Just before Christmas, President Biden signed H.R. 6256, the Uyghur Forced Labor Prevention Act. At only eight pages long, it is poised to have a sweeping impact on U.S business, which imported more than US$430 billion worth of goods from China last year. Here is a short summary of what we see as the most important aspects of the law from a corporate perspective.
While attention on forced labor in China has focused on the Xinjiang Uyghur Autonomous Region (XUAR), the new law is broader, applying to:
“… goods mined, produced, or manufactured wholly or in part with forced labor in the People’s Republic of China, including by Uyghurs, Kazakhs, Kyrgyz, Tibetans, and members of other persecuted groups in the People’s Republic of China, and especially in the Xinjiang Uyghur Autonomous Region …”
The law also uses the language “goods, wares, articles, or merchandise” to describe items/materials covered, although none of these terms are defined.
Cotton, tomatoes and polysilicon are specifically called out as part of a list of “high-priority sectors for enforcement” to be addressed by the Forced Labor Enforcement Task Force, in consultation with the Secretary of Commerce and the Director of National Intelligence in a strategy to enforce the prevention of US importation of the covered items/materials. The list of high-priority sectors is not to be limited to those three items, yet there is no definition of “high-priority sectors” or guidance on how the Forced Labor Enforcement Task Force is to interpret or apply the term.
Due Diligence Process
The law envisions a due diligence process will be established for companies to assess the presence of goods mined, produced, or manufactured wholly or in part with forced labor from the People’s Republic of China, especially from the XUAR. The process is to address:
- due diligence, effective supply chain tracing, and supply chain management measures to ensure that importers do not import any covered items/materials;
- the type, nature, and extent of evidence that demonstrates that goods originating in the People’s Republic of China were not mined, produced, or manufactured wholly or in part in the XUAR; and
- the type, nature, and extent of evidence that demonstrates that goods originating in the People’s Republic of China, including goods detained or seized pursuant to section 307 of the Tariff Act of 1930 (19 U.S.C. 1307), were not mined, produced, or manufactured wholly or in part with forced labor.
A note on the new law from the law firm Paul Hastings offers some insight into what this form of due diligence may entail, using the blueprint of the “Countering America’s Adversaries Through Sanctions Act” (22 U.S.C. § 9241a) (CAATSA). The CAATSA guidance requires that importers demonstrate “reasonable care” to enable U.S. Customs and Border Protection (CBP) to make a determination.
The law includes a rebuttable presumption that any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the XUAR are banned from importation into the U.S. This rebuttable presumption also applies to any goods, wares, articles, and merchandise produced by:
- entities exporting products from the People’s Republic of China into the United States that were mined, produced or manufactured wholly or in part in the XUAR, or by any of the entities listed below;
- entities working with the government of the XUAR to recruit, transport, transfer, harbor or receive forced labor or Uyghurs, Kazakhs, Kyrgyz, or members of other persecuted groups out of the XUAR;
- entities and facilities, including the Xinjiang Production and Construction Corps, that source material from the XUAR or from persons working with the government of the XUAR or the Xinjiang Production and Construction Corps for purposes of the “poverty alleviation” program or the “pairing-assistance” program or any other government labor scheme that uses forced labor.
In order to rebut this presumption, a company must submit documentation that it has:
- fully complied with the due diligence guidance and any regulations issued to implement that guidance; and
- completely and substantively responded to all inquiries for information from CBP to ascertain whether the goods were mined, produced, or manufactured wholly or in part with forced labor.
The CBP Commissioner is to then make a determination based on clear and convincing evidence that the good, ware, article, or merchandise was not mined, produced, or manufactured wholly or in part by forced labor. If the Commissioner does not make such a determination, the presumption stands and the items/materials are banned from importation. According to Paul Hastings,
“… it will be challenging to overcome the presumption that covered goods will be subject to exclusion – importers will be required to prove covered goods are not made with forced labor to a ‘clear and convincing evidence’ standard. As the Department of Homeland Security (DHS) notes in connection with CAATSA, ‘Clear and convincing evidence is a higher standard of proof than a preponderance of the evidence, and generally means that a claim or contention is highly probable. An importer who wishes to import merchandise that is subject to the rebuttable presumption under CAATSA Section 321 carries the burden to overcome the presumption by providing sufficient information to meet the clear and convincing standard.’ While the mandatory guidance from the multi-agency task force regarding the kind of information that might be considered by CBP will be forthcoming, DHS has issued detailed guidance regarding CAATSA…”
The schedule for implementation as set forth in the law is as follows. It is worth noting that although regulations are contemplated by the law, no deadline for their promulgation is included in the legislation.
- December 23, 2021 – H.R. 6256 signed into law.
- January 26, 2022 (30 days after enactment) – Deadline for notice to be published in the Federal Register soliciting public comments on how best to ensure that covered items/materials are not imported into the U.S.
- March 12, 2022 – End of 45 day public comment period.
- March 23, 2022 – Deadline for Department of State to issue a diplomatic strategy to promote initiatives to enhance international awareness of and to address forced labor in the XUAR.
- April 26, 2022 – (45 days after close of public comment period) – Deadline for holding a public hearing.
- June 21, 2022 – (180 days after enactment):
- Forced Labor Enforcement Task Force to submit to Congress a report on the strategy developed after public comment and public hearing. This strategy includes the guidance to importers on due diligence.
- Rebuttable presumption takes effect.
What This Means
There are several parallels between H.R. 6256 and Section 1502 of the Dodd-Frank Act on conflict minerals, so it is reasonable to expect similar reactions, such as:
- a likely short-term prohibition on XUAR-sourced goods/materials by industry associations and many corporate procurement programs. Pockets of specialized credible social/human rights information and supply chain traceability may exist in limited amounts, possibly for the three high-priority sectors. However, the absence of similar information more broadly creates significant ambiguity for any company to reliably evaluate the source or manufacturing conditions within their supply chains to rebut the presumption. In an abundance of caution, many entities will most likely simply ban goods/materials known to originate from the XUAR;
- a renewed focus on social audits/auditors and responsible sourcing programs managed by industry groups. Auditors called upon to perform human rights audits in China should expect additional scrutiny of their qualifications, competence, audit processes/procedures and audit results as part of the assessment of rebuttable presumption evidence quality. Some may face meaningful challenges in that regard as most social auditors are unaccustomed to their work being used for, or submitted to, the U.S. government as bases of compliance determinations;
- development of new due diligence initiatives or major modifications to existing ones to conform to these due diligence and rebuttable presumption information requirements;
- more opportunities for the use of technology including blockchain; and
- lawsuits opposing the legislation and/or regulations once issued, causing uncertainty, confusion and delays in implementation of the mandate.