G7 Leaders Sharpen Concentrate on Labor Points in Xinjiang: What Does This Imply for Multinational Companies with Provide Chains within the Area? | King & Spalding

Series 2, 10 in 10: Issue 3

INTRODUCTION

The June G7 summit showed that eliminating forced labor in Xinjiang remains a top priority for leaders in the world’s most advanced economies. But what does this mean for international companies with supply chains extending into the region? In this analysis, we outline the political landscape and consider how UK and US companies should mitigate legal risk.

POLITICAL LANDSCAPE

At the end of the G7 summit in June, the heads of state and government published a joint communique in which they undertook to ensure that global supply chains are free from forced labor. Allegedly, this is a general obligation that extends to all cases of forced labor, regardless of geographic location. As such, it is little more than a reformulation of the state’s duty to protect in accordance with the UN Guiding Principles on Business and Human Rights (“UNGPs”).

However, the context suggests that the G7 leaders (at least from certain countries) had something more specific in mind. The communique expressly expresses concern about “government-sponsored forced labor of vulnerable groups and minorities, including in agriculture, the solar and clothing industries.” The communique does not mention Xinjiang, but a separate White House statement identified these sectors as “the main supply chains in Xinjiang.” Prior to this, British Foreign Secretary Dominic Raab had pledged to take steps to ensure that British companies are not part of the supply chains that lead to the gates of the detention centers in Xinjiang.

What should companies, particularly in the UK and US, that are concerned about reputational and legal risks associated with supply chains in Xinjiang, interpret these statements?

EXISTING SOURCES OF LEGAL RISK FOR COMPANIES WITH LINKS TO FORCED LABOR IN XINJIANG

United Kingdom

In the UK, the Modern Slavery Act requires companies “doing business” in the UK with sales in excess of £ 36 million to publish an annual statement setting out the steps they are taking to prevent modern slavery in their business Supply chains and stores have taken hold. Government guidance on the law states, among other things, that the annual statement “should aim” to provide information about the parts of its business and supply chains that are at risk of slavery, including forced labor, and the steps to be taken of the company to assess and control the risk.

Given the numerous public statements made by the UK government on the risk of forced labor in Xinjiang (see the Foreign Minister’s statement to Parliament in January and the March updated guidance on overseas business risks in China) and the concerns raised by UN experts, any company with supply chain links should follow up Xinjiang, which is required to report under the Modern Slavery Act, expressly acknowledges the risk in its statement and sets out the steps it is taking to prevent or mitigate the risk through its human rights due diligence.

The law does not impose legal sanctions if such issues are not addressed in its modern slavery statement. Although the UK government recently announced its intention to introduce financial sanctions for companies that fail to comply with their statutory reporting requirements, such sanctions have not yet come into force (as noted in a very critical report by the relevant parliamentary special committee in June). In any event, penalties are expected to be imposed in cases where a qualifying entity does not make a statement at all, rather than making a statement that does not adequately address a material risk.

Despite the UK government’s tough public stance, existing legislation to regulate the impact on the supply chain in Xinjiang is lacking in teeth and there is no sign that the government will take any action anytime soon to remedy this. However, it would be a mistake for UK companies to conclude that they are isolated from legal liability for forced labor in their supply chains in Xinjiang.

Recent developments in common law open the door to civil claims against UK companies over the effects of forced labor on their international supply chains. There is a current authority from the UK Supreme Court (e.g. Vedanta Resources v. Lungowe [2019] UKSC 20) that UK companies may, in certain circumstances, be held liable in UK courts for human rights abuses committed by their overseas subsidiaries and other third parties. A relevant factor in the UK company’s due diligence towards data subjects is whether a company claims in published materials that it has some level of oversight and control over a third party. While unprecedented, it could lead to a lawsuit by victims of suspected forced labor in Xinjiang against a buying company in the UK for failing to properly implement the measures set out in its Modern Slavery Declaration.

Alternatively, the alleged victim of forced labor can be given the opportunity to make claims against a customer company for tortious acts because it is responsible for a dangerous situation that can be exploited by a third party. In fact, the Court of Appeal recently refused, on a due diligence appeal, to find a criminal offense from the widow of a Bangladeshi shipbreaker (Begum v. Maran (UK) Ltd [2021] EWCA 326). This gives rise to negligent claims against UK-based buyer companies for alleged labor law violations by third parties in their supply chains, including in Xinjiang.

In view of this case law, especially in cases where a company is (e.g. reputational risk) if the company does not implement it appropriately.

To address this risk, there are certain basic steps a company can take. First, public statements about modern slavery and human rights in general should be realistic and focus on the process rather than the outcome. Rather than saying that there is no tolerance for forced labor in a company’s supply chain (a statement that can often prove to be demonstrably false given the prevalence of forced labor in global supply chains), the better approach is to identify the existence of a risk and lay set out the practical steps the company is taking to address this. Second, the company should ensure that it fully implements these systems and processes in accordance with international standards. In this way, a company maximizes its chances of demonstrating that it has complied with its legal obligation to the appropriate standard of care.

USA

In the US, the normative standard – the prohibition of forced labor in supply chains – is essentially the same as in the UK. However, the means of enforcement and thus also the type of legal risk for companies differ. While the UK has a transparency law and jurisdiction suggesting tort liability risk, the main risk for companies in the US is restrictions on imports or exports to companies that may be using forced labor in Xinjiang.

A July 2020 recommendation by the Ministry of Foreign Affairs, Treasury, Commerce and Homeland Security warned companies about the “reputational, financial and legal risks” of supply chain links to forced labor in Xinjiang or to products made outside of Xinjiang that use or labor Goods from Xinjiang. Legal risks, warned the ministries, “could withhold clearance orders …, include civil or criminal investigations and export controls”. To mitigate risk, the departments advised that “organizations should use appropriate industry-specific due diligence policies and procedures.”

A US law that has been in force since 1930 (19 USC § 1307) prohibits the importation of goods that have been produced in whole or in part by forced labor. “Forced labor” generally includes “any work or service that … is required, under threat of any penalty, for failure to perform, and for which the worker does not volunteer”.

The forced labor import ban is administered by the United States Customs and Border Protection Service (CBP). CBP may subject goods produced by forced labor to foreclosure, confiscation, or both. If information is “reasonable but inconclusive” suggests that items have been manufactured using forced labor, CBP may issue a “retention order” (“WRO”). The item will then be held at the border and cannot be sold in the US until further determined. This order alone can lead to costly delays, even if canceled later, as well as damage to reputation, as the order is published on the CBP website. If CBP subsequently receives sufficient information to determine whether it has been forced labor, the item cannot be imported into or sold in the United States.

The CBP is closely examining the imports from Xinjiang. In 2019 and 2020, it enacted WROs against several Chinese companies that manufacture clothing and hair care products in Xinjiang. In January 2021, CBP issued a “regional” WRO against all cotton and tomato products from Xinjiang, as well as derived products such as clothing or tomato sauce, including products made outside of Xinjiang that use cotton or tomatoes from Xinjiang. In June 2021, CBP issued a WRO against a company from Xinjiang that manufactures silica-based products.

CBP’s investigation found the following “forced labor indicators” in Xinjiang: “Debt bondage, restricted mobility, isolation, intimidation and threats, withheld wages and abusive living and working conditions”.

A bill now pending in Congress, HR 1155, would add to the risks. According to the law, goods from Xinjiang will be manufactured under forced labor and their importation will be prohibited. Penalties for violations would include extended civil and criminal fines.

HOW SHOULD COMPANIES EXPOSED TO SUPPLY CHAIN ​​RISKS IN XINJIANG RESPOND?

The mechanisms by which a company can be held legally accountable for involvement in forced labor in Xinjiang vary depending on where it does business and where it is located. However, the international definition of forced labor and the related standards expected of companies are consistent. This provides some clarity to companies in the UK, US and beyond who are concerned about links to forced labor in Xinjiang: acknowledge that there is significant risk; and take steps in accordance with the UNPs to remedy this through human rights due diligence. In a changing legal landscape, this approach offers the best protection against legal, financial and reputational risks.