Breaking Developments in Business & Human Rights Enforcement—Top Glove Finding Modification, De Minimis Exception Revocation, and New Timelines

Breaking Developments in Business & Human Rights Enforcement—Top Glove Finding Modification, De Minimis Exception Revocation, and New Timelines

September 15, 2021, Covington Alert

Recent days have seen several substantive and procedural developments in U.S. Customs and Border Protection’s (“CBP”) efforts to combat the importation of goods made with forced labor, with important implications for Business & Human Rights compliance programs and companies involved in global trade and the importation of goods to the United States:

• CBP modified a forced labor finding covering certain disposable gloves made by Top Glove Corporation Bhd. (“Top Glove”) in Malaysia and cleared the way for those imports to resume, based on the manufacturer’s demonstration that it had addressed the 11 International Labor Organization (“ILO”) forced labor indicators; companies should evaluate whether their supply chain due diligence focuses on the ILO indicators.
• CBP effectively revoked prior policy guidance authorizing a de minimis exception to the scope of a withhold release order (“WRO”) on silica-based products, but suggested that a court might endorse the exception; companies that had considered relying on this exception should consider building a record for litigation.
• CBP is considering publishing aspirational timelines for three phases in its forced labor investigations; companies should understand CBP’s process and take immediate action after any report of forced labor allegations affecting goods that they manufacture or import, as CBP’s goal is to commence enforcement expeditiously.

Below, we provide a brief overview of the legal framework as background, and then unpack each of the above developments and their implications.

Background

The recent developments are best understood in the context of the statutory and regulatory framework governing CBP’s authority to detain and exclude goods made with prohibited forced labor, and the broader implications that flow from forced labor in supply chains.[1]

Section 307 of the Tariff Act of 1930 prohibits the importation of merchandise mined, produced, or manufactured, wholly or in part, in any foreign country by forced labor.[2] CBP can initiate investigations into goods suspected of being made by forced labor, whether on its own initiative or based on information from outside parties. Where available information “reasonably but not conclusively indicates” that goods were produced, in whole or in part, through forced labor, CBP can issue WROs detaining goods at ports of entry.[3] After its investigation, CBP may publish a formal finding that the goods are made with forced labor.[4]

If an importer’s goods are detained pursuant to a WRO or a formal finding, the importer may submit proof of “admissibility” (i.e., that the goods can be imported into the U.S.) within three months after the date of importation in order to seek release of the goods. Among the documents that importers must provide to CBP are a certificate of origin signed by the foreign seller or owner, along with a statement of the ultimate consignee detailing the investigation into the labor used in producing the goods and components.[5] If CBP concludes that the detained goods are “admissible”, then it will release the goods for entry into the United States.[6] If CBP finds to the contrary, then CBP will exclude the goods from entry.[7] CBP has issued guidance regarding other documentation relevant to establishing admissibility, and has made clear through rulings that it requires extensive and accurate documentation of a supply chain free of forced labor. Within three months of importation, and prior to a formal finding by CBP, companies may opt to forgo submitting proof of admissibility and instead re-export goods subject to a WRO to another destination outside of the United States.[8]

Goods covered by a formal finding shall be seized and subject to forfeiture and may not be re-exported.[9] A finding remains in effect “unless the importer establishes by satisfactory evidence that the merchandise was not mined, produced, or manufactured in any part with the use of a class of labor specified in the finding.”[10] If an importer successfully makes such a showing, then CBP may modify or revoke its finding.

An importer may contest the exclusion of goods through a protest submitted to the port,[11] and may challenge CBP’s denial of a protest in the U.S. Court of International Trade (“CIT”).[12]

Modification of Top Glove Finding

On September 10, 2021, CBP published notice of its determination that disposable gloves made in Malaysia by Top Glove were no longer being made with prohibited convict, forced, or indentured labor, thereby modifying a March 29, 2021 finding that such gloves were made with prohibited labor and subject to seizure. The same determination renders inactive a WRO covering the gloves, issued on July 15, 2020, such that the gloves can now be imported to the United States. This is reportedly the first instance of an import ban revocation under Section 307 since 1994.

CBP’s notice explained that pursuant to its regulations, Top Glove had “provided additional information to CBP, which CBP believes establishes by satisfactory evidence that the subject disposable gloves are no longer mined, produced, or manufactured in any part with forced labor.”[13] An accompanying CBP press release further explained that “Top Glove has addressed all [ILO] indicators of forced labor identified at its Malaysian facilities” and highlighted the facts that the company made over $30 million in remediation payments to workers and had improved labor and living conditions. The press release also noted that the original WRO was issued based on evidence of several ILO indicators, “including debt bondage, excessive overtime, abusive working and living conditions, and retention of identity documents.” CBP has not published information about the specific evidence that CBP found sufficient, cautioning that the “required evidence and timeline for modification or revocation may vary depending upon the specific circumstances of each individual case.”

Implications: The Top Glove finding provides a roadmap for companies impacted by a CBP forced labor enforcement action—and companies seeking to proactively mitigate forced labor risks in their supply chains—towards successful remediation. Importantly, CBP underscored that it uses the 11 ILO indicators of forced labor as its analytical framework when assessing the existence of forced labor and the extent of any remediation efforts. Accordingly, companies should consider structuring their forced labor due diligence and risk mitigation strategies to combat the following indicators:

• Abuse of vulnerability
• Deception
• Restriction of movement
• Isolation
• Physical and sexual violence
• Intimidation and threats
• Retention of identity documents
• Withholding of wages
• Debt bondage
• Abusive working and living conditions
• Excessive overtime

CBP had previously released guidance emphasizing the centrality of the ILO indicators in the modification process, and also provided examples of documentation that can help demonstrate remediation of those indicators, including supply chain maps, policies and evidence of their implementation, third party audit results, and remediation plans. The Top Glove revocation reinforces the importance of integrating ILO indicators into a company’s forced labor mitigation efforts.

Revocation of Hoshine Withhold Release Order De Minimis Exception

On September 8, 2021, CBP revised a “Frequently Asked Questions” guidance (“Hoshine FAQ Guidance”) that it had issued in late July 2021 regarding a June 2021 WRO covering silica-based products made by Hoshine Silicon Industry Co. Ltd. (“Hoshine”) and its subsidiaries.

The Hoshine FAQ Guidance was notable, among other things, for its explicit creation of a de minimis exception to the WRO’s coverage. This exception narrowed the Hoshine WRO’s scope and appeared designed to enable CBP to focus its enforcement efforts on goods for which the contribution of forced labor was more significant. Commentators had noted that the scope of the exception was unclear and could present implementation challenges.

Rather than clarify its scope, on September 8, 2021, CBP effectively revoked the exception; it is now reasonably clear that CBP would not recognize any de minimis exception in the first instance, i.e., a challenge to the detention of specific goods. In the revised Hoshine FAQ Guidance, CBP replaced its description of the de minimis principle with this sentence: “However, CBP recognizes there may be some very fact-specific instances, where the question of the contribution of prohibited labor to the whole of a product (from a quantitative and a qualitative perspective) is something that a court might consider with respect to the statutory intent of Section 1307 of Title 19, United States Code.”[14]

Implications: In conducting supply chain diligence with respect to the Hoshine WRO, companies should continue to assess the strength of arguments that any forced labor contribution is de minimis. If goods are detained subject to the Hoshine WRO, CBP is likely to reject these arguments unless and until the CIT authorizes the application of a de minimis exception with respect to the detained goods. It is also possible that CBP would view any future court decision as fact- and product-specific, depending on the reasoning and approach of the court. Interested parties may also wish to evaluate the viability of presenting a hypothetical or proposed manufacturing process in the context of an advance ruling. The advantage of this approach would be the creation of a more complete record for ultimate consideration by the CIT.

Investigatory Timelines

We have been informed that CBP is considering publishing new timelines that will guide its investigation of forced labor petitions. A forced labor petition alleges that goods made using forced labor are being imported, or are likely to be imported, into the United States.[15] While the timelines are not yet official, CBP has suggested they will likely be as follows:

• Preliminary review: CBP will aim to complete its preliminary review of forced labor petitions within 30 days after the petition is received, and decide whether to reject the petition or refer it for investigation.
• Determination on whether to issue WRO: After a petition is referred for investigation, CBP will aim to determine within 90-180 days whether there is evidence reasonably indicating that goods made with forced labor are being imported, thereby warranting issuance of a WRO. This determination will be based on CBP’s additional analysis and field work.
• Finding: After a WRO issues, CBP will aim to issue a formal finding with respect to the subject goods within 180-365 days. Historically, most investigations have not proceeded to the finding stage; there are presently only six active findings, as compared to 50 active WROs. But CBP has indicated that with enhanced resources, it plans to issue more findings going forward.

Implications: Companies should take prompt action after any public or internal report of forced labor allegations affecting goods that they manufacture or import. Although petitions are not released to the public, companies should attempt to determine the source of forced labor risk in their supply chain. CBP may take many months to conclude its preliminary review and determine whether to issue a WRO. Moreover, given that the timelines above are aspirational rather than legally binding, silence or inaction on the part of CBP for a period extending beyond the timelines should not be taken as a rejection of the forced labor petition.

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Covington has specialized expertise and a global practice devoted to advising multinational clients on Business and Human Rights, including in relation to forced labor-related risk mitigation strategies. In conjunction with our active Customs practice—which includes former CBP Commissioner Alan Bersin—and our experts in trade policy 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 and enforcement 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 (U.S.) 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 firm