US Steps Up Actions Against Forced Labor as Congress Considers Further Measures

As particular regions come under increased media scrutiny, the issue has renewed interest in Congress, which is considering several bills to enhance forced labor enforcement. Moreover, with the United States taking a “whole-of-government” approach against goods made from forced labor, it is critical that companies act now to mitigate risk in their supply chains. We describe these actions in further detail below.

Congressional Action

• On September 22, 2020, the US House of Representatives overwhelmingly passed the Uyghur Forced Labor Prevention Act (UFLP). The UFLP seeks to prevent forced labor-derived imports from China, especially the Xinjiang Uyghur Autonomous Region (Xinjiang), impose sanctions on violating entities, and establish new disclosures to the Securities and Exchange Commission of certain activities related to Xinjiang.
• Later on September 30, 2020, the House passed a related bill, the Uyghur Forced Labor Disclosure Act of 2020 (UFLD). The UFLD would require additional disclosures without providing exceptions established under the UFLP.
• On October 15, industry and trade associations submitted a letter to Senate leadership on the Committees on Foreign Relations, Finance, and Banking, Housing and Urban Affairs in which they urged the Senate to consider modifications to the rebuttable presumption under the UFLP that all goods from Xinjiang are prohibited from entry into the United States and the disclosure provisions under the UFLP and UFLD.

Executive Action

• While Congress has been working on this legislation to target supply chains that use forced labor in Xinjiang, on July 1, the Departments of State, Commerce, Homeland Security, and the Treasury issued a Xinjiang Supply Chain Business Advisory highlighting the reputational, economic, and legal risks to businesses with potential exposure in their supply chains to Xinjiang or to facilities outside Xinjiang that use labor or goods from Xinjiang. The Advisory includes analysis on:
  • Assisting in developing surveillance tools for the P.R.C. government in Xinjiang;
  • Relying on labor or goods sourced in Xinjiang, or from factories elsewhere in China implicated in the forced labor of individuals from Xinjiang in their supply chains, given the prevalence of forced labor and labor abuses in the region; and
  • Aiding in the construction of internment facilities used to detain Uyghurs and members of other Muslim minority groups, and/or in the construction of manufacturing facilities that are in close proximity to camps operated by businesses accepting subsidies from the P.R.C. government to subject minority groups to forced labor.
• On July 31, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) blocked the property and interests in property of the Xinjiang Production and Construction Corps (including all of its 50% or more owned subsidiaries) and two related officials for their connection to serious human rights abuse in Xinjiang.
• On September 30, the Department of Homeland Security’s Customs and Border Protection (CBP) issued a new Withhold Release Order targeting palm oil from Malaysia produced with forced labor.
• Also on September 30, the United States Department of Labor’s Bureau of International Labor (ILAB) released the annual List of Goods Produced by Child Labor or Forced Labor.

What Imports Does the Uyghur Forced Labor Prevention Act Prohibit?

The UFLP establishes, with limited exceptions, that all goods, wares, articles and merchandise mined, produced, or manufactured wholly or in part in Xinjiang, or by persons working with the Xinjiang government for purposes of the “poverty alleviation” program or the “pairing-assistance” program, which subsidizes the establishment of manufacturing facilities in Xinjiang, shall be deemed to be goods, wares, articles, and merchandise described in section 307 of the Tariff Act of 1930 (19 U.S.C. § 1307) as produced from forced labor.

This “shall be deemed” language appears to create a rebuttable presumption that all goods from Xinjiang are prohibited from entry into the United States under 19 U.S.C. § 1307.

This presumption raises several issues for importers and potentially for downstream US customers, including possible detention of shipments and sanctions as discussed below. Shipments suspected of being produced with forced labor could be detained by CBP and excluded if CBP determines that forced labor was used in the production of the goods. Here, the presumption would lead CBP to first determine that all goods from Xinjiang are prohibited and then seize such goods. As reported in an October 12, 2020 S&P Global Market Intelligence report, this ban could impact companies across many industries.

Because the UFLP’s potential expansion of downstream products to an import ban, it is important for importers to exercise reasonable care for ensuring supply chains do not have products made by forced labor. In other non-region wide contexts, CBP has provided general guidance on reasonable care. CBP would likely have to update its guidance if the law passes.

Import-Related Enforcement Provisions Under the UFLP

Section 5 of the UFLP provides the enforcement strategy. The UFLP’s language indicates that Congress anticipates enforcement principally through Withhold Release Orders (WRO) issued pursuant to 19 U.S.C. § 1307. In particular the provision

• Calls for CBP to provide its enforcement strategy and lists of companies and products produced by forced labor, “and a list of businesses that sold products in the United States made wholly or in part by forced or involuntary labor in the Xinjiang Uyghur Autonomous Region.”
• Establishes that executive agencies report to Congress includes, to the extent practicable, a list of Chinese entities or affiliates that directly or indirectly use forced or involuntary labor in Xinjiang, and a list of “[f]oreign persons that acted as agents of the entities or affiliates” of those entities. (Sec. 7(c)(1)).

Sanctions Provisions Under the UFLP

The UFLP requires annual reports, starting 180 days after enactment, that identify foreign persons determined to be knowingly involved in Xinjiang forced labor or imports into the United States of Xinjiang forced labor goods, and then it mandates blocking and visa sanctions on those persons. The UFLP authorizes the use of the authorities provided in the International Emergency Economic Powers Act (IEEPA) to take these actions, but if enacted, it is possible that the President would issue a new Executive Order under IEEPA and the UFLP to assist with putting these sanctions in place, such as by also targeting persons who provide material support to, or are owned or controlled by, sanctioned persons.

Before the President can remove the sanctions for any particular person, the UFLP requires that the President make a determination and give 15-day notice to Congress that the sanctioned person did not engage in activity for which sanctions have been imposed, the person has been appropriately sanctioned, there has been a credible change in the person’s behavior, or termination of sanctions is in the national security interests of the United States. While a court may find the President is not bound by this language, Presidents have so far followed similar notice provisions on other sanctions laws before removing a sanctioned entity.

The UFLP has some penalties language that appears to need further refinement, but the intent seems to be to provide that the penalties available under IEEPA shall apply not only to a US person who violates the sanctions, but also to a “foreign person that violates, attempts to violate, conspires to violate, or causes a violation” of the sanctions.

The sanctions section also includes a sunset provision that terminates all sanctions five years after enactment of the UFLP.

How Will the UFLP Change Securities and Exchange Commission Disclosures?

Section 9 of UFLP would revise Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m) by requiring disclosure of certain activities in Xinjiang, including knowingly engaging in an activity with an entity or the affiliate of an entity:

• Creating/providing technology or other assistance to create mass population surveillance systems in Xinjiang,
• Building/running detention facilities for Muslim minorities in Xinjiang,
• Engaging in the “pairing-assistance” program or with any entity for which the Department of Homeland Security has issued a withhold release order; or
• Conducting any transaction or having had dealing with any person the property and interests in property of which were sanctioned (i) by the Secretary of State for the detention or abuse Muslim minority groups in Xinjiang; (ii) pursuant to the Global Magnitsky Human Rights Accountability Act (22 U.S.C. 2656); or (iii) any person or entity responsible for, or complicit in, committing atrocities in Xinjiang.

Section 9 also provides the scope of disclosure that would be required under the UFLP. This includes: (i) the nature and extent of activity; (ii) gross revenues and net profits, if any, attributable to the activity; and (iii) whether the issuer or the affiliate of the issuer intends to continue the activity.

As passed in the House, UFLP Section 9(b)(2)(B) provides broad exceptions from the disclosure requirements activities of the issuer or affiliate of the issuer relating to: (i) the import of manufactured goods, including electronics, food products, textiles, shoes, and teas, that originated in the Xinjiang; or (ii) manufactured goods containing materials that originated or are sourced in Xinjiang.

Unlike prior legislations requiring an SEC disclosure for certain Iran-related transactions, there currently is no exception for transactions that are authorized by the US Government, such as pursuant to an authorization issued by the Department of the Treasury to engage in certain transactions with a blocked person.

CBP Continues Issuing WROs

In addition to the Xinjiang region-wide prohibition established under the UFLP, CBP is continuing to issue WROs. As discussed previously, merchandise is subject to exclusion through WROs enforced by CBP and/or seizure, and may lead to criminal investigation of the importer(s). These WROs range across industries from and products. Most recently, on September 30, 2020, CBP issued a WRO on palm oil & palm oil products from Malaysia produced by FGV Holdings Berhad and its subsidiaries and joint ventures.

ILAB issues

On September 30, 2020, ILAB issued the List of Goods Produced by Child Labor or Forced Labor (ILAB List or ILAB Report). Currently, the ILAB List comprises 155 goods from 77 countries. The ILAB List “is adding five goods produced by forced labor by Muslim minorities in China,” which raises the listed number of goods from China’s Xinjiang Region to nine.

• These goods newly added to the ILAB list include gloves, hair products, textiles, thread/yarn, and tomato products.
• This is in other goods from Xinjiang which were previously on the ILAB List, including cotton, electronics, footwear, and garments
• The ILAB Report states that “the production of these goods through forced labor takes place primarily in Xinjiang.” But the Report also raises the possibility that future actions against regions outside of Xinjiang may be forthcoming.
• The ILAB Report states that “(w)hile previous research has focused on goods and products produced in Xinjiang, recent external reports indicate that Uyghurs also have been transported to work in other provinces in China, increasing the number of goods potentially made with forced labor and broadening the risk of forced labor in supply chains.”
  • As the ILAB Report notes, “Companies with supply chains that link to China, including, but not limited to, Xinjiang, should conduct due diligence to ensure that suppliers are not engaging in forced labor.”

Key Takeaways

The United States is continuing to take expansive actions to combat forced labor. Ensuring that companies remain compliant with increased US efforts to enforce human rights standards requires the implementation of enhanced compliance programs that establish Corporate Social Responsibility and sanctions awareness as the foundation of business operations, improve operational guidelines through regular internal review and reporting, and implement training and controls across value chains.