As the United States Targets China’s Human Rights Abuses, Companies Should Prepare for Stricter Due Diligence on Forced Labor

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As the United States seeks to take more forceful action punishing China for its escalating human rights abuses against Muslim ethnic minorities in the Xinjiang autonomous region and the citizens of Hong Kong, international businesses whose supply chains intersect with China should be prepared for new legislation and regulatory enforcement that could result in penalties. Companies will need to take additional steps to ensure their due diligence processes account for potential human rights risks associated with forced labor in Xinjiang and elsewhere in the country.

Since 2017, the Chinese Government has embarked on a brutal campaign against the Uyghurs and other Turkic Muslims living primarily in the Xinjiang autonomous region in western China. Leaked documents published by the New York Times in November 2019 reveal the cruel extent of the crackdown. Chinese authorities have thrown one to two million adult Uyghurs into “re-education” camps, with the goal of stamping out Uyghur culture, and with it any possibility of a separatist movement emerging in the region. Chinese President Xi Jinping has framed the crackdown as necessary to protect the security of the Chinese state, warning that terrorist attacks result when countries put “human rights above security.” In addition to the camps, the Chinese Government has used technologies that include facial recognition, genetic testing, and big data, as well as employing conventional methods such as community informants, to surveil and gather information on Uyghurs.

According to a report by the Australian Strategic Policy Institute (ASPI), the Chinese Government has transported Uyghurs out of Xinjiang to work in factories across the country. The report estimates that more than 80,000 Uyghurs were transferred out of Xinjiang between 2017 and 2019, and ASPI has identified 27 factories in nine Chinese provinces using Uyghur labor transferred from Xinjiang. As a result, companies should be cognizant of the fact that China often deploys Xinjiang minorities to work in factories in other parts of China, a practice known as ‘mutual pairing’. Such practices increase the specter of sanctions being applicable against companies whose supply chains potentially involve labor inputs in other regions of the country, and not just Xinjiang.

Facing mounting pressure from civil society organizations, human rights defenders, and Uyghur refugees, Congress has established new legislative frameworks that more closely link U.S. human rights objectives to forced labor abuses in Xinjiang. S. 3744, the Uyghur Human Rights Policy Act, signed into law on June 17, is the first major piece of legislation aimed at punishing China for its human rights abuses in Xinjiang. The measure provides mechanisms for sanctioning abusers of human rights in Xinjiang. Additionally, Section 4(7) of the Act states that U.S. companies with activities in Xinjiang should take steps, including in any public or financial filings, to ensure that their goods are not using forced labor inputs or contributing to human rights violations in Xinjiang or elsewhere in China. In Section 7(5), the Act mandates a report to be submitted to the House Committee on Foreign Affairs and the Senate Committee on Foreign Relations that must include, among other things, a list of foreign companies benefitting from forced labor in Xinjiang.

A measure with more serious potential repercussions for companies is H.R. 6210, the Uyghur Forced Labor Prevention Act. H.R. 6210 lists all companies found by the Congressional-Executive Commission on China to be suspected of using the forced labor of ethnic minorities in China. Most of the companies on the list are in the processed food and apparel industries. More importantly, the measure establishes a rebuttable presumption that all goods manufactured in Xinjiang are made with forced labor; accordingly, such goods are banned under the Tariff Act of 1930 unless the Customs Border and Protection Commissioner certifies otherwise. The bill would also impose sanctions and visa restrictions on individuals and senior Chinese officials determined to be complicit in forced labor in Xinjiang. Additionally, H.R. 6210 requires companies to certify annually to the Securities and Exchange Commission that their products do not contain forced labor inputs from Xinjiang.

H.R. 6210 was introduced in the House by Congressman Jim McGovern (D-MA) in March and was co-authored by Senator Marco Rubio (R-FL). Both lawmakers serve as co-chairs of the Congressional-Executive Commission on China. The bill is further cosponsored by a wide range of Democrats and Republicans and stands some chance of passing in Congress, particularly if human rights conditions in Xinjiang further deteriorate and/or more evidence emerges that international companies are sourcing from Xinjiang. On July 13, China announced sanctions on Rubio as well as the Congressional-Executive Commission on China, signaling that Beijing takes the legislation seriously. Although H.R. 6210 is less likely to become law, companies should still consider taking a broader and deeper look at their supply chains and preemptively implementing measures to ensure they are not contributing to forced labor in the region.

Even before S. 3744 became law, the State Department and Treasury Department already had robust regulatory tools to enforce sanctions on China and Chinese nationals for violating human rights. For example, the Global Magnitsky Human Rights Accountability Act, when paired with the International Emergency Economic Powers Act (IEEPA), allows the President to pursue sanctions against systemic human rights abuse and corruption around the world under the rationale that they are a national security emergency in need of a proportional policy response. The Trump Administration’s 2017 Executive Order on sanctioning agents of such malfeasance was based on a combination of IEEPA and Global Magnitsky authorities, which ultimately makes for a highly flexible human rights policy regime, and either the IEEPA, the Global Magnitsky Act, or both, have been aggressively employed by Treasury and State to target influential foreign nationals who grossly abuse human rights.

Additionally, in June, Trump issued an Executive Order on advancing international religious freedom. Sections 6(a) and 6(b) of the E.O. link sanctions authorities under the IEEPA and the Global Magnitsky Act to violations of religious freedom – which was not explicitly the case before the issuance of the E.O. This follows recommendations made by the U.S. Commission on International Religious Freedom (USCIRF) that the Trump Administration use human rights sanctions authorities to target foreign nationals who violate religious freedom principles.

This is especially significant with respect to China because Nury Turkel, a Uyghur refugee and Chairman of the Board for the Uyghur Human Rights Project, was recently appointed by House Speaker Nancy Pelosi (D-CA) to serve as a Commissioner at USCIRF. Critically, Turkel has stated that he wants the Administration to sanction senior Chinese officials using authorities under the Uyghur Human Rights Policy Act. Turkel is also fully supportive of the Uyghur Forced Labor Prevention Act.

With respect to regulatory enforcement, on July 9, Treasury and State announced that the Administration was sanctioning four senior Chinese officials responsible for gross human rights violations against ethnic and religious minorities in Xinjiang, using authorities under the Global Magnitsky Act. The Administration also sanctioned the Xinjiang Public Security Bureau. This is the first time that Treasury has used human rights-related authorities to sanction senior Chinese officials for human rights violations in Xinjiang and also the first time the United States has used such a mandate to sanction a state law enforcement agency in China. The sanctions determination further that while the Trump Administration is reticent to upset the economic,commercial, and trade equilibrium between Washington and Beijing, strong pressure from Congress, civil society, and career officials in the Administration can compel punitive action. Companies will accordingly need to show that their activities in China are not connected to or supportive of the above sanctioned entities, or any entities that are sanctioned by the United States in the future.

China’s detention and surveillance of the Uyghurs is part of the Chinese Politburo’s more extensive crackdown on human rights. On June 30, China passed the draconian Hong Kong national security law, criminalizing secession, subversion against the Chinese Government, terrorist activities, and collusion with foreign forces to endanger national security in the city. In response, President Trump signed an Executive Order ending Hong Kong’s preferential trade status. He also signed into law H.R. 7440, the Hong Kong Autonomy Act, which imposes sanctions on entities that help violate Hong Kong’s autonomy and financial institutions that do business with them, including subsidiaries of U.S. firms. China’s enforcement of its national security law, in tandem with the crackdown against the Uyghurs in Xinjiang and their transportation to other provinces, bolsters the rationale for U.S. actions against China broadly.

The Trump Administration has not promulgated any specific policy that establishes a new enforcement framework for punishing companies involved in forced labor abuses in Xinjiang. On July 1, however, the State Department, Treasury, Customs and Border Protection, and the Commerce Department issued an advisory about the risks of supply chain links to entities that engage in human rights abuses, including forced labor in Xinjiang and elsewhere in China. In addition to the Global Magnitsky Act and the Trafficking Victims Protection Act, the advisory list the Uyghur Human Rights Policy Act among the Trump Administration’s existing statutes for authorizing enforcement actions. Of value to companies exploring potential human rights risk management strategies, the advisory also provides details on due diligence that is expected of companies operating in China, referencing corporate responsibilities under the OECD’s Guidelines on Multinational Enterprises and Guiding Principle 13 of the U.N. Guiding Principles on Business and Human Rights. There are additional due diligence obligations for businesses in China because NGOs have provided credible evidence that third-party audits of factory facilities are often conducted under dubious conditions that are manipulated by the Chinese Government.

On balance, over the coming months and years, businesses should expect further U.S. due diligence requirements and restrictions on business activities as the Chinese state continues to subvert human rights across the country. Companies supplying products, goods, and services in China – especially Xinjiang – should be prepared for a new reality in which supply chains are more closely scrutinized based on evolving U.S. expectation for human rights there.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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