On July 1, 2020, the US Department of State, jointly with the US Department of Treasury, the US Department of Commerce, and the US Department of Homeland Security, issued an advisory (the “Advisory”) to caution US businesses about the risks of supply chain links to entities that allegedly engage in human rights abuses including the forced labor of Uyghurs, ethnic Kyrgyz, ethnic Kazakhs and other Muslim minority groups, in the Xinjiang Uyghur Autonomous Region (“Xinjiang”) in China and beyond. The Advisory builds on the Uyghur Human Rights Policy Act of 2020, recently signed into law, authorizing the President to impose sanctions on persons, including Chinese government officials, determined to be responsible for certain human rights violations and abuses committed against Muslim minority groups in China or elsewhere. (Our blog posts on the background of this law and its passage are available here and here). The Advisory was issued following a series of actions by the US Government as outlined therein, including the June 5th addition of thirty-three entities to the Bureau of Industry and Security’s (“BIS”) Entity List (our blog post available here).
What activities present heightened risks?
The Advisory outlines three types of activities that present heightened risks to companies with supply chain links to entities engaged in human rights abuses, as follows:
- The provision of goods, services, and surveillance technology in Xinjiang (e.g., selling or providing biometric devices, cameras, computers, or other surveillance items; involvement in joint ventures with PRC government officials where the development of surveillance is known; the supply of services to internment camps; or the supply of goods or technologies to Entity List entities, as explained in Annex 1 of the Advisory);
- Sourcing goods (including components and raw materials) produced in Xinjiang, or from factories elsewhere in China implicated in the forced labor of individuals from Xinjiang, either by themselves sourcing from Xinjiang, or by receiving a government-facilitated transfer of workers from Xinjiang; and
- Assistance with the construction of facilities used for the detention of Uyghurs and other Muslim minority groups and/or assisting in the construction of manufacturing facilities in the vicinity of businesses accepting subsidies from the Chinese government who operate using forced labor.
Entities (both US and non-US), involved in any of the above-outlined or similar activities, may face reputational, economic, and legal risks, including but not limited to the issuance of Withhold Release Orders (WROs) by US Customs and Border Protection (“CBP”) (i.e., the detention of goods entering the United States where forced labor was used for such goods’ manufacture), for US entities, civil or criminal investigations resulting in violations of US laws and regulations, and lastly, the imposition of export controls (e.g., addition to BIS’s Entity List). In addition to CBP, the Advisory lists BIS, US Immigration and Customs Enforcement, and US Department of the Treasury’s Office of Foreign Assets Control as the enforcement authorities and indicates that violators may be subject to civil and/or criminal penalties.
What are the red flags to watch out for?
While the Advisory stops short of imposing a ban on conducting business with Xinjiang, it takes a clear position that companies face substantial reputational, economic and legal risks as a result of being affiliated with potential human rights abuses. To that end, the Advisory provides a list of potential “indicators” (i.e., “red flags”) that companies may use to assess the potential exposure of their supply chain to the situation in Xinjiang. US and non-US entities are advised to implement human rights-related due diligence policies and procedures and internal controls to address the risks. These include, but are not limited to:
- A lack of transparency (e.g., the use of shell companies or structuring payments in a way that conceals the origin of goods from the ultimate purchaser);
- The use of alternate terminology by Chinese suppliers to describe internment centers (e.g., “education training centers” or “legal education centers”);
- The receipt by Chinese suppliers of financial assistance from the Chinese government as part of China’s poverty alleviation efforts or vocational training programs; and
- The use of factories co-located with, or in close proximity to internment camps.
What actions should companies take?
The Advisory underscores the importance of enhanced due diligence of the supply chain with potential links to Xinjiang, including the following recommendations:
- US businesses selling products and technology or providing research and services to customers in China should conduct a thorough examination of the use of such goods and services to reduce the likelihood that they may be used to advance the human rights abuses in Xinjiang;
- US businesses that source directly from China, or whose supply chains run through China, should undertake due diligence to ensure that goods imported into the United States were not made, wholly or in part, with forced labor, on the presumption that the labor of individuals presently or previously subjected to internment in Xinjiang constitutes forced labor.
- Industry groups should share information and cooperate in securing their supply chains; and
- Well-documented due diligence policies and procedures may potentially be considered as mitigating factors by the US authorities.
We are assisting many companies with designing effective due diligence responses in view of this guidance and have compiled a database of primary and secondary reporting from various sources (governments, press, NGOs) of Chinese facilities allegedly linked to the use of forced labor. If you have questions, please contact the authors.
The authors thank Taylor Parker for contributing to this blog post.