U.S. Releases Updated Business Advisory on Xinjiang Human Rights Risk

U.S. Releases Updated Business Advisory on Xinjiang Human Rights Risk

July 15, 2021, Covington Alert

On July 13, 2021, multiple U.S. agencies released an updated version of the Xinjiang Supply Chain Business Advisory (the “Advisory” or “Business Advisory”), originally published in July 2020. The updated Advisory warns in stark terms of legal risks associated with alleged forced labor and other human rights issues in supply chains with links to Xinjiang and other regions of China, provides additional guidance regarding due diligence strategies, reviews recent enforcement activities, and signals a comprehensive multilateral approach to addressing human rights risks in the supply chains of multinationals.

While neither the original nor the updated Business Advisories have the force of law, the prior Business Advisory preceded an uptick of U.S. enforcement efforts. With this increased enforcement set against a backdrop of other U.S. legislative and policy developments, the publications provide important guidance—and a clear warning of yet more enforcement ahead—for companies doing business in China.

Context—July 2020 Business Advisory

On July 1, 2020, the U.S. Departments of State, Treasury, Commerce, and Homeland Security issued a Business Advisory describing suspected forced labor and other oppressive practices in Xinjiang Uyghur Autonomous Region (“Xinjiang”) and other regions of China, and associated risks to businesses with supply chain exposure (see our prior alert). The original Advisory cautioned that businesses with potential forced labor exposure should be aware of various legal risks and should implement human rights-related due diligence policies and procedures, and noted that effective due diligence measures might be considered as mitigating factors by U.S. enforcement authorities.

Updated July 2021 Business Advisory

The updated Business Advisory covers much of the same ground as the original Advisory, but frames the allegations and legal risks for business in much starker terms. Some of the significant updates and revisions to the Advisory include:

1. A significant shift in how allegations are framed: While the original Advisory referred to “human rights abuses,” the updated Advisory repeatedly uses terms such as “genocide” and “crimes against humanity” to describe the alleged treatment of Uyghurs and members of other ethnic and religious minority groups in Xinjiang. This is consistent with former Secretary of State Pompeo’s January 2021 determination regarding the Chinese government’s actions in Xinjiang, which was reaffirmed by current Secretary Blinken in March 2021

2. A warning to terminate business relationships where mitigation is not possible: The original Advisory suggested that companies should undertake heightened human rights due diligence in line with relevant international standards to identify potential supply chain issues, and described some of the obstacles to effective due diligence in the region such as lack of reliability of on-site social audits. The updated Advisory places more emphasis on responsibly ending relationships when a business lacks the ability to prevent or mitigate human rights risks. The Advisory states that “businesses and individuals that do not exit supply chains, ventures, and/or investments connected to Xinjiang could run a high risk of violating U.S. law” and highlights legal risks including:

• violation of statutes criminalizing forced labor, including knowingly benefitting from participation in a venture while knowing or in reckless disregard of the fact that the venture has engaged in forced labor (i.e., the Trafficking Victims Protection Reauthorization Act);
• sanctions violations if dealing with designated persons;
• export control violations; and
• violation of the prohibition of importations of goods produced in whole or in part with forced or convict labor.

3. More guidance on addressing risks outside of Xinjiang: The Advisory calls on businesses to work to eliminate forced labor from their entire supply chains, even where final processing or exportation does not occur in Xinjiang. The Advisory suggests that the U.S. government is increasingly concerned about:

• alleged forced labor practices in areas of China outside of Xinjiang, including “reports documenting the expansion of internment camps to Tibet and Inner Mongolia to arbitrarily detain other ethnic and religious minorities and documenting the use of forced labor beyond Xinjiang such as in the fishing industry”;
• large-scale People’s Republic of China (“PRC”) government “mutual pairing assistance programs,” through which companies from other parts of China establish satellite factories in Xinjiang in return for incentives; and
• involuntary transfer of Xinjiang laborers to Chinese factories outside Xinjiang in a variety of industries including apparel and textiles, electronics, solar energy, and automotive.

4. Expanded list of high-risk sectors: The updated Advisory features an expanded “Illustrative List” of industries that have been the subject of public allegations of reliance on forced labor. The list includes several additions to the list in the original Advisory, reflecting Withhold Release Orders (“WROs”) issued by U.S. Customs and Border Protection (“CBP”) involving raw cotton, gloves, metallurgical grade silicon, viscose, tomato products, some fishing products and renewable energy inputs, including polysilicon, ingots, wafers, crystalline silicon solar cells, and crystalline silicon solar photovoltaic modules. The updated Advisory also includes annexes detailing forced labor risks in solar, cotton, textile, and garment supply chains. The focus on solar supply chains suggests that the recent WRO covering Hoshine silica-based products (see our prior alert here) may be just the beginning of actions targeting solar supply chains.

5. Increased focus on alleged human rights risks aside from forced labor: In addition to alleged forced labor-related risks, the Advisory also flags heightened risks associated with the provision of goods, services, and technology in Xinjiang and with a nexus to Xinjiang surveillance. According to the Advisory, mass surveillance is deployed systematically against members of minority groups in Xinjiang. The updated Advisory provides an example of an app reportedly used by police to identify roughly 20,000 individuals for detention in one week, according to leaked government documents. It warns businesses that those engaged in or linked to such activities “may face reputational risks and/or trigger U.S. criminal or civil enforcement or administrative and other actions.” The Advisory highlights efforts that have been taken to date to respond to these risks, including a number of additions to the Department of Commerce’s Entity List and Department of Treasury’s Non-SDN Chinese Military Industrial Complex Companies List. These warnings are particularly relevant to technology and bio-tech companies and international investors.

6. A clear message to investors: The updated Advisory specifically addresses entities with ties to the U.S. financial system, highlighting a number of existing anti-money laundering and other compliance regimes used to deter criminal activity, including human trafficking. The Advisory encourages financial institutions to assess and mitigate exposure to the risk of handling the proceeds of possible forced labor on behalf of clients.

7. A commitment to broad interagency and multilateral efforts to combat forced labor and other human rights issues: The Advisory includes an updated list of U.S. government actions focused on human rights, including the Department of Commerce’s recent additions to the Entity List and the Treasury Department’s sanctions pursuant to executive orders. The group of agencies authoring the Advisory has also expanded to include the Office of the United States Trade Representative (“USTR”) and the Department of Labor. Notably, a section explaining USTR’s role in combatting forced labor highlights a provision in the Labor Chapter of the United States-Mexico-Canada Agreement (“USMCA”) that requires each party to “prohibit the importation of goods into its territory” made in whole or part with forced labor, which has already been implemented in Canadian legislation.

It is unclear whether other U.S. allies and trading partners will adopt similar import restrictions. Leaders of the G7 at their June 2021 Summit expressed concern about “the use of all forms of forced labour in global supply chains, including state-sponsored forced labour of vulnerable groups and minorities, including in the agricultural, solar, and garment sectors.” They instructed the G7 Trade Ministers “to identify areas for strengthened cooperation and collective efforts towards eradicating the use of all forms of forced labour in global supply chains, ahead of the G7 Trade Ministers' meeting in October 2021.” The European Commission has publicly mentioned the idea of enforcement through import restrictions in the context of its anticipated proposal on human rights and environmental due diligence. How this would be done, however, remains unclear. Notably, a day prior to the updated Advisory’s release, on July 12, 2021, the European Commission issued general guidance regarding forced labor due diligence, but did not specifically reference China or Xinjiang.

Implications for Businesses

The updated Advisory signals a continued and heightened focus on forced labor issues across the U.S. Government. Indeed, one day after the updated Advisory’s issuance, the U.S. Senate passed the Uyghur Forced Labor Prevention Act, which, if enacted, would expand enforcement tools targeting forced labor in supply chains. Businesses should redouble efforts to review their supply chains and assess potential exposure to alleged forced labor and other human rights risk, as enforcement activities by regulators may well increase in frequency and scope following the latest Advisory.

Some steps that businesses may consider in response to the Advisory include:

1. Review export controls compliance in light of the updated Entity List designations of companies operating in Xinjiang;

2. Review existing due diligence on supply chains linked to Xinjiang, including supply chain mapping and traceability efforts to determine the extent to which any of their product supply chains may involve Xinjiang or transferred Xinjiang labor;

3. Consider adequacy of social audit procedures and other means of verifying labor standards given the difficulty of conducting audits in Xinjiang;

4. Design and implement mitigation measures if any potential human rights risks are identified, including crisis response planning and strategies for handling relationships with business partners;

5. Establish rapid response teams and strategies for interacting with CBP in the event shipments are detained at ports of entry;

6. For financial institutions and investors, consider potential exposure under existing U.S. anti-money laundering and other laws;

7. For companies involved in the development of surveillance technology, review the extent to which third-party due diligence processes encompass diligence on downstream entities; and

8. Develop a strategy for engagement on these issues with key stakeholders, including investors, government agencies, multilateral organizations, and NGOs.

Lastly, companies should be mindful of Chinese statutes aimed at deterring or blocking implementation of certain foreign government measures, including the recent law on Countering Foreign Sanctions (see our prior alert here). The scope of the law and how it will be applied are uncertain, but it is possible that WROs would be considered by Chinese authorities to be foreign acts that seek to “contain and suppress China,” or “discriminatory restrictive measures taken by foreign states against Chinese citizens and organizations” within the meaning of the statute. China’s Ministry of Commerce criticized the U.S. Commerce Department’s July 9, 2021 designation of additional Chinese companies on the Entity List for activities related to Xinjiang as “unreasonable suppression of Chinese enterprises” and vowed to take unspecified “necessary measures” in response. China’s Foreign Ministry condemned the updated U.S. Advisory and disputed its allegations of human rights abuses in response to media questions. Depending on how the Chinese authorities choose to implement the new law and similar regulations, it may become increasingly difficult to comply with U.S. legal requirements pertaining to alleged forced labor while also limiting exposure under the Chinese blocking statutes, and companies should formulate compliance strategies with due care.

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Covington is one of the few U.S.-based international law firms that has specialized expertise and a global practice devoted to advising multinational clients on Business and Human Rights, including in relation to Xinjiang-related risk mitigation strategies. In conjunction with our active Customs practice—which includes former CBP Commissioner Alan Bersin —and our experts in environmental law, the renewable energy sector, and trade controls, Covington is well positioned to advise companies on how to navigate interactions with CBP, assess supply chain risks and benchmark supply chain diligence programs, manage crisis communications and reputational risk that may result from allegations of forced labor, assess the contractual and commercial impacts of WROs, and evaluate potential disclosure obligations. These practices work closely with our Public Policy and China practices on these issues to provide comprehensive advice and intelligence.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Business & Human Rights, Trade Policy, International Trade Controls, and Public Policy practices.