for U.S. businesses to profit from manufacturing goods abroad and for
consumers to benefit from an increasing array of quality products at low
cost. Various labor issues (such as child labor, forced overtime work,
workplace health and safety, and unionization) have emerged at these
factories. In May 2000, for example, the Chentex factory in Nicaragua-which
produces much of the Army and Air Force exchange's private label jeans and
denim product-interfered in a wage dispute involving two labor groups,
firing the union leaders of one of the groups. Subsequently, much publicity
ensued over working conditions at this factory.

6 In 1988, 1989, and 1994, we reviewed the nature and prevalence of
sweatshops in
Sweatshops in the U.S.: Opinions on Their Extent and Possible Enforcement
Options
(GAO/HRD-88-130BR, Aug. 30, 1988), "Sweatshops" in New York City: A Local
Example of
a Nationwide Problem (GAO/HRD-89-101BR, June 8, 1989), and Garment Industry:
Efforts to Address the Prevalence and Conditions of Sweatshops
(GAO/HEHS-95-29,
Nov. 2, 1994).

International labor rights were defined in the Trade Act of 1974 as the
right of association; the right to organize and bargain collectively; a
prohibition on the use of any form of forced or compulsory labor; a minimum
age for the employment of children; and acceptable conditions of work with
respect to minimum wages, hours of work, and occupational safety and health.
As globalization progressed, U.S. government agencies, nongovernmental
organizations,7 industry associations, retailers, and other private
organizations began addressing worker rights issues in overseas factories.
For example, the International Labor Organization, a United Nations
specialized agency that formulates international policies and programs to
help improve working and living conditions, has endorsed four international
labor principles: (1) freedom of association and the effective recognition
of the right to collective bargaining, (2) the elimination of all forms of
forced or compulsory labor, (3) the effective abolition of child labor, and
(4) the elimination of discrimination in employment.8 Appendix II provides
additional information on governmental agencies', nongovernmental
organizations', and industry associations' efforts to address worker rights
in overseas factories.

The Military Exchanges The military exchanges are separate, self-supporting
instrumentalities of and Their Private Label the United States located
within the Department of Defense (DOD). The Merchandise Federal Acquisition
Regulation, the Defense Federal Acquisition

Regulation supplement, and component supplements do not apply to the
merchandise purchased by the exchanges and sold in their retail stores,
since the purchases are not made with appropriated funds.9 The Assistant
Secretary of Defense (Force Management Policy) is responsible for

7 In this case, nongovernmental organizations are private organizations that
pursue activities to relieve suffering, promote the interests of the poor,
protect the environment, provide basic social services, or undertake
community development.

8 The four principles are contained in the International Labor
Organization's Declaration on Fundamental Principles and Rights at Work that
were adopted by the International Labor Conference in 1998.

9 The exchanges indirectly receive benefits from appropriated funds. For
example, they do not pay (1) rent for the use of properties owned by the
U.S. government, (2) the salaries of military personnel working for the
exchanges, and (3) utilities associated with overseas exchanges. Such
benefits are not recorded on the exchanges' books; however, DOD's finance
and accounting data showed that, in fiscal year 2000, such benefits accrued
to the Army and Air Force Exchange totaled $155.9 million; to the Navy
Exchange Service Command, $32.3 million; and to the Marine Corps Community
Services, $6.4 million.

establishing uniform policies for the military exchanges' operations.10 The
exchanges are managed by the Army and Air Force Exchange Service (AAFES),
the largest exchange, and by the Navy Exchange Service Command (Navy
Exchange) and Marine Corps Community Services (Marine Corps Exchange). The
exchanges operate retail stores similar to department stores selling
apparel, footwear, household appliances, jewelry, cosmetics, food, and other
merchandise.11 For the past several years, about 70 percent of the
exchanges' earnings from these sales revenues were allocated to morale,
welfare, and recreation activities- libraries, sports programs, swimming
pools, youth activities, tickets and tour services, bowling centers, hobby
shops, music programs, outdoor facilities, and other quality of life
improvements for military personnel and their families-and about 30 percent
to new exchange facilities and related capital projects.

The number of retail locations and the annual revenues and earnings reported
by the exchange services for 1999 and 2000 are shown in table 1.

Table  1:  Number  of  Retail Locations  and  Reported  Annual Revenues  and
Earnings for Military Exchanges

Dollars in millions

   Exchange   Number of
   service    locations         1999 revenues 1999 earnings 2000 revenues 2000 earnings
    AAFES                1,423        $6,690           $361        $7,042          $381
     Navy                  113         1,831             55         1,974
 Marine Corps               16           547             44           573
    Total                1,552        $9,068           $460        $9,589          $503

Source: GAO's analysis of data provided by AAFES, Navy Exchange, and Marine
Corps Exchange.

The exchanges have created private label products, which generally carry
their own name or a name created exclusively for the exchange. The exchanges
began creating private labels in the mid-1980s to provide lower prices for
customers, to obtain higher earnings margins for the exchanges, and to
remain competitive with major discount retailers. Private labels are
profitable for retailers because their costs do not include marketing,
product development, or advertising, which are used by companies to position
national brands in the marketplace and to maintain the market

10 The Assistant Secretary reports to the Under Secretary (Personnel and
Readiness) who, in turn, reports to the Deputy Secretary of Defense.

11 The exchanges provide a host of other services and specialty stores,
including furniture stores, florist shops, barber and beauty shops, optical
shops, liquor stores, and fast-food restaurants.

share. In 2000, AAFES reported purchases of $44.8 million in private label
merchandise from overseas companies, and the Navy Exchange reported
purchases of $11.6 million in private label merchandise from importers.12
The Marine Corps Exchange only recently created its private label and did
not purchase any private label merchandise from importers or overseas
companies in 2000, but it reported purchases of about $350,000 of AAFES' and
the Navy Exchange's private label merchandise for resale in its stores. The
private label goods sold by the military exchanges are shown in table 2.

        Table 2: Private Label Merchandise of the Military Exchanges

 Exchange  Types of merchandise               Exchanges' private label name
  AAFES           Apparel            Ponytails, Royal Manor, Gumballs, Passports, Laura
                                                 Leigh, and RR Menswear
                Housewares                               Belagio
            Beverages & snacks                      Patriot's Choice
               Lawn & garden                             Strike
                   Toys                               Soldier Bear
           Health & beauty aids                        AAFES Brand
                Toiletries                         American Mercantile
                Beef jerky                          KC Cattle Company
                Dog treats                             Paw Prints

Navy Exchange Apparel Health & beauty aids Beverages & snacks Lawn & garden
Automotive accessories Housewares Eyeglass accessories Eyeglass frames
Toiletries Beef jerky Dog treats

Basic Concepts and Modern Images
NEX
Patriot's Choice
Strike
Autoport
Harbor Home, Belagio
NEX Optics
Harborview Eyewear
American Mercantile
KC Cattle Company
Paw Prints

Marine Corps Exchange Apparel Health & beauty aids Beverages & snacks Lawn &
garden Automotive accessories Housewares Toiletries Beef jerky

4 Star
NEX
Patriot's Choice
Strike
Autoport
Harbor Home, Belagio
American Mercantile
KC Cattle Company

          Source: AAFES, Navy Exchange, and Marine Corps Exchange.

12 For merchandise purchased directly from overseas companies, the exchanges
pay customs duties and tariffs on the portion that is imported into the
United States, as do retailers in the private sector. In fiscal year 2000,
AAFES was the only exchange that directly imported merchandise from overseas
companies, and it paid $6 million in tariffs.

Military Exchanges' Efforts to Identify Working Conditions in Overseas
Factories Not As Proactive As Some Private Sector Retailers' Efforts

The retailers we contacted in the private sector are more proactive about
identifying working conditions than the military exchanges. They
periodically requested that suppliers provide a list of overseas factories
and subcontractors that they used to make the retailers' private label
merchandise, administered questionnaires on working conditions, visited
factories, and researched labor issues in the countries where prospective
factories are located. The military exchanges largely rely on their
suppliers to identify and address working conditions in overseas factories
that manufacture the exchanges' private label merchandise. The exchanges
generally did not maintain the names and locations of the relevant overseas
factories. The exchanges assumed that their suppliers and other U.S.
government agencies, such as U.S. Customs Service, ensured that labor laws
and regulations that address working conditions and minimum wages were
followed.

Leading Private Sector Retailers Are Proactive in Identifying Overseas
Working Conditions

The 10 leading private sector retailers we contacted are more active in
identifying working conditions than the military exchanges for a variety of
reasons, ranging from a sense of social responsibility to pressure from
outside groups and a desire to protect the reputation of their companies'
product lines. These retailers periodically requested that overseas
suppliers provide a list of factories and subcontractors that they used to
make the retailers' private label merchandise. Some retailers we contacted
terminated a business relationship with suppliers that used a factory
without disclosing it to the retailers. For example, JCPenney's purchase
contracts stipulate that failure by a supplier or one of its contractors to
identify its factories and subcontractors may result in JCPenney's taking
the following actions: seeking compensation for any resulting expense or
loss, suspending current business activity, canceling outstanding orders,
prohibiting the supplier's subsequent use of the factory, or terminating the
relationship with the supplier. JCPenney officials told us that they have
terminated suppliers for using unauthorized subcontractors. Some retailers
that we interviewed, such as The Neiman Marcus Group, Inc., JCPenney, and
Liz Claiborne, Inc., developed a company questionnaire, which they had
factory management complete. The questionnaire addressed health and safety
issues and whether U.S. or foreign government agencies had investigated the
factory. The retailers used the questionnaire to provide factories with
feedback on their compliance with the retailers' standards and for the
retailer to provide the factory an opportunity to make improvements in
working conditions before an inspection. The representatives of these
retailers told us that they visited factories to verify the accuracy of the
factories' answers to the questionnaire before ordering merchandise.

Each of the 10 retailers we contacted told us they also used information on
human rights issues that was either developed internally or was available
from government agencies and nongovernmental organizations to assess labor
issues in the countries where the factories are located. This included the
Department of State's annual Country Reports on Human Rights Practices (a
legislatively mandated report to Congress that covers worker rights issues
in 194 countries), which the retailers frequently cited as a source for
identifying labor issues in a particular country. Most retailers also used
information obtained from the United Nations; U.S. Department of State; U.S.
Customs Service; U.S. Department of Labor; and nongovernmental
organizations, such as Amnesty International.13 The retailers we contacted
used this information in their assessments of suppliers to avoid business
arrangements with factories in areas with a higher risk of labor abuses. In
addition, some of the retailers told us that their decisions to buy
merchandise made in a particular country sometimes depended on whether they
could improve factory conditions in a country. For example, companies such
as Levi Strauss & Co. used only those Chinese factories that corrected
problem conditions, an approach supported by the officials we met at the
Departments of State and Labor.14

Exchanges Are Less Proactive in Identifying Factories' Working Conditions

The military exchanges' methods for identifying working conditions in
overseas factories that manufacture their private label merchandise are not
as proactive as the methods employed by companies in the private sector.
Only the Army and Air Force Exchange knew the identity of the factories that
manufactured its private label merchandise, and none of the exchanges knew
the nature of working conditions in these factories. Instead, they assumed
that their suppliers and other government agencies ensured good working
conditions. While the exchanges have sent letters to some suppliers
describing their expectations of compliance with labor laws and regulations
that address working conditions and minimum wages in individual countries,
they have not taken steps to verify that overseas factories are in
compliance or otherwise acted to determine the status of employee working
conditions; instead, they assumed that their suppliers and other government
agencies ensured good working conditions. For

13 Amnesty International is a human rights organization that annually
releases a report about human rights abuses in every country of the world.

14 According to the State Department's Country Reports on Human Rights
Practices, freedom of association is severely restricted in China, and
forced labor is a problem as well.

example, the Navy Exchange and the Marine Corps Exchange do not routinely
maintain the name and location of the overseas factories that manufactured
their merchandise because they rely on brokers and importers to acquire the
merchandise from the overseas factories. The AAFES Retail Business
Agreement15 requires suppliers to promptly provide subcontractors' name and
manufacturing sites upon request. But because it had no program to address
working conditions in overseas factories, AAFES has not requested this
information, except for the suppliers it used for its private label apparel,
and then only to check on the quality of the merchandise being manufactured.
AAFES' records show that in fiscal year 2000, its private label apparel was
manufactured in 70 factories in 18 countries and territories, as shown in
table 3.

Table 3:  Number of Factories  by Country or Territory  That Produced AAFES'
Private Label Apparel in Fiscal Year 2000

                     Country/territory No. of factories

                                  China 27

Taiwan

Indonesia

Singapore

Hong Kong

India

Fiji

Macau

Nicaragua

Pakistan

Brunei

Myanmar (Burma)

Honduras

Korea

Malaysia

Mauritius

Saipan

                                 Thailand 1

Source: AAFES.

In some cases, the exchanges' private label merchandise was manufactured in
countries that have been condemned internationally for their human rights
and worker rights violations. For example, at 9 of the

15 The AAFES Retail Business Agreement contains terms and conditions
applicable to the business relationship between the supplier and AAFES.

10 retailers we contacted, officials told us that they had ceased purchasing
from Myanmar (formerly Burma) in the 1990s because of reports of human
rights abuses documented by governmental bodies, nongovernmental
organizations, and the news media; at one retailer we contacted, officials
told us that they had ceased purchasing from Myanmar in 2000 for the same
reasons. In contrast, during 2001, each exchange purchased private label
apparel made in Myanmar.

For the most part, the exchanges assume compliance with laws and regulations
that address child or forced labor in the countries where their factories
are located instead of determining compliance. In 1996, for example,
following the much publicized El Monte, California, sweatshop incident, the
Navy Exchange notified all of its suppliers by letter that it expected its
merchandise to be manufactured without child or forced labor and under safe
conditions in the workplace, but it did not attempt to determine whether
these suppliers and their overseas factories were willing and able to meet
these expectations.16 The Navy Exchange and Marine Corps Exchange relied
solely on their suppliers to address working conditions in the factories.
Similarly, AAFES' management officials told us that they assumed that their
suppliers were in compliance with applicable laws and regulations by virtue
of their having accepted an AAFES purchase order. According to these
management officials, when suppliers accept a purchase order, they certify
that they are complying with their Retail Business Agreement. This
agreement, distributed by letter to all suppliers in 1997, states that by
supplying merchandise to AAFES, the supplier guarantees that it-along with
its subcontractors-has complied with all labor laws and regulations
governing the manufacture, sale, packing, shipment, and delivery of
merchandise in the countries where the factories are located.17 According to
AAFES officials, an AAFES contracting officer and a representative of the
supplier are to sign the agreement. We reviewed the contracting arrangements
between AAFES and nine of its suppliers of private label merchandise. Only
four of the nine suppliers had signed the AAFES Business Agreement.

AAFES management officials also told us that they rely on the reputation of
their suppliers for assurance that overseas factories are in compliance

16 Although its suppliers have changed since 1996, the Navy Exchange has not
issued another notification letter.

17  Although its  suppliers have  changed since  1997, AAFES has  not issued
another agreement letter.

with its business agreements. For example, these officials told us that they
use only the overseas suppliers that have existing business relationships
with other major U.S. retailers. The officials also stated that since many
of these private retailers have developed and are using their own program to
address working conditions in their overseas factories, the use of the same
suppliers provided some degree of confidence that the suppliers are working
within the laws of the host nation. However, some retailers we contacted
said their programs addressed factory conditions only for the period that
the factories were manufacturing the retailer's merchandise and that the
factories did not have to follow their program when they were manufacturing
merchandise for another company. AAFES management officials also told us
that they rely on the U.S. Customs Service to catch imported products that
are manufactured under abusive working conditions. However, the Customs
officials we interviewed told us that their agency encourages companies to
be aware of the working conditions in supplier factories to further reduce
their risk of becoming engaged in an import transaction involving
merchandise produced with forced or indentured child labor.18 According to
the Customs' officials, the military exchanges-like retailers-are
responsible for assuring that their merchandise is not produced with child
or forced labor.

A single industry standard for adequate working conditions does not exist,
and the retailers we contacted did not believe that such a standard was
practical because each company must address different needs, depending on
the size of its operations, the various locations where its merchandise is
produced, and the labor laws that apply in different countries. However,
each of the retailers that we contacted had taken three key steps that could
serve as a framework for the exchanges in promoting compliance with local
labor laws and regulations in overseas factories. They involve (1)
developing codes of conduct19 for overseas suppliers; (2) implementing their
codes of conduct by disseminating expectations to their purchasing staff,
suppliers, and factory employees; and (3) monitoring to better ensure
compliance. The three steps taken by the retailers vary in scope

Single Industry Standard Not Considered Practical, but Industry Practices
and Other Assistance Could Be Useful to Military Exchanges

18 See Forced Child Labor Advisory, U.S. Customs Service (Dec. 2000).

19 For the purpose of this report, the term "codes of conduct" is used
generically to refer to various types of corporate policies and standards
concerning working conditions in factories. These codes of conduct take
different forms, including statements of company policy in the form of
letters to suppliers, provisions in purchase orders or letters of credit,
and/or compliance certificates.

and rigor, and they are evolving. We did not independently evaluate the
effectiveness of these retailers' efforts, but the retailers'
representatives told us that although situations could occur in which their
codes of conduct are not followed, they believed that these steps provided
an important framework for ensuring due diligence and helped to better
assure fair and safe working conditions. The government agencies we visited
and the International Labor Organization also recognized these three steps
as key program elements and expressed a willingness to assist the exchanges
in shaping a program to assure that child or forced labor was not used to
produce their private label merchandise.

Three Industry Practices Could Provide a Framework for the Exchanges

Developing a Code of Conduct

Representatives of the 10 retailers we contacted believed that the three
steps they have taken-developing codes of conduct for overseas suppliers;
implementing their codes of conduct by disseminating expectations to their
purchasing staff, suppliers, and factory employees; and monitoring to better
ensure compliance-provide due diligence as well as a mechanism to address
and improve working conditions in overseas factories. For example, officials
at Levi Strauss & Co. told us that after they refused to do business with a
prospective supplier in India because the supplier's factory had wage
violations and health and safety conditions that did not meet Levi Strauss &
Co.'s guidelines, the supplier made improvements and requested a
reassessment 4 months later. According to Levi Strauss & Co., the
reassessment showed that the supplier had corrected wage violations and met
health and safety standards. In addition, employee morale had also improved,
as indicated by lower turnover, improved product quality, and higher
efficiency at the factory.

In 1991, Levi Strauss & Co. became the first multinational company to
establish a code of conduct to convey its policies on working conditions in
supplier factories, and subsequently such codes were widely adopted by
retailers. According to the Department of Labor, U.S. companies have adopted
codes of conduct for a variety of reasons, ranging from a sense of social
responsibility to pressure from competitors, labor unions, the media,
consumer groups, shareholders, and worker rights advocates. In addition,
allegations that a company's operations exploit children or violate other
labor standards put sales-which depend heavily on brand image and consumer
goodwill-at risk and could nullify the hundreds of millions of dollars a
company spends on advertising. According to Business for Social
Responsibility, a nongovernmental organization that provides assistance for
companies developing and implementing corporate codes of conduct, adopting
and enforcing a code of conduct can be

beneficial for retailers because it can strengthen legal compliance in
foreign countries, enhance corporate reputation/brand image, reduce the risk
of negative publicity, increase quality and productivity, and improve
business relationships.

Codes of conduct vary in content. They can be a mixture of labor principles
recommended by international organizations like the International Labor
Organization, local laws, and internal corporate standards,20 but they
almost always include the following elements: prohibitions against child
labor, forced labor, discrimination, harassment, or abuse, and requirements
to ensure health and safety. They frequently include provisions on working
hours, overtime compensation, wages and benefits, support for freedom of
association and the right to organize and bargain collectively, and
compliance with applicable laws. In addition, enforcement or corrective
actions for violations of the code are listed in some codes of conduct. For
example, the code of conduct for Federated Department Stores (one of the
retailers we contacted) states,

"when notified by the U.S. Department of Labor or any state or foreign
government, or after

determining upon its own inspection that a supplier or its subcontractor has
committed a

serious violation of law relating to child or forced labor or unsafe working
conditions,

Federated will immediately suspend all shipments of merchandise from that
factory and will discontinue further business with the supplier."21

An official from Federated Department Stores, Inc., said that the company
would demand that the supplier factory institute the monitoring programs
necessary to ensure compliance with its code of conduct prior to the
resumption of any business dealings with that supplier.

A variety of monitoring organizations, colleges, universities, and
nongovernmental organizations have codes of conduct, and codes of conduct
have now been widely adopted by the private sector. The International Labor
Organization's Business and Social Initiatives

20 Resource guides on codes of conduct in the apparel industry are available
from the International Labor Organization and the Department of Labor.
Business for Social Responsibility, a nongovernmental organization, provides
companies that are developing corporate codes of conduct with guidance and
information and maintains a database of corporate human rights policies and
practices for its membership.

21 Federated Department Stores, Inc., Corporate Polices, Sweatshops.

Implementing Codes of Conduct

Database22 includes codes of conduct for about 600 companies. While the
military exchanges' core values oppose the use of child or forced labor to
manufacture their merchandise, the military exchanges do not have codes of
conduct articulating their views. Examples of Internet Web sites with codes
of conduct are included in appendix III.

Although retailers in the private sector implement their codes of conduct in
various ways, officials of the retailers we contacted told us that they
generally train their buying agents and quality assurance employees on their
codes of conduct to ensure that staff at all stages in the purchasing
process are aware of their company's code. For example, an official at Levi
Strauss & Co. stated that his company continually educates its employees,
including merchandisers, contract managers, general managers in source
countries, and other personnel at every level of the organization during the
year. Officials of the retailers we contacted told us they also have
distributed copies of their codes of conduct to their domestic and
international suppliers and provided them with training on how to comply
with the code. In addition, some retailers required suppliers to post codes
of conduct and other sources of labor information in their factories in the
workers' native language. For example, The Walt Disney Company has
translated its code of conduct into 50 different languages and requires each
of its suppliers to post the codes in factories in the appropriate local
language. Retailers such as Liz Claiborne, Inc., and Levi Strauss & Co. also
work with local human rights organizations to make sure that workers
understand and are familiar with their codes of conduct.

Some retailers dedicate staff solely to implementing a code of conduct,
while other retailers assign these duties to various departments-such as
compliance, quality assurance, legal affairs, purchasing agents, and
government affairs-as a collateral responsibility. Executives and officials
from the retailers we contacted stated that the successful implementation of
a code of conduct requires the involvement of departments throughout the
supply chain, both internally and externally (including supplier and
subcontractor factories). They also stated that the involvement of senior
executives is critical because they provide an institutional emphasis that
helps to ensure that the code of conduct is integrated throughout the
various internal departments of the company.

22 The database consists of information on corporate policies and reports,
codes of conduct, accreditation and certification criteria, and labeling
programs and is available on the International Labor Organization's Web site
at http://oracle02.ilo.org:6060/vpi/vpisearch.first.

Monitoring for Compliance

To help ensure that suppliers' factories are in compliance with their codes
of conduct, the retailers we contacted have used a variety of monitoring
efforts. Retailer officials told us that the extent of monitoring varies and
can involve internal monitoring, in which the company uses its own employees
to inspect the factories; external monitoring, in which the company
contracts with an outside firm or organization to inspect the factories; or
a combination of both. The various forms of monitoring involve the visual
inspection of factories for health and safety violations; interviewing
management to understand workplace policies; reviewing wage, hour, age, and
other records for completeness and accuracy; and interviewing workers to
verify workplace policies and practices. The 10 retail companies we
contacted did not provide a precise cost for their internal and external
monitoring programs, but a representative of Business for Social
Responsibility estimated that monitoring costs ranged from $250,000 to $15
million a year. Some retailers suggested that the military exchanges could
minimize costs by joining together to conduct monitoring, particularly in
situations where the exchanges are purchasing merchandise manufactured at
the same factories.

Companies that rely on internal monitoring use their own staff to monitor
the extent to which supplier factories adhere to company policies and
standards. According to an official with the National Retail Federation, the
world's largest retail trade association, retailers generally prefer
internal monitoring because it provides them with first-hand knowledge of
their overseas facilities. At the same time, representatives of the
nongovernmental organizations we visited expressed their opinion that
inspections performed by internal staff may not be perceived as sufficiently
independent. According to information we obtained from the retailers we
contacted, nearly all of them had an internal monitoring program to inspect
all or some supplier factories; their internal monitoring staff ranged from
5 to 100 auditors located in domestic and international offices. Some
retailers said they perform prescreening audits before entering into a
contractual agreement, followed by announced and unannounced inspections at
a later time. The frequency of audits performed at supplier factories
depends on various factors, such as the rigor and size of the corporation's
monitoring plan, the location of supplier factories, and complaints from
workers or nongovernmental organizations.

Some retailers-along with colleges, universities, and factories-are also
using external monitoring organizations that provide specially trained
auditors to verify compliance with workplace codes of conduct. We visited
four of these monitoring organizations-Fair Labor Association, Social

Accountability International, Worker Rights Consortium, and Worldwide
Responsible Apparel Production. More information on these monitoring
organizations appears in appendix II. Each organization has different
guidelines for its monitoring program, but typically, a program involves (1)
a code of conduct that all participating corporations must implement and (2)
the inspection of workplaces at supplier factories participating in the
program by audit firms accredited by the organization. External monitoring
organizations' activities differ in scope. For example, under the Fair Labor
Association's program, companies use external monitors accredited by the
Fair Labor Association for periodic inspections of factories. In contrast,
in the Worldwide Responsible Apparel Production's program, individual
factories are certified as complying with their program. Although
differences in scope exist-and have led to debate on the best approach for a
company-corporations that are adopting external monitors believe they are
valuable for providing an independent assessment of factory working
conditions.

Advisory Services Are Available to Assist the Exchanges in Formulating a
Program

Conclusions

Some retailers we contacted offered to share their experiences in developing
programs to address working conditions in overseas factories. The
Departments of Labor and State, the U.S. Customs Service, and the
International Labor Organization prepare reports that address working
conditions in overseas factories. These organizations expressed a
willingness to assist the military exchanges in shaping a program to assure
that child or forced labor does not produce private label exchange
merchandise. Furthermore, the International Labor Organization offered to
provide advisory services, technical assistance, and training programs to
help the military exchanges define and implement best labor practices
throughout their supply chain.

The military exchanges lag behind leading retailers in the practices they
employ to assure that working conditions are not abusive in overseas
factories that manufacture their private label merchandise. As a result, the
exchanges do not know if workers in these factories are treated humanely and
compensated fairly. The exchanges recently became more interested in
developing a program to obtain information on worker rights and working
conditions in overseas supplier plants, and the House Armed Services
Committee Report for the Fiscal Year 2002 National Defense Authorization Act
requires them to do so. However, developing a program that is understood
throughout the supply chain, lives up to expectations over time, and is
cost-effective will be a challenge. Leading retailers have been addressing
these challenges for as long as 10 years and have taken

three key steps to promote adequate working conditions and compliance with
labor laws and regulations in overseas factories-developing codes of
conduct, implementing the codes of conduct by the clear dissemination of
expectations, and monitoring to ensure that suppliers' factories comply with
their codes of conduct. Drawing on information and guidance from various
U.S. government agencies and the International Labor Organization can
facilitate the military exchanges' development of such a program.
Information available from these entities could be useful not only in
establishing an initial program but also in implementing it over time, and
the costs may be minimized by having the military exchanges pursue these
efforts jointly.

As the Secretary of Defense moves to implement the congressionally directed
program to assure that private label exchange merchandise is not produced by
child or forced labor, we recommend the Under Secretary of Defense
(Personnel and Readiness), in conjunction with the Assistant Secretary of
Defense (Force Management Policy), require the Army and Air Force Exchange
Service, Naval Exchange Service Command, and Marine Corp Community Services
to develop their program around the framework outlined in this report,
including

Recommendations for Executive Action

* creating a code of conduct that reflects the values and expectations that
the exchanges have of their suppliers;

* developing an implementation plan for the code of conduct that includes
steps to communicate the elements of the code to internal staff, business
partners, and factory workers and to train them on these elements;

* developing a monitoring effort to ensure that the codes of conduct are
upheld;

* using government agencies, such as the Departments of State and Labor,
retailers, and the International Labor Organization as resources for
information and insights that would facilitate structuring their program;

* establishing ongoing communications with these organizations to help the
exchanges stay abreast of information that would facilitate their
implementation and monitoring efforts to assure that exchange merchandise is
not produced by child or forced labor; and

* pursuing these efforts jointly where there are opportunities to minimize
costs.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, the Assistant Secretary of Defense
(Force Management Policy) concurred with its conclusions and
recommendations. The Assistant Secretary identified planned implementing
actions for each recommendation and, where action had not already begun,
established July 1, 2002, as the date for those actions to be effective. The
Department's written comments are presented in their entirety in appendix
IV.

We are sending copies of this report to the appropriate congressional
committees; the Secretary of Defense; the Secretary of the Army; the
Secretary of the Navy; the Secretary of the Air Force; the Commander,
Army and Air Force Exchange Service; the Commander, Navy Exchange
Service Command; the Commander, Marine Corps Community Services;
the Director, Office of Management and Budget; and interested
congressional committees and members. We will also make copies
available to others upon request.

Please contact me at (202) 512-8412 if you or your staff has any questions
concerning this report. Major contributors to this report are listed in
appendix V.

Barry W. Holman, Director
Defense Capabilities and Management

List of Congressional Requesters

The Honorable Cynthia McKinney
The Honorable Sherrod Brown
The Honorable David E. Bonior
The Honorable Julia M. Carson
The Honorable Peter A. DeFazio
The Honorable Sam Farr
The Honorable Earl F. Hilliard
The Honorable Marcy Kaptur
The Honorable Dennis Kucinich
The Honorable Jim McGovern
The Honorable George Miller
The Honorable Lynn Nancy Rivers
The Honorable Bernard Sanders
The Honorable Jan Schakowsky
The Honorable Fortney Pete Stark
House of Representatives

                      Appendix I: Scope and Methodology

To compare military exchanges with the private sector in terms of the
methods used to identify working conditions at the overseas factories, we
limited our work to the exchanges' efforts related to private label
suppliers and performed work at the military exchanges and leading retail
companies. To determine the actions of the exchanges to identify working
conditions in the factories of their overseas suppliers, we reviewed the
policies and procedures governing the contract files, purchase orders, and
contractual agreements at the exchanges' headquarters offices and
interviewed officials responsible for purchasing merchandise sold by the
exchanges. For example, we reviewed the contracting arrangements between the
Army and Air Force Exchange Service (AAFES) and nine of its suppliers of
private label merchandise to determine if AAFES had requested information on
working conditions in overseas factories and whether the suppliers had
signed the contractual documents. For historical perspective, we reviewed
the results of prior studies and audit reports of the military exchanges. We
met with officials and performed work at the headquarters of AAFES in
Dallas, Texas; the Navy Exchange Service Command (Navy Exchange) in Virginia
Beach, Virginia; and the Marine Corps Community Services (Marine Corps
Exchange) in Quantico, Virginia.

To determine the actions of the private sector to identify working
conditions in the factories of their overseas suppliers, we analyzed 10
leading private sector companies' efforts to identify working conditions in
overseas factories by interviewing the companies' officials and the
documentation they provided. We chose seven of the companies from the
National Retail Federation's list of the 2001 Top 100 Retailers (in terms of
sales) in the United States.1 The retailers and their ranking on the
Federation's list follow: Federated Department Stores, Inc. (15); JCPenney
(8); Kohl's (36); Kmart (5); The Neiman Marcus Group, Inc. (64); Sears,
Roebuck and Co. (4); and Wal-Mart (1). The remaining three companies- The
Walt Disney Company, Levi Strauss & Co., and Liz Claiborne, Inc.- were
chosen on the basis of recommendations from U.S. government agencies,
nongovernmental organizations, and industry associations as being among the
leaders in efforts to address working conditions in overseas factories.
These three companies generally refer to themselves as "manufacturers" or
"licensing" organizations, but they also operate retail stores. We
interviewed officials and reviewed documents from the Departments of State
and Labor, the Office of the United States Trade

1  The  National  Retail  Federation is  the  world's  largest retail  trade
association.

Appendix I: Scope and Methodology

Representative, and the International Labor Organization to gain a
perspective on government and industry efforts to address factory working
conditions. We also interviewed officials from industry associations and
labor and human rights groups.

To identify steps the private sector has taken to promote adequate working
conditions at factories that could serve as a framework for the exchanges,
we focused on the efforts of the 10 retailers. We documented the programs
and program elements (e.g., codes of conduct, plans for implementing codes
of conduct throughout the supply chain, and monitoring efforts) used by the
10 retailers that we contacted. We did not independently evaluate the
private sector programs to determine the effectiveness of their efforts or
to independently verify specific allegations of worker rights abuses.
Rather, we relied primarily on discussions with retailers' officials and the
documentation they provided. We met with officials from government agencies
and reviewed independent studies such as State and Labor Department and
International Labor Organization reports, providing a perspective on
government and industrywide efforts to address working conditions in
overseas factories. We documented the procedures the exchanges used to
purchase merchandise and interviewed headquarters personnel responsible for
buying and inspecting merchandise made overseas. We also reviewed the
exchanges' policies, statements of core values, and oversight programs.

To gain a perspective on the various approaches to address worker rights
issues, we interviewed nongovernmental organizations and industry
associations, including representatives from the National Labor Committee,
National Consumers League, International Labor Rights Fund, Global Exchange,
Investor Responsibility Research Center, Business for Social Responsibility,
National Retail Federation, and the American Apparel and Footwear
Association. In addition, we interviewed officials from four monitoring
organizations-the Fair Labor Association; Social Accountability
International; Worldwide Responsible Apparel Production; and Worker Rights
Consortium-which inspect factories for compliance with codes of conduct
governing labor practices and human rights.

To collect information on government enforcement actions and funding for
programs to address working conditions in overseas factories, we interviewed
officials from the Department of State's Office of International Labor
Affairs, the Department of Labor's Bureau of International Labor Affairs,
the U.S. Customs Service's Fraud Investigations Office, and the Office of
the United States Trade Representative. For an international

Appendix I: Scope and Methodology

perspective on worldwide efforts, we visited the International Labor
Organization's offices in Washington, D.C., and Geneva, Switzerland.

We performed our review from April through November 2001 in accordance with
generally accepted government auditing standards.

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

                             Government Agencies

U.S. Customs Service

The Customs Service's Fraud Investigations Office and its 29 attachï¿½ offices
in 21 countries investigate cases concerning prison, forced, or indentured
labor.1 The Customs officials work with the Department of State, Department
of Commerce, and nongovernmental organizations to collect leads for
investigations. In some cases, corporations have told Customs about
suspicions they have about one of their suppliers and recommended an
investigation. In addition, private citizens can report leads they may have
concerning a factory. The Forced Child Labor Center was established as a
clearinghouse for investigative leads, a liaison for Customs field offices,
and a process to improve enforcement coordination and information. Customs
also provides a toll-free hotline in the United States (1-800-BE-ALERT) to
collect investigative leads on forced labor abuses.

Outreach efforts from the Customs Service involve providing seminars around
the world for U.S. government agencies, foreign governments, nongovernmental
organizations, and corporations concerning forced and indentured labor
issues. In December 2000, Customs published a manual entitled Forced Child
Labor Advisory, which provides importers, manufacturers, and corporations
with information designed to reduce their risk of becoming engaged in a
transaction involving imported merchandise produced with forced or
indentured child labor. Customs also publishes on its Internet Web site a
complete list of outstanding detention orders and findings concerning
companies that are suspected of producing merchandise from forced or
indentured labor. Customs can issue a detention order if available
information reasonably, but not necessarily conclusively, indicates that
imported merchandise has been produced with forced or indentured labor; the
order may apply to an individual shipment or to the entire output of a type
of product from a given firm or facility. If, after an investigation,
Customs finds probable

1 Customs enforces section 307 of the Tariff Act of 1930 (19 U.S.C. sec.
1307), which prohibits the importation of merchandise produced in whole or
in part with prison labor, forced labor, or indentured labor under penal
sanction. Customs attachï¿½ offices are in the following countries: (1)
Austria, (2) Belgium, (3) Brazil, (4) Canada, (5) Columbia, (6) England, (7)
France, (8) Germany, (9) Italy, (10) Japan, (11) Korea, (12) Mexico, (13)
Panama, (14) People's Republic of China, (15) the Philippines, (16) Russia,
(17) Singapore, (18) South Africa, (19) Thailand, (20) Uruguay, and (21)
Venezuela.

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

cause that a class of merchandise is a product of forced or indentured child
labor, it can bar all imports of that product from that firm from entering
the United States.

On June 5, 1998, the Department of the Treasury's Advisory Committee on
International Child Labor was established to provide the Treasury Department
and the U.S. Customs Service with recommendations to strengthen the
enforcement of laws against forced or indentured child labor, in particular,
through voluntary compliance and business outreach. The Advisory Committee
was established to support law enforcement initiatives to stop illegal
shipments of products made through forced or indentured child labor and to
punish violators. The Committee comprises industry representatives and child
labor experts from human rights and labor organizations.

Customs Service officials told us they have met with leading retailers to
provide feedback on their internal monitoring programs to assure that their
merchandise is not produced with forced child labor. Customs Service
officials expressed a willingness to assist the exchanges in shaping a
program to assure that child or forced labor does not produce private label
exchange merchandise.

                          U.S. Department of Labor

The Department of Labor conducts targeted enforcement sweeps in major
garment centers in the United States, but it does not have the authority to
inspect foreign factories. In August, 1996, the Department of Labor called
upon representatives of the apparel industry, labor unions, and
nongovernmental organizations to join together as the Apparel Industry
Partnership (later becoming the Fair Labor Association) to develop a plan
that would assure consumers that apparel imports into the United States are
not produced under abusive labor conditions.

The Bureau of International Labor Affairs, Department of Labor, has produced
seven annual congressionally requested reports on child labor, entitled By
the Sweat and Toil of Children, concerning the use of forced labor, codes of
conduct, consumer labels, efforts to eliminate child labor, and the economic
considerations of child labor. Other relevant reports on worker rights
produced by the Bureau include the 2000 Report on Labor Practices in Burma
and Symposium on Codes of Conduct and International Labor Standards.

Since 1995, the Department of Labor has also contributed $113 million to
international child labor activities, including the International Labor

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

Organization's International Program for the Elimination of Child Labor. In
addition, the Department of Labor provided the International Labor
Organization with $40 million for both fiscal years 2000 and 2001 for
programs in various countries concerning forced labor, freedom of
association, collective bargaining, women's rights, and industrial relations
in lesser-developed nations. The Department also provides any company that
would like to learn how to implement an effective monitoring program with
technical assistance, and Labor officials have expressed a willingness to
assist the exchanges in shaping a program to assure that private label
exchange merchandise is not produced by child or forced labor.

                          U.S. Department of State

On January 16, 2001, the Department of State's Anti-Sweatshop Initiative
awarded $3.9 million in grants to support efforts to eliminate abusive
working conditions and protect the health, safety, and rights of workers
overseas. The Anti-Sweatshop Initiative is designed to support innovative
strategies to combat sweatshop conditions in overseas factories that produce
goods for the U.S. market. Five nongovernmental and international
organizations, such as the Fair Labor Association, International Labor
Rights Fund, Social Accountability International, American Center for
International Solidarity, and the International Labor Organization, received
over $3 million. In addition, the U.S. Agency for International Development
will administer an additional $600,000 for smaller grants in support of
promising strategies to eliminate abusive labor conditions worldwide.

The Department of State's Bureau of Democracy, Human Rights, and Labor
publishes Country Reports on Human Rights Practices, a legislatively
mandated annual report to Congress concerning worker rights issues,
including child labor and freedom of association in 194 countries. Retailers
and manufacturers stated they have utilized these reports to stay abreast of
human and labor rights issues in a particular country and to make factory
selections. The Department of State has expressed a willingness to assist
the exchanges in shaping a program to assure that child or forced labor does
not produce private label exchange merchandise.

Office of the U.S. Trade The Office of the U.S. Trade Representative leads
an interagency working

Representative group-the Trade Policy Staff Committee-which has the right to
initiate worker rights petition cases under the Generalized System of
Preferences. The Generalized System of Preferences Program establishes trade

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

preferences to provide duty-free access to the United States for designated
products from eligible developing countries worldwide to promote development
through trade rather than traditional aid programs. A fundamental criterion
for the Generalized System of Preferences is that the beneficiary country
has or is taking steps to afford workers' internationally recognized worker
rights, including the right to association; the right to organize and
bargain collectively; a prohibition against compulsory labor; a minimum age
for the employment of children; and regulations governing minimum wages,
hours of work, and occupational safety and health. Under the Generalized
System of Preferences, any interested party may petition the committee to
review the eligibility status of any country designated for benefits. If a
country is selected for review, the committee then conducts its own
investigation of labor conditions and decides whether or not the country
will continue to receive Generalized System of Preferences benefits.
Interested parties may also submit testimony during the review process. In
addition, U.S. Trade Representatives can express their concern about worker
rights issues in a country to foreign government officials, which may place
pressure on supplier factories to resolve labor conditions. (The general
authority for duty-free treatment expired on September 30, 2001 [19 U.S.C.
2465]. Proposed legislation provides for an extension with retroactive
application similar to previous extensions of this authority. Authority for
sub-Saharan African countries continues through September 30, 2008 [19
U.S.C. 2466b]).

International Labor Organization

The International Labor Organization is a United Nations specialized agency
that seeks to promote social justice and internationally recognized human
and labor rights. It has information on codes of conduct, research programs,
and technical assistance to help companies address human rights and labor
issues. Currently, the International Labor Organization is developing
training materials to provide mid-level managers with practical guidance on
how to promote each of its four fundamental labor principles both internally
and throughout a company's supply chain. The following are the four
fundamental principles: (1) freedom of association and the effective
recognition of the right to collective bargaining, (2) the elimination of
all forms of forced or compulsory labor, (3) the effective abolition of
child labor, and (4) the elimination of discrimination in employment. These
principles are contained in the International Labor Organization's
Declaration on Fundamental Principles and Rights at Work and were adopted by
the International Labor Conference in 1998. To promote the principles, the
U.S. Department of Labor is funding various projects pertaining to improving
working conditions in the garment and

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

textile industry and is addressing issues of freedom of association,
collective bargaining, and forced labor in the following regions or
countries: Bangladesh, Brazil, Cambodia, the Caribbean, Central America,
Colombia, East Africa, East Timor, Kenya, India, Indonesia, Jordan, Morocco,
Nigeria, Nepal, Vietnam, southern Africa, and Ukraine. For fiscal years 2000
and 2001, these projects received about $40 million in funding.

On January 16, 2001, the International Labor Organization was awarded
$496,974 by the Department of State Anti-Sweatshop Initiative to research
how multinational corporations ensure compliance with their labor
principles. Another research project seeks to demonstrate the link between
international labor standards and good business performance. A major product
of the research will be a publication for company managers that looks at the
relationship between International Labor Organization conventions and
company competitiveness and that then examines how adhering to specific
standards (i.e., health and safety, human resource development, and
workplace consultations) can improve corporate performance. The
International Labor Organization has also created the Business and Social
Initiatives Database, which includes extensive information on corporate
policies and reports, codes of conduct, accreditation and certification
criteria, and labeling programs on its Web site. For example, the database
contains an estimated 600 codes of conduct from corporations,
nongovernmental organizations, and international organizations.

From fiscal year 1995 through fiscal year 2001, the Congress has
appropriated over $113 million for the Department of Labor for international
child labor activities including the International Labor Organization's
International Program on the Elimination of Child Labor. The program has
estimated that the United States will pledge $60 million for the 2002-3
period. The United States is the single largest contributor to the
International Program on the Elimination of Child Labor, which has focused
on the following four objectives:

* Eliminating child labor in specific hazardous and/or abusive occupations.
These targeted projects aim to remove children from work, provide them with
educational opportunities, and generate alternative sources of income for
their families.

* Bringing more countries that are committed to addressing their child labor
problem into the program.

* Documenting the extent and nature of child labor.

* Raising public awareness and understanding of international child labor
issues.

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

The program has built a network of key partners in 75 member countries
(including government agencies, nongovernmental organizations, media,
religious institutions, schools, and community leaders) in order to
facilitate policy reform and change social attitudes, so as to lead to the
sustainable prevention and abolition of child labor. During fiscal years
2000-2003, the United States is funding programs addressing child labor in
the following countries or regions: Bangladesh, Brazil, Cambodia, Colombia,
Costa Rica, the Dominican Republic, El Salvador, Ghana, Guatemala, Haiti,
Honduras, India, Jamaica, Malawi, Mongolia, Nepal, Nicaragua, Nigeria,
Pakistan, the Philippines, Romania, South Africa, Tanzania, Thailand,
Uganda, Ukraine, Vietnam, Yemen, and Zambia and Africa, Asia, Central
America, Inter-America, and South America.

Nongovernmental Organizations

Business for Social Responsibility

Business for Social Responsibility, headquartered in San Francisco,
California, is a membership organization for companies, including retailers,
seeking to sustain their commercial success in ways that demonstrate respect
for ethical values, people, communities, and the environment. (Its sister
organization, the Business for Social Responsibility Education Fund, is a
nonprofit charitable organization serving the broader business community and
the general public through research and educational programs.) In 1995, this
organization created the Business and Human Rights Program to address the
range of human rights issues that its members face in using factories
located in developing countries. The Business and Human Rights Program
provides a number of services; for example, it offers (1) counsel and
information to companies developing corporate human rights policies,
including codes of conduct and factory selection guidelines for suppliers;
(2) information services on human rights issues directly affecting global
business operations, including country-specific and issue-specific
materials; (3) a means of monitoring compliance with corporate codes of
conduct and local legal requirements, including independent monitoring; (4)
a mechanism for groups of companies, including trade associations, to
develop collaborative solutions to human rights issues; and (5) the
facilitation of dialogue between the business community and other sectors,
including the government, media, and human rights organizations.

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

                           Fair Labor Association

The Fair Labor Association, a nonprofit organization located in Washington,
D.C., offers a program that incorporates both internal and external
monitoring. In general, the Association accredits independent monitors,
certifies that companies are in compliance with its code of conduct, and
serves as a source of information for the public. Companies affiliated with
the Association implement an internal monitoring program consistent with the
Fair Labor Association's Principles of Monitoring, covering at least
one-half of all their applicable facilities during the first year of their
participation, and covering all of their facilities during the second year.
In addition, participating companies commit to using independent external
monitors accredited by the Fair Labor Association to conduct periodic
inspections of at least 30 percent of the company's applicable facilities
during its initial 2-to 3-year participation period. On January 16, 2001,
the Fair Labor Association was awarded $750,000 by the Department of State's
Anti-Sweatshop Initiative to enable the organization to recruit, accredit,
and maintain a diverse roster of external monitors around the world. The
Fair Labor Association's participating companies include the following:
Adidas-Saloman A.G.; Nike, Inc.; Reebok International Ltd.; Levi Strauss &
Co.; Liz Claiborne, Inc.; Patagonia; GEAR for Sports; Eddie Bauer; Josten's
Inc.; Joy Athletic; Charles River Apparel; Phillips-Van Heusen Corporation;
and Polo Ralph Lauren Corporation.

Global Exchange Global Exchange, headquartered in San Francisco, California,
is a nonprofit research, education, and action center dedicated to
increasing global awareness among the U.S. public while building
international partnerships around the world. Global Exchange has filed and
supported class-action lawsuits against 26 retailers and manufacturers
concerning alleged sweatshop abuse in Saipan's apparel factories.2 As of
September 2001, 19 of those corporations had settled for $8.75 million and
have agreed to adopt a code of conduct and a monitoring program in Saipanese
factories that produce their merchandise.

International Labor Rights The International Labor Rights Fund is a
nonprofit action and advocacy

Fund organization located in Washington, D.C. It pursues legal and
administrative actions on behalf of working people, creates innovative
programs and enforcement mechanisms to protect workers' rights, and
advocates for better protections for workers through its publications;

2 Saipan  is part  of the Commonwealth  of Northern Mariana  Islands, a U.S.
territory.

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

testimony before national and international hearings; and speeches to
academic, religious, and human rights groups. The Fund is currently
participating in various lawsuits against multinational corporations
involving labor rights in Burma, Colombia, Guatemala, and Indonesia.

In 1996, the International Labor Rights Fund and Business for Social
Responsibility were key facilitators in establishing a monitoring program
for a Liz Claiborne, Inc., supplier factory in Guatemala. The Guatemalan
nongovernmental monitoring organization, Coverco, was founded from this
process and has since published two public reports on the results of its
meetings with factory management and factory workers. Officials at Liz
Claiborne, Inc., stated that the monitoring initiative has been very
effective in detecting and correcting problems and helpful in offering ideas
for best practices and has provided enhanced credibility for the company's
monitoring efforts.

In 2001, the International Labor Rights Fund was awarded an Anti-Sweatshop
Initiative grant from the Department of State in the amount of $152,880. The
Fund plans to undertake a project to work with labor rights organizations in
Africa, Asia, and Latin America to build a global campaign for national and
international protections for female workers. The Fund will conduct worker
surveys and interviews in Africa and the Caribbean to determine the extent
of the problem. In addition, the Fund and its nongovernmental organization
partners will develop an educational video to help alert women workers in
these countries about the problem of sexual harassment.

Investor Responsibility Research Center

The Investor Responsibility Research Center, located in Washington, D.C., is
a research and consulting organization that performs independent research on
corporate governance and corporate responsibility issues. The Center
contributed to the University Initiative Final Report, which collected
information on working conditions in university-licensed apparel factories
in China, El Salvador, Mexico, Pakistan, South Korea, Thailand, and the
United States. The report addresses steps the universities can implement to
address poor labor conditions in licensee factories and ongoing efforts by
government and nongovernmental organizations to improve working conditions
in the apparel industry. The report is based on factory visits and
interviews with nongovernmental organizations, labor union officials,
licensees, factory owners and managers, and government officials.

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

National Consumers League

The National Consumers League is a nonprofit organization located in
Washington, D.C. Its mission is to identify, protect, represent, and advance
the economic and social interests of consumers and workers. Created in 1899,
the National Consumers League is the nation's oldest consumer organization.
The League worked for the national minimum wage provisions in the Fair Labor
Standards Act (passed in 1938) and has helped organize the Child Labor
Coalition, which is committed to ending child labor exploitation in the
United States and abroad. The Child Labor Coalition comprises more than 60
organizations representing educators, health groups, religious and women's
groups, human rights groups, consumer groups, labor unions, and child labor
advocates. The Coalition works to end child labor exploitation in the United
States and abroad and to protect the health, education, and safety of
working minors.

                          National Labor Committee

The National Labor Committee is a nonprofit human rights organization
located in New York City. Its mission is to educate and actively engage the
U.S. public on human and labor rights abuses by corporations. Through
education and activism, the committee aims to end labor and human rights
violations. The committee has led "Corporate Accountability Campaigns"
against major retailers and manufactures to improve factory conditions. In
El Salvador, the National Labor Committee has facilitated an independent
monitoring program between (1) The GAP, the retailer; (2) Jesuit University
in San Salvador, the human rights office of the Catholic Archdiocese; and
(3) the Center for Labor Studies, a nongovernmental organization. The
committee advocates that corporations should disclose supplier factory
locations and hire local religious or human rights organizations to conduct
inspections in factories.

Social Accountability International

Social Accountability International, founded in 1997, is located in New York
City, New York. It is a nonprofit monitoring organization dedicated to the
development, implementation, and oversight of voluntary social
accountability standards in factories around the world. In response to the
inconsistencies among workplace codes of conduct, Social Accountability
International developed a standard, named the Social Accountability 8000
standard, for workplace conditions and a system for independently verifying
compliance of factories. The Social Accountability 8000 standard promotes
human rights in the workplace and is based on internationally accepted
United Nations and International Labor Organization conventions. Social
Accountability 8000 requires individual facilities to be certified by
independent, accredited certification firms with regular follow-up audits.
As of November 2001, 82 Social Accountability 8000

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

certified factories were located in 21 countries throughout Asia, Europe,
North America, and South America. U.S. and international companies adopting
the Social Accountability 8000 standard are Avon, Cutter & Buck, Eileen
Fisher, and Toys R Us. In 2001, Social Accountability International was
awarded an Anti-Sweatshop Initiative grant from the Department of State of
$1 million for improving social auditing through research and collaboration;
capacity building; and consultation with trade unions, nongovernmental
organizations, and small and medium-sized enterprises; and consumer
education. These projects will take place in several countries, including
Brazil, China, Poland, and Thailand, and consumer education will be focused
on the United States.

                          Worker Rights Consortium

Worker Rights Consortium, a nonprofit monitoring organization located in
Washington, D.C., provides a factory-based certification program for
university licensees. University students, administrators, and labor rights
activists created Worker Rights Consortium to assist in the enforcement of
manufacturing codes of conduct adopted by colleges and universities; these
codes are designed to ensure that factories producing goods bearing college
and university logos respect the basic rights of workers. The Worker Rights
Consortium investigates factory conditions and reports its findings to
universities and the public. Where violations are uncovered, the Consortium
works with colleges and universities, U.S.-based retail corporations, and
local worker organizations to correct the problem and improve conditions. It
is also working to develop a mechanism to ensure that workers producing
college logo goods can bring complaints about code of conduct violations,
safely and confidentially, to the attention of local nongovernmental
organizations and the Worker Rights Consortium. As of November 2001, 92
colleges and universities had affiliated with the Worker Rights Consortium,
adopting and implementing a code of conduct in contracts with licensees.

Worldwide Responsible Apparel Production

The Worldwide Responsible Apparel Production, a nonprofit monitoring
organization located in Washington, D.C., monitors and certifies compliance
with socially responsible standards for manufacturing and ensures that sewn
products are produced under lawful, humane, and ethical conditions. The
basis for creating the monitoring and certification program came from
apparel producers that requested that the American Apparel & Footwear
Association address inconsistent company standards and repetitive
monitoring. The program is a factory certification program that requires a
factory to perform a self-assessment followed by an evaluation by a monitor
from the Worldwide Responsible Apparel

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

Production Certification Program. On the basis of this evaluation, the
monitor will either recommend that the facility be certified or identify
areas where corrective action must be taken before such a recommendation can
be made. Following a satisfactory recommendation from the monitor, the
Worldwide Responsible Apparel Production Certification Board will review the
documentation of compliance and decide upon certification. The Certification
Program was pilot tested in 2000 at apparel manufacturing facilities in
Central America, Mexico, and the United States. As of November 2001, 500
factories in 47 countries had registered to become certified.

                            Industry Associations

American Apparel & Footwear Association

The American Apparel & Footwear Association, a national trade association
located in Washington, D.C., represents roughly 800 U.S. apparel, footwear,
and supplier companies whose combined industries account for more than $225
billion in annual U.S. retail sales. The Association was instrumental in
creating the Worldwide Responsible Apparel Production monitoring program.
The Association's Web site states that "members are committed to socially
responsible business practices and to assuring that sewn products are
produced under lawful, humane, and ethical conditions." The American Apparel
& Footwear Association has also created a Social Responsibility Committee,
in which various manufacturers meet to discuss their programs to address
worker rights issues.

                         National Retail Federation

As the world's largest retail trade association, National Retail Federation,
located in Washington, D.C., conducts programs and services in research,
education, training, information technology, and government affairs to
protect and advance the interests of the retail industry. The Federation's
membership includes the leading department, specialty, independent,
discount, and mass merchandise stores in the United States and 50 nations
around the world. It represents more than 100 state, national, and
international trade organizations, which have members in most lines of
retailing. The National Retail Federation also includes in its membership
key suppliers of goods and services to the retail industry. The Federation
has a Web site link entitled, "Stop Sweatshops," which provides information
on the retail industry's response to sweatshops, including forms of
monitoring and a brief history of U.S. sweatshops. The Federation also has
an International Trade Advisory Council, comprising retail and

Appendix II: Efforts of Government Agencies, Nongovernmental Organizations,
and Industry Associations to Address Working Conditions in Overseas
Factories

sourcing representatives, which discusses various issues pertaining to
international labor laws; international trade; and customs matters, both in
the legislative and regulatory areas.

Appendix III: Examples of Web Sites With Codes of Conduct

The codes  of conduct  for the retailers  we visited that have  posted their
codes on the Internet are at the Internet Web sites shown in table 4.

Table 4: Retailers' Web Sites With Codes of Conduct

Retailers Web site

Federated Department Stores, Inc. www.federated-fds.com

Levi Strauss & Co. www.levistrauss.com

Liz Claiborne, Inc. www.lizclaiborne.com

JCPenney www.jcpenney.net

The Neiman Marcus Group, Inc. www.nmgoperations.com

Wal-Mart www.walmart.com

The Walt Disney Company www.disney.go.com

Appendix IV: Comments From the Department of Defense

Appendix IV: Comments From the Department of Defense

Appendix IV: Comments From the Department of Defense

Appendix V: GAO Contacts and Staff Acknowledgments

GAO Contacts Ronald L. Berteotti (214) 777-5702
Roger L. Tomlinson (214) 777-5777

Acknowledgments  In  addition to  those named  above, Nelsie  Alcoser, Jimmy
Palmer, and Susan Woodward made key contributions to this report.

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