On July 1, 2020, the US Departments of State, Treasury, Commerce, and Homeland Security jointly issued an advisory, “Risks and Considerations for Businesses with Supply Chain Exposure to Entities Engaged in Forced Labor and other Human Rights Abuses in Xinjiang” (the “Advisory”). Although this Advisory does not set out any new laws, it was published shortly after the Uyghur Human Rights Policy Act of 2020 (the “Act”) was signed into law on June 17, 2020. These developments suggest a shift in enforcement focus on the Xinjiang Uyghur Autonomous Region (“XUAR”), including imports from XUAR, exports and technology transfers to XUAR, and other business activity in China that may implicate XUAR.
The Advisory urges US and non-US businesses, academic institutions, research service providers, and investors with connections to XUAR to implement appropriate human rights due diligence policies, procedures, and internal controls to mitigate reputational, economic, and legal risks. The Advisory suggests that the failure to take appropriate due diligence steps may increase the risk of sanctions or law enforcement activity by the US government.
Types of Exposure – Supply Chain (Procurement), Technology (Sales/Partnerships), and Construction-Related Activity
The Advisory highlights three potential areas of supply chain exposure to human rights abuses in XUAR: (1) assisting in developing surveillance tools for the Chinese government that would be used in XUAR; (2) relying on labor or goods sourced in XUAR, or from factories elsewhere in China using forced labor from XUAR; and (3) aiding in the construction of internment facilities in XUAR or manufacturing facilities that are in close proximity to such facilities.
Surveillance: The Advisory warns that businesses, academic institutions and others providing goods, services and technology “with a nexus” to XUAR surveillance “may face reputational risks and/or trigger US law enforcement or other actions.” This includes, among others:
- Exports to China or development in China of products or technologies relating to biometrics, cameras, computers, microchips or microprocessors (which are specifically listed in the Advisory), or other products or technology with surveillance capabilities; and
- Joint ventures with the Chinese government or Chinese companies “whose intellectual property has been known to aid the development or deployment of a surveillance system used arbitrarily against members of minority groups or others.” This may include granting access to genetic databases or assisting with the involuntary collection of genetic data; facial recognition research related to Chinese minorities; partnerships with Chinese technology facial recognition firms involved with enabling China’s surveillance activities; or inviting such parties to conferences (or participating in conferences organized or sponsored by such parties) where technical issues on surveillance-related activities will be discussed.
Forced labor: The Advisory identifies a number of industries with heightened supply chain risks related to forced labor in internment camps, prisons, and elsewhere in XUAR:
- Cotton: The Advisory indicates that XUAR is responsible for most of China’s domestic cotton production, and that forced labor may be used throughout the vertical supply chain, including in producing apparel. The Advisory warns that US companies that export cotton to China “face potential reputational and other risks” if their cotton is used in manufacturing that employs forced labor from XUAR.
- Other industries using forced labor in XUAR: The Advisory lists other “illustrative” industry sectors that “have been identified as using forced labor” in XUAR, including food production, agriculture, cell phones and electronic assembly, mining, and, notably, hair products.
Human Rights Due Diligence
The Advisory encourages businesses with supply chain links to XUAR to implement human rights due diligence in line with international best practices.
Due Diligence Recommendations
The Advisory identifies a number of sources for human rights due diligence best practices, including the United Nations Guiding Principles on Business and Human Rights, the Organization for Economic Co-operation and Development Guidelines on Multinational Enterprises, and the International Labor Organization Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy.
In addition, the Advisory includes the following due diligence recommendations for businesses and individuals:
- Review end users of products, technology, research, and services to reduce the likelihood that supplied goods or services are being used to build, maintain, or support: (i) internment camps; (ii) the broader surveillance apparatus of the Chinese government; (iii) companies that employ forced labor; or (iv) activities that enable human rights abuses, including forced collection of biometric data and coercive transfer of ethnic minority groups.
- Conduct due diligence if providing goods or materials that can be used to construct internment facilities (such as concrete, steel, rebar, chain-link fencing, paving materials, and glass) to reduce the likelihood that internment camps are the ultimate beneficiaries;
- Conduct appropriate due diligence to determine if Chinese entity customers operating in XUAR may employ forced labor or using laborers from XUAR.
The Advisory notes that well-documented and implemented due diligence policies and procedures may be considered “mitigating factors” by US authorities in the event businesses inadvertently engage in sanctionable activity or cross other legal red lines discussed below.
Risks to Financial Institutions
The Advisory recommends that financial institutions assess “their potential exposure to the risk of handling the proceeds of forced labor on behalf of their clients,” in line with the risk-based approach of their existing anti-money laundering, counterterrorist financing, and counterproliferation financing programs, and to implement a mitigation process in line with the risk.
Unreliability of Third-Party Audits
In assessing potential exposure to entities “involved in” the use of forced labor, surveillance or other targeted practices in XUAR, the Advisory cautions that third-party audits alone may not be a credible source of information, because, among other reasons, auditor interviews with workers may not be reliable. Instead, the Advisory suggests collaboration with industry groups to research potential indicators of forced labor in Chinese languages, and to build relationships with Chinese suppliers and recipients of US goods and services, to understand their possible relationships in XUAR under the mutual pairing assistance program (which partners companies in more developed parts of China with activities in XUAR).
The Advisory does not provide any guidance on what nexus to targeted activity in XUAR is sufficient for the company to be “involved in” such targeted activity. While companies using forced labor or surveillance in XUAR would clearly be covered, it is unclear if companies providing ancillary support (e.g., transport, logistics, or management) to targeted activities would also be covered.
The Advisory identifies several US government resources for compliance and due diligence, including:
- The US Department of Labor’s Comply Chain, which provides information on due diligence measures specific to forced labor and child labor in supply chains;
- The US Department of State’s Responsible Sourcing Tool, which includes an in-depth examination of 11 key sectors and 43 commodities at risk for human trafficking or trafficking-related practices, as well as 10 comprehensive risk-management tools; and
- US Customs’ Forced Labor Importer Due Diligence Fact Sheet.
It also lists the following “potential indicators of forced labor or labor abuses” in XUAR:
- Lack of Transparency: Firms operating in XUAR using shell companies to hide the origin of their goods, write contracts with opaque terms, and conduct financial transactions where it is difficult to determine where the goods were produced, or by whom.
- Social Insurance Programs: Companies operating in XUAR disclosing high revenue but having very few employees paying into the government’s social security insurance program.
- Terminology: Any mention of internment terminology (e.g., Education Training Centers (职业教育培训中心) or Legal Education Centers) coupled with poverty alleviation efforts, ethnic minority graduates, or involvement in reskilling.
- Government Incentives: Companies operating in XUAR receiving government development assistance as part of the government’s poverty alleviation efforts or vocational training programs; companies involved in the mutual pairing assistance program.
- Government Recruiters: Companies operating in XUAR implementing nonstandard hiring practices and/or hiring workers through government recruiters.
- Factory Location: Companies operating in XUAR located within or near internment camps, or within or near industrial parks involved in poverty alleviation efforts.
The Advisory identifies a number of US legal tools that could result in negative consequences for individuals and entities that engage in the types of activity described in the Advisory.
The BIS Entity List
Section 744.11 and related provisions of the US Export Administration Regulations (“EAR”) authorize BIS to add companies to the Entity List and thereby impose licensing requirements on the export, reexport, or transfer (in-country) of “items subject to the EAR,” based on a finding that such entities are “acting contrary to the national security or foreign policy interests of the United States.” BIS has previously added Chinese technology companies and government entities to the Entity List for their alleged involvement in human rights abuses in XUAR, including the provision of surveillance technology to law enforcement in XUAR.
OFAC can sanction individuals and entities that are viewed as engaging in human rights abuses in XUAR, such as with entities that use forced labor from Xinjiang. Executive Order (“E.O.”) 13818, which implements the Global Magnitsky Human Rights Accountability Act, is one such authority. In addition, the Uyghur Human Rights Policy Act of 2020 requires reporting, and the imposition of sanctions, on persons involved in human rights abuses in XUAR.
Customs and Importation Risk
19 U.S.C. Section 1307 prohibits the importation of merchandise mined, manufactured, or produced, wholly or in part, by forced labor, including convict labor, forced child labor, and indentured labor. The Advisory states that:
Where evidence indicates that goods from Xinjiang are produced with forced, indentured, or convict labor, CBP will deny entry to those goods, which could lead to the goods being seized and forfeited, or even to the issuance of civil penalties against the importer and other parties, as appropriate. ICE’s Homeland Security Investigations (HSI) may initiate criminal investigations relating to the importation of forced labor-made goods in violation of US law.
Federal Acquisition Regulations (“FAR”)
The Advisory states that the FAR prohibits federal contractors, sub-contractors, and their agents from engaging in a range of human trafficking related activities. Any violations of the FAR can result in suspension or debarment from US government contracting.
Under the Trafficking Victims Protection Act (“TVPA”), the US government can bring criminal charges against any person benefitting from forced labor, if the person knew of or recklessly disregarded evidence of such forced labor. In addition, the Advisory points out that there is also a civil right of action under the TVPA.
The Advisory could be a precursor to increased sanctions and enforcement actions by US agencies related to activities in XUAR. In the past, multi-agency due diligence advisories such as the recent maritime advisory have been followed by increased enforcement and sanctions activity.
For example, the US government may continue to use the Entity List to target technology companies and universities and research institutions connected to XUAR surveillance that may be reliant on US-origin components or technologies. To date OFAC has not targeted any persons for alleged human rights violations in XUAR, although this may change with the passage of the Uyghur Human Rights Policy Act of 2020. In addition, US Customs recently seized a shipment of human hair products believed to have been made from individuals in labor camps in XUAR.
Companies with direct or indirect business connections to XUAR (or companies operating in XUAR) will need to consider developing risk-based supply chain due diligence procedures that can stand up to scrutiny by US enforcement agencies, sometimes operating with 20/20 hindsight. Given the difficulties in conducting on the ground due diligence, we expect that many companies will face difficulties similar to those faced by companies trying to build due diligence procedures to comply with the Conflict Mineral Rule. One potential solution would be a public-private partnership similar to the Customs Trade Partnership Against Terrorism (CTPAT) which allows companies to submit “security profiles” for testing and verification by a CTPAT Supply Chain Security Specialist. In the likely case that the US government will not certify compliance programs, companies with supply chain risk should consider independent testing and auditing of their supply chain due diligence procedures.