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New Year, new reasons to know your supply chain

January 10th, 2022 / By: / Feature

New law will impact how textile companies do business with China. 

by Nate Bolin

On December 23, 2021, President Biden signed into law the Uyghur Forced Labor Prevention Act (UFLPA) which will significantly raise the stakes for any company importing from or doing business with China. Most significantly, once the statute fully comes into effect in 2022, importers of a wide range of products into the United States—including many textile-related products—will need to be in a position to prove that their products do not originate from the Xinjiang region of China, or otherwise contain content from that region, or that is the product of forced labor in China. 

Importers who cannot meet this standard of proof may see their imports detained and may be subject to additional U.S. government scrutiny, including the potential criminal prosecution. In addition, publicly-traded companies subject to Securities and Exchange Commission (SEC) regulations will now need to report on the presence of forced labor inputs from China in their products and supply chains. 

Complicating the picture, the prospect of Chinese retaliation for the new law means that many companies will soon be forced to make a choice about when and how to remain engaged with the Chinese market. Knowing all aspects of your supply chain is thus a critical task awaiting all companies in the advanced textile industry in 2022.

Understanding import bans

Under the new law, U.S. Customs and Border Protection (CBP) must implement, by April 22, 2022, a region-wide withhold release order (WRO) on all merchandise imports into the U.S. that are believed to originate from the Xinjiang region of China or otherwise contain content from that region or that is the product of forced labor related to repression of the Uyghur minority or other minority groups in China. The presumption will be applied under Section 307 of the Trade Act of 1930, as amended (19 U.S.C. § 1307) and is expected to be enforced in a similar fashion to the ban on products of North Korean forced labor that were implemented in 2017-2018. 

Among other things, importers suspected of importing subject merchandise will need to prove by “clear and convincing evidence” that the merchandise is not the product of Xinjiang or forced labor in China. Otherwise, such merchandise will be detained and possibly destroyed. To meet the “clear and convincing evidence” standard, importers will likely need to be able to produce records covering their entire supply chain for the imported product and details such as lists of employees, the wages paid to those employees, details on labor conditions at each production location, and independent third-party reports. 

In the coming months, CBP is expected to issue further guidance to assist companies with proper supply chain due diligence and compliance with the new restrictions. Based on recent U.S. government guidance, including last summer’s Xinjiang Supply Chain Business Advisory, however, the compliance bar will likely be set very high and will require significant compliance resources for most companies with supply chains that touch China.

Sanctions explained

The new law empowers the U.S. Treasury Dept.’s Office of Foreign Assets Control (OFAC) to impose sanctions on any non-U.S. person believed to be involved in or to be “contributing to” or “assisting in” forced labor or other human rights violations in Xinjiang or related to the Uyghur minority in China. This adds to OFAC’s existing authority to sanction human rights violators. In recent years, OFAC has used this authority to sanction state-owned companies in Xinjiang by including them on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List). 

Companies that do business with SDN List companies and individuals can face severe civil and criminal penalties, including up to $1 million in fines and 20 years imprisonment. As a result, careful screening of all parties to any transaction that involves China will be critical to ensure compliance.

Public company reporting

Companies subject to U.S. Securities and Exchange Commission (SEC) financial reporting requirements under Section 13 of the Exchange Act of 1934, as amended—a category that includes most publicly-listed companies on U.S. securities exchanges—will be required to report publicly on any activities related to Xinjiang and forced labor in China in which they “knowingly” engage. The new reporting requirement will apply to all Exchange Act reports filed on or after June 21, 2022. 

The term “knowingly,” as used in the new law, can be applied very broadly to conduct by a company and its subsidiaries, affiliates, employees and agents that can be imputed to the company under a “know or reason to know” standard. It is expected that future shareholder and financial reports will be carefully evaluated by current and prospective investors and activist shareholders and may lead to divestments and litigation involving public companies believed to have violated the restrictions of the new law.

Compliance tips

As can be seen, the new law increases the pressure for companies in the advanced textile industry to carefully evaluate all aspects of their supply chains to identify any suppliers that may source inputs or labor from China and then to closely examine those suppliers to ensure they are in compliance with the new law’s restrictions. In considering next steps, companies should at a minimum:

  • Engage with CBP and other relevant U.S. government agencies as they develop the rules that will implement the new law.
  • Begin a supply chain review now to identify potential risk areas and products that may be targeted for WROs and to collect relevant records that can be used to demonstrate the absence of forced labor inputs from any imported products.
  • Ensure that supply chain scrutiny becomes a regular part of internal audit checklists and compliance policies.
  • For public companies, make sure that information relevant to sourcing of labor and inputs is appropriately reported as part of regular Exchange Act filings.
  • Carefully consider the impact of any responses to the new law on investments and customers in China and take appropriate strategic decisions to mitigate these risks.

Given the very high “clear and convincing evidence” standard set by the new law and the practical difficulties of essentially “proving a negative,” the new law may force some companies to look outside of China for suppliers or even to abandon China as a significant market for their products. To ensure that any such decisions are made carefully and after due consideration, however, it is important to add understanding and complying with the UFLPA to your 2022 “to do” list.

Nate Bolin is a partner with DLA Piper LLP (U.S.). His areas of expertise include trade remedies, export controls, economic sanctions, CFIUS and related areas of national security and international trade laws.