The Uyghur Forced Labor Prevention Act: How It Impacts Your Company
In September, the U.S. House of Representatives (House) passed H.R. 6210, the Uyghur Forced Labor Prevention Act, in an overwhelming 406-3 bipartisan vote.1 The legislation, if passed by the Senate and signed by the president, has serious implications for companies that source products or materials, either directly or indirectly, from the Xinjiang Uyghur Autonomous Region (XUAR) in China. In summary, the legislation proposes to (1) prohibit the importation of goods made wholly or in part in the XUAR or by persons working with the Chinese government for purposes of its "poverty alleviation" or "pairing-assistance" programs, which allegedly use forced labor from China's ethnic minority populations; (2) provide a mechanism to impose sanctions on foreign persons who knowingly engage in or facilitate forced labor in the XUAR and/or contribute to or provide support for efforts to contravene U.S. law regarding the importation of goods made by forced labor; and (3) establish new disclosure requirements for U.S.-listed companies that knowingly engage with entities involved in certain activities related to the XUAR. Our key takeaways and predictions regarding the pending legislation are set forth below.
- There are two potential paths for Congress to pass H.R. 6210 and for it to become law this year. The first scenario is if, after the November elections, the Senate passes the legislation under the unanimous consent process. This process would allow the Senate to rapidly pass the legislation on an expedited basis if no Senator objects. H.R. 6210 could be a strong contender for this process given the overwhelming bipartisan support it received in the House. The second potential scenario is for Congress to include H.R. 6210 in a larger, must-pass legislative spending package. Because funding for the federal government expires December 11, 2020, Congress is expected to pass a large spending package that would not only fund the government through 2021 but also include other Congressional priorities prior to that date. That omnibus spending bill will be an opportunity for members of Congress to attach unrelated legislative priorities – such as H.R. 6210. Because the bill could pass later this year, it will be important to monitor upcoming legislative activity on this issue given its momentum in Congress and the considerable bipartisan support it has received in the House and Senate.
- The legislation would establish a rebuttable presumption that labor occurring in the XUAR or by persons anywhere in China engaged in "poverty alleviation" or "pairing-assistance" programs constitutes forced labor for purposes of the 19 U.S.C. § 1307, which prohibits the importation of goods made with forced labor. To overcome that presumption, importers would need to establish to U.S. Customs and Border Protection (CBP), by "clear and convincing evidence," that the goods were not produced wholly or in part by convict labor, forced labor, or indentured labor under penal sanctions. If CBP determines that the importer has satisfied the evidentiary burden, CBP would then be required to submit a report that contains such a determination to "the appropriate congressional committees" and the public.
In effect, the legislation would shift the burden of proof from CBP to the importer and raise the evidentiary bar. Currently, CBP may issue a Withhold Release Order (WRO) – i.e., an order to detain shipments of a particular commodity – when information "reasonably but not conclusively" indicates that merchandise produced by forced labor is being, or is likely to be, imported into the United States.2 CBP will release the merchandise if the importer establishes "by satisfactory evidence" that the merchandise is admissible.3 In contrast, under the proposed legislation, CBP would likely issue broad WROs (e.g., for high-priority sectors) and importers would be required to demonstrate, through "clear and convincing" evidence (which may be a higher standard than "satisfactory evidence") that imported merchandise covered by the WRO is admissible.
Rebutting a presumption of forced labor is a challenging endeavor. Based on our experience, CBP will expect to see that the companies involved have a program that effectively addresses the International Labour Organization's (ILO's) 11 Indicators of Forced Labor, which represent the most common signs or "clues" that point to the possible existence of a forced labor.4 As part of that exercise, CBP will likely require back-up in the form of policies (and evidence of their implementation), supply chain maps which trace the origin of the inputs, and the location of the various production steps, internal and third-party audit reports, and copies of remediation plans. Companies may find it difficult to undertake due diligence on this issue in China because, as noted by the Xinjiang Supply Chain Business Advisory issued by the by U.S. Department of State in July, "auditor interviews with workers cannot be relied upon given the pervasive surveillance, and evidence of the worker's fear of sharing accurate information."5 That, coupled with reports that auditors have reportedly been detained or otherwise threatened, suggest that third-party audits may not be a credible source of information.6 Whether a company can satisfy the "clear and convincing evidence" standard without one or more external audit reports remains to be seen. Keep in mind that a favorable finding by CBP may be subject to congressional scrutiny; as such, protectionist politics could play a critical role in admissibility determinations. Companies that have implemented anti-forced labor compliance policies, and have a robust internal audit function, will be better equipped to deal with the uncertainty.
- The proposed legislation would provide additional means to impose sanctions on foreign persons engaged in or supporting forced labor in XUAR, which is already a sanctions enforcement priority. Although new sanctions authorities expressly targeting forced labor in XUAR would send a powerful symbolic message, and may have some long-term deterrent effects, the president and the Office of Foreign Assets Control (OFAC) already possess the sanctions tools necessary to address this conduct, and other similar human rights abuses, which they have been doing aggressively in recent months. Under H.R. 6210, two categories of foreign persons shall be subject to blocking and visa-related sanctions, after being identified in a report to Congress—foreign persons who:
- Knowingly engage in, are responsible for, or facilitate the forced labor of Uyghurs, Kazakhs, Kyrgyz, and members of other Muslim minority groups in the XUAR; and
- Knowingly engage in, contribute to, assist, or provide financial, material or technological support for efforts to contravene United States law regarding the importation of forced labor goods from the XUAR.
Earlier this year, the Uyghur Human Rights Policy Act of 2020, enacted in June 2020, expanded sanctions authorities targeting XUAR in a very similar manner by imposing sanctions on foreign persons responsible for, among other things, torture, as well as cruel, inhuman, or degrading treatment or punishment of the Uyghurs and other Muslin minority groups. That law, too, requires a report to Congress identifying each foreign person before sanctions can be imposed. As of this date, no report has been issued.
Nevertheless, the president and OFAC have acted aggressively during this past year to target human rights abuses in many locations, including the XUAR, under Executive Order (E.O.) 13818 of December 20, 2017, "Blocking the Property of Persons Involved in Serious Human Rights Abuse or Corruption," which implements the Global Magnitsky Human Rights Accountability Act. E.O. 13818 authorizes blocking sanctions to be imposed on a foreign person who is determined "to be responsible for or complicit in, or to have directly or indirectly engaged in, serious human rights abuse."
Most recently, in July 2020, E.O. 13818 served as the basis for OFAC to impose blocking sanctions against a Chinese entity and two current or former Chinese government officials in connection with serious human rights abuses in the XUAR. This action has proven to be massively disruptive to supply chains throughout the region, as the sanctioned entity, Xinjiang Production and Construction Corps (XPCC), has a significant presence in the XUAR. In the near term, we anticipate that OFAC will target additional human rights abusers in the XUAR, including those involved in forced labor, with blocking sanctions pursuant to E.O. 13818. We also expect associated heightened enforcement risk for companies that continue to operate in the region without adopting an appropriate risk-based response to this challenging issue.
- The proposed legislation would impose new disclosure obligations on publicly listed companies. There are three features of those disclosure obligations that may be particularly challenging for companies. First, the draft legislation would require companies to disclose details about the nature, extent, and financial impact of their "knowing" involvement in a range of activities and also with a potentially wide range of actors, including:
- Assisting in creating or providing to technology to create mass population systems in XUAR;
- Engaging in an activity with an entity or an affiliate of an entity "building and running detention facilities" in XUAR; and
- Conducting any transaction or having "dealings" with a range of persons and entities subject to sanctions, including the Global Magnitsky Rights Accountability Act, or persons or entities "responsible for, or complicit in, committing atrocities in" XUAR.
The disclosure requirements do not, however, include reporting about goods that originated in XUAR or contain materials originating or sourced from there.
Second, the new obligations could be quickly imposed on companies. Ordinarily, Congress defines a disclosure obligation at a relatively high level and then instructs the Securities and Exchange Commission (SEC) to implement the obligation by agency rulemaking. In this instance, however, the draft legislation dictates the terms of the required disclosures and will not involve any rulemaking by the SEC. As a result, the new requirements could come into effect quickly.
Third, the proposed disclosure obligations are not subject to any materiality requirement and therefore an issuer would be required to disclose de minimis transactions. As a general matter, SEC disclosure requirements include a materiality requirement in order to be investor-relevant. In this instance, however, Congress is seeking to use SEC disclosure requirement to advance political interests, albeit ones with bipartisan support. Due to the lack of a materiality requirement, companies would need to institute strict internal controls to ensure that they could identify reportable transactions, some of which could be quite small. The lack of a materiality threshold, along with the likelihood that companies will need to begin making disclosure relatively quickly after the legislation is signed into law, may make it challenging for companies to implement the necessary systems and controls to identify disclosable transactions in compliance with the legislation.
Companies with supply chains involving China should pay close attention to this proposed legislation and act now to memorialize and/or update their anti-forced labor policies and procedures. A good first step for U.S. importers is to map their supply chain. (How far back beyond the first tier of suppliers, and how to adequately survey suppliers on issues of forced labor, will depend on the nature of a company's business.) Mapping the supply chain will set the stage for additional, risk-based compliance measures, including tightening internal controls, audits, or even moving some or all of the supply chain out of the XUAR region or out of China entirely.
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1The U.S. House of Representatives passed a related bill, H.R. 6270, known as the Uyghur Forced Labor Disclosure Act of 2020, along more partisan lines on September 30, 2020 (253-163). H.R. 6270 would impose stricter public disclosure requirements on companies relating to goods manufactured with materials sourced from XUAR. Additionally, Senator Marco Rubio (R-FL) earlier this year introduced S. 3471, Senate companion legislation to H.R. 6210.
219 C.F.R. § 12.42(e).
319 C.F.R. § 12.42(g).
4International Labour Office, ILO Indicators of Forced Labour.
5U.S. Department of State, Xinjiang Supply Chain Business Advisory.
7For example, disclosure requirements involving Iran (Public Law 112-158, the Iran Threat Reduction and Syria Human Rights Act of 2012) were signed by the president on August 10, 2012 and started to apply to companies in February 2013. By contrast, the conflict minerals and extractive industries disclosure requirements under Dodd-Frank required SEC rulemaking, which took years to complete. The resulting SEC rules were then challenged in court, which changed their scope and further delayed their implementation.
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