Government Regulation

The U.S. Fight Against Forced Labor

The Uyghur Forced Labor and Prevention Act (UFLPA) ushers in an unprecedented shift in U.S. Customs and Border Protection (CBP) enforcement. Multinationals need better tools to manage their supply chains.

By
Larry Sussman
December 16, 2023
T

he Uyghur Forced Labor Prevention Act (UFLPA), enacted in 2022, marked an extraordinary shift in U.S. Customs and Border Protection (CBP) enforcement. Under this legislation, virtually every product, service, or component linked to downstream production from third-party nations and traced back to Xinjiang, China, faces rigorous customs scrutiny upon entering the United States. Importers are now compelled to substantiate that their supply chains are entirely divorced from Xinjiang, presenting a significant challenge to ensure compliance.

Customs can now impose monetary fines as high as the value of a shipped product, or detain and seize products. The new U.S. Customs enforcement strategy is aggressive and technologically sophisticated; businesses seeking to navigate its enforcement need a sophisticated understanding of Chinese supply chains. Data from WireScreen, a business intelligence platform, provides valuable tools that help to identify exposure to manufacturing operations in Xinjiang.

What Prompted the New Restrictions

Since 1890, the United States has technically prohibited the import of goods manufactured with convict labor. Section 307 of the Tariff Act of 1930 expanded this to prohibit the importation of any product made with forced labor. These laws were rarely enforced because of their protectionist origins and an exception which swallowed the rule, called the consumptive demand exception — that is, imports were allowed if there was no supply of a particular good in the United States. Congress, however, removed this exception in 2015, and Section 307 experienced a slight uptick in enforcement. In 2017, Congress initiated a groundbreaking concept by establishing a presumption that goods mined, produced, or manufactured by North Korean nationals would be deemed to be made with forced labor, and thus, the importation of such goods into the United States was prohibited.

UFLPA: A New Level of Forced Labor Restrictions

Then came an even bigger shift in U.S. policy. Effective June 21, 2022, Congress enacted the Uyghur Forced Labor Prevention Act, which stems from widespread accusations of forced labor involving ethnic Uyghurs and other minorities in western China. The new law has the potential to affect thousands of companies within and outside of China, including billions of dollars in trade flows. It requires screening goods that move through more than 150 countries and regions. To meet this challenge, U.S. Customs is now activating sophisticated enforcement tools.

Presumed to be Restricted

The Uyghur Forced Labor Prevention Act (UFLPA) presumes that the U.S. will prohibit the import of all goods mined, produced, or manufactured wholly or in part in Xinjiang (or by an entity on the forced labor "entity list"). This includes goods made anywhere in the world, if any of their inputs originated or passed through Xinjiang. For example, more than $700 million in shipment value of goods originating from Vietnam, Malaysia, and Thailand destined for the United States have already been classified as denied or pending denial under the forced labor act, according to the U.S. Customs and Border Patrol UFLPA Statistics Dashboard. Those goods or their parts are suspected of having transited through Xinjiang.

The only exceptions are in cases where the importer of record: 

  1. Proves with clear and convincing evidence that the goods were not produced at all by forced labor
  2. Fully responds to all Customs and Border Patrol requests
  3. Has fully complied with the detailed strategy document issued by the Department of Homeland Security and aimed at preventing ties to forced labor. Recognize that even if Customs and Border Patrol agrees to grant this exception, the details relied upon in doing so must be submitted to Congress and publicized.

Policy Reasoning for Creating the UFLPA Presumption

Congressional testimony indicates that one reason for establishing the presumption is research indicating that the lack of transparency in Xinjiang makes it "impossible to distinguish between industry and manufacturing that involves forced labor and that which does not." Consequently, it is uncertain whether any U.S. importer of record possesses the ability, resources, or inclination to overcome the hurdles required to meet the exception in cases where the exporter is based in Xinjiang or utilizes a branch to operate in Xinjiang.

In effect, the forced labor act may result in a de facto boycott of supply chains that have these characteristics. In contrast, U.S. importers that can prove their imported goods are completely outside the scope of the forced labor act, operating entirely outside of Xinjiang, stand a better chance of achieving a favorable outcome.

The Penalties for UFLPA Violations 

Customs and Border Patrol enforces the Uyghur Forced Labor Prevention Act in three ways: 

  •  By stopping the goods at port (detention)
  •  Preventing entry in advance of the port (exclusion)
  •  Confiscating the goods (seizure)     

In a detention, Customs will typically provide instructions to the importer on how to submit information to rebut the presumption of forced labor. The importer may seek permission for immediate export treatment to reroute its detained shipment to another country before a determination is made. If the importer meets the clear and convincing test described above or proves the shipment was outside the scope of the forced labor act, customs will process a release. It will also report the evidence relied upon for exception cases to Congress and the public. In an exclusion, appeals may be submitted electronically by the importer before goods arrive. Similarly, the importer must either rebut the forced labor presumption or prove that the import was outside the scope of the regulations. 

In a seizure or forfeiture, a referral to the customs officer will be made at the port of entry. This action will begin notice and due process timing deadlines for the purposes of submitting a petition. 

Once handed over to a fines, penalties and forfeiture officer, there is also the possibility of a forfeiture of goods or a referral for criminal prosecution.

Credit: CBP

Civil Penalties for UFLPA Non-Compliance

The main civil penalty is a monetary fine for commercial fraud and negligence. The negligence standard is defined as a failure to exercise reasonable care with respect to complying with the Uyghur forced labor act.

These fines include:

  • An amount not to exceed the domestic value of the goods (for fraud)
  • Four times the loss of amounts deprived the government, the domestic value, or 40 percent of the dutiable value (for gross negligence)  
  • Two times the loss of amounts deprived the government or 20 percent of the dutiable value (for negligence).  

Each fine is capped at the domestic value of the goods. There are also other penalties like those for brokers, or record-keeping violations.

Performing Due Diligence on Your Supply Chain

To effectively safeguard against violations of the UFLPA, businesses must now comprehensively map their global supply chains. This involves building a robust due diligence system. Supply chain tracing – a critical component of this process – entails meticulous documentation of the roles played by entities within the supply chain and the intricate web of relationships they share.  

To achieve this goal, the term "relationships" encompasses various connections within the supply chain. This includes identifying officers and directors, as well as those holding dual roles across different entities. It also involves identifying individuals who own 5 percent or more of outstanding voting shares of the entities in question. The scrutiny extends to relationships involving two or more persons exerting control or being under common control, along with family ties, broadening the scope of considerations.

Furthermore, it is crucial that all these measures be supported by English translations. In supply chain management, internal controls play a pivotal role, referencing and scrutinizing key datasets. These details ought to be seamlessly integrated into an operational or accounting system that is complemented by audited financial statements.

The details outlined above underscore the expansive scope of the Customs and Border Patrol enforcement strategy. U.S. Customs is seeking to go beyond the conventional first-level review of suppliers, insisting upon a deeper comprehension of manufacturing entities and their intricate business structures. Specifically, Customs is honing in on scenarios where forced labor is interwoven into an otherwise legitimate production process. The agency is also targeting evasive measures, such as instances where Chinese exporters, though based outside Xinjiang, exploit Xinjiang-incorporated branches for production in the region. This heightened scrutiny marks a proactive stance in addressing nuanced challenges and ensuring compliance with the UFLPA.

Rapidly Trace Xinjiang Entities with WireScreen

WireScreen delivers unparalleled insights into Chinese companies operating in Xinjiang, offering crucial Chinese entity relationship data as mandated by U.S. Customs. Boasting data on more than 10 million Chinese companies and 20 million people, WireScreen excels at mapping intricate business structures and corporate relationships, including elusive branches within Xinjiang.

Sample of company profile and corporate relationship mappings available in WireScreen.

WireScreen also addresses the complexities inherent in Xinjiang branch operations. The challenges posed by unregistered activities and concealed affiliate relationships in China often impede transparency, particularly in the meticulous tracing of supply chains as required by Customs officers. WireScreen's ability to track historical changes in entity ownership, branch formations, and deregistrations makes it an invaluable tool for identifying evasive measures. Consequently, WireScreen provides invaluable insights for U.S.-based importers that are subject to the Uyghur Forced Labor Prevention Act.

What Comes After the UFLPA

Enforcement of the Uyghur Forced Labor Prevention Act is expected to be expanded in the near future.

First, the UFLPA has effectively amended the Uyghur Human Rights Policy Act of 2020, or UHRPA. The revised policy gives the U.S. President expanded powers to impose sanctions on foreign entities and people responsible for human rights abuses related to forced labor. Legislation is expected from Congress that is likely to employ sanctions against Chinese exporters and their agents. WireScreen provides proprietary collections and search features to conveniently track and monitor such sanctions.

Second, according to Congressional testimony about the forced labor act, there are at least 55,000 corporate entities now operating in Xinjiang. It’s possible that the UFLPA Entity List may become the longest country list in the history of U.S. sanctions. The WireScreen platform has extensive entries on many of these firms. A normal search of the platform yields more than 100,000 hits for Xinjiang-affiliated entries. This coverage is being expanded and updated daily.

Advancing Technology for Tracing Product Origins

Third, a growing number of American manufacturers and importers have begun to use isotopic and D.N.A. testing to rebut the forced labor act presumption. Customs and Border Patrol has accepted these submissions as forms of evidence. However, Congress has asked that Customs and Border Patrol also use such technologies to trace product origins to Xinjiang irrespective of exporter documentation. Additional technologies and tools can be expected in both directions. WireScreen continues to add forced labor act-related tools to its platform, especially in the area of hard-to-trace affiliation data.

Additional UFLPA-related Developments

Analysts are expecting more regulation and focus on the traceability of global supply chains. Here are a few anticipated developments:

     •  Additional whole-of-government strategies for coordinated UFLPA policy enforcement.

     •  More attention to affiliates and people who act as agents for known forced labor violators. 

     • Clarification on the inability to use the so-called de minimis loophole to avoid the forced labor act for products that are shipped by air and land directly to consumers inside the United States.

Global Trends in Forced Labor Regulations

Finally, the Uyghur Forced Labor Prevention Act seems to be at the head of a global trend. Forced labor law compliance is expected to become commonplace for many developed nations. Notably, Germany’s Supply Chain Due Diligence Act, enacted in January 2023, already requires larger German companies to trace their supply chain for human rights risks, such as forced or prison labor. 

More recently, the European Union has begun contemplating regulations that would ban products manufactured with forced labor from entering its market—a move that mirrors the U.S. forced labor act. WireScreen is adapting to this emerging trend, actively monitoring the global footprint of Chinese entities and their downstream supply connections beyond China.

Conclusion 

The Uyghur Forced Labor Prevention Act (UFLPA), implemented in 2022, intensifies scrutiny on products from Xinjiang, China, requiring importers to demonstrate Xinjiang exclusion in their supply chains. With potential restrictions becoming a de facto boycott, compliance involves stringent due diligence and supply chain mapping. WireScreen plays a crucial role by offering vital insights into Chinese companies operating in Xinjiang, aiding businesses in navigating complex regulatory requirements. Enforcement mechanisms encompass fines, penalties, and potential forfeiture. Anticipated developments include expanded enforcement, sanctions, and emerging technologies like isotopic and DNA testing. Globally, forced labor regulations are gaining momentum, with WireScreen adapting to monitor Chinese entities beyond China, aligning with the evolving trend of global supply chain due diligence. Businesses must stay abreast of these changes to ensure compliance with evolving standards.

Larry is an experienced lawyer who worked for over 20 years as a partner and Head of China at O’Melveny & Meyers in Beijing, and as a partner at Hogan Lovells. As Special Counsel at WireScreen, he specializes in analyzing Chinese ownership structures and their associated national security and sanctions implications.

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