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HOME > Publications > Professional Articles > Recommendations for FIEs in China to Cope With the UFLPA

Recommendations for FIEs in China to Cope With the UFLPA

Author: Carl Li & Yang Cao 2022-07-07225

On December 23rd, 2021, the Uyghur Forced Labor Prevention Act[1] (the “UFLPA”) was signed into law. Accordingly, the U.S. authorities, including the U.S. Customs and Border Protection (the “CBP”), have published the Strategy to Prevent the Importation of Goods Mined, Produced, or Manufactured with Forced Labor in the People’s Republic of China[2] (the “Strategy”) and U.S. Customs and Border Protection Operational Guidance for Importers[3] (the “Guidance”).


The UFLPA has classified goods into two types: (1) those that are mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region (the “Xinjiang”) of the People’s Republic of China (the “PRC”), or by entities on the UFLPA Entity List (the “Covered Goods”); and (2) those that are sourced completely from outside Xinjiang and have no connection to entities on the UFLPA Entity List (the “Uncovered Goods”), and thus are not within the purview of the UFLPA.


Part I: Covered Goods


To import Covered Goods into the U.S., importers need to overcome the presumption by providing CBP with information in great scope and depth.


For Covered Goods, the UFLPA has imposed a rebuttable presumption that all Covered Goods are made with forced labor, and thus are prohibited from entering the United States. This rebuttable presumption also applies to downstream products that incorporate inputs that are made in Xinjiang or by an entity on the UFLPA Entity List[4] (the “Entity List”), regardless of where the products are produced.


To rebut this presumption, the importer must prove to CBP, by clear and convincing evidence, that it has not only fully complied with the guidance to importers in the section 6 of the Strategy, but also has completely and substantively responded to all inquiries from and by CBP to ascertain whether the goods were in violation of UFLPA. More specifically, CBP has divided the information requirements into four categories: (1) due diligence system information[5]; (2) supply chain tracing information[3]; (6) information on supply chain management measures[7]; and (4) evidence that goods originating in China were not made wholly or in part by forced labor[8]. For each category, CBP has outlined in the Guidance a non-exhaustive list of documents that may be required by CBP to overcome the presumption.


Although the documentation suggested by the Guidance may appear daunting already, CBP may still require more documents otherwise suggested by the Strategy, such as the extensive list[9] of labor information thereof, or information not suggested at all but unique to the case under CBP’s review, therefore greatly enlarging the scope and depth of documentation that could be requested.


High-Priority Sectors and its downstream industries are under close watch by CBP


In addition, the Guidance and Strategy have each listed several high-priority sectors (the “High-Priority Sectors”) of enforcement with additional suggestions on documentation to be provided to CBP for examination. These High-Priority Sectors includes apparel, cotton and cotton products[10], silica-based products (including polysilicon)[11] and tomatoes and its downstream products[12]. Since silica is a raw material that is used to make aluminum alloys, silicones, and polysilicon, which is then used in many other goods, these silica-based products, along with their downstream industries, will be under close watch of CBP. 


The Strategy repeatedly hints that it may be impossible to overcome the presumption because the burden of proof is too high


For an importer to be certain that it will be able to satisfy all CBP requests for information, the potential costs of compliance are not only high, but may be unpractical given the immensely detailed documents suggested by the Guidance and Strategy. Even the Strategy blatantly admits that: (1) sufficient due diligence may not be possible; (2) tracing supply chains will be very difficult, and consequently such importers may not be able to provide detailed enough evidence; and (3) even with the Strategy’s emphasis on independent audits, reliable audits may not be available at all. Despite this material impracticability, no “safe harbors” or similar venues to help importers cope with this issue have been created. Consequently, even if an importer has established a sophisticated compliance system, it still suffers from the risk that it may not be able to overcome the presumption due to the lack of evidence.


Part II: Uncovered Goods


For the Uncovered Goods, even if the UFLPA does not apply, if CBP has taken an enforcement action pursuant to the UFLPA on such Uncovered Goods, the importer will still need to provide CBP with: (1) supply chain tracing information, and (2) evidence that such Uncovered Goods were not made wholly or in part in the Xinjiang.


The Strategy stipulates that a supply chain tracing system should “map” the entire supply chain, up to and including suppliers of raw materials used in the production of the imported good or material, allowing the importer to identify who is doing the work at each step in the process and the conditions under which the work is being done. Additionally, such system should be able to demonstrate chain of custody of goods and materials from the beginning of the supply chain to the buyer of the finished product using established methods, such as identity preservation and segregation.


Part III: Recommendation


To cope with the UFLPA and its related measures, an importer can: (1) analyze the level of risk for it to be adversely affected by the UFLPA (the “Risk Level”); (2) sets its own compliance goals according to the Risk Level; (3) build the proper compliance systems and enforce respective measures to lower the Risk Level; (4) prepare in anticipation of potential enforcement action; and (5) shall comply with both the PRC and U.S. laws simultaneously.

 

Risk analysis


The Risk Level of the following types of enterprises are in descending order: (1) the enterprises with a supply chain that incorporates entities on the Entity List or otherwise contains Xinjiang elements; (2) the enterprises that operates in the High-Priority Sectors; (3) enterprises that exports goods to U.S. in large volume; and (4) enterprises that exports parts, components, raw materials and etc. in large volume to third countries which then export finished products to U.S.

 

Please also note that the Risk Level will be higher if: (1) any of the importer’s supplier is an affiliate to entities on the Entity List; (2) the importation contains inputs from factories that source materials both from within Xinjiang and outside Xinjiang, making it harder to verify that no non-Xinjiang materials have been replaced by or commingled with Xinjiang materials in the manufacturing process.

 

Additionally, both the Entity List and the designated High-Priority Sectors will be updated at least annually, and the High-Priority Sectors is likely to further expand because the Risks and Considerations for Businesses and Individuals with Exposure to Entities Engaged in Forced Labor and other Human Rights Abuses linked to Xinjiang, China[13] (the“Advisory”), which has been repeatedly relied by U.S. authorities in drafting the Strategy, has outlined in its Annex 2 a list of industries that contains elements already identified as using forced labor in Xinjiang but have yet to be classified as High-Priority Sectors.Therefore, importers should carefully monitor the Entity List, the Strategy and the Advisory (as updated) to have a clear understanding of their Risk Level.

 

Setting compliance goals and building compliance systems


For enterprises with the highest Risk Level (i.e., its supply chain incorporates entities on the Entity List or otherwise contains Xinjiang elements), it should consider whether the goods it export to U.S. constitutes Covered Goods, and if the goods it exports are indeed Covered Goods, it should consider changing its supply chain so the goods it exports would become Uncovered Goods, because even if the importer is willing to spend an enormous amount of money and efforts in building its compliance system, it may still later find it to be impossible to gather sufficient evidence to overcome the presumption, as repeatedly hinted in the Strategy.

 

For the enterprise with relatively high Risk Levels (e.g., it operates within the High-Priority Sectors), it should consider building a supply chain tracing system that substantially meets the requirements of the Strategy while also taking the relevant Chinese legislation into consideration.

 

For those with relatively lower Risk Levels, it may be more economical to build a supply chain tracing system only for its most important markets, products and customers, taking into account its available resources, while closely monitoring any updates to the Entity List, the Strategy and the Advisory.

 

Preparation in anticipation of potential enforcement actions


The time frame to petition the CBP in resolving enforcement actions, in light of the extensive information required, may be inadequate depending on the enterprise’s existing compliance system, so it is prudent to pre-establish a mechanism or contingency plan to cope with potential enforcement actions. An enterprise may consider: (1) arranging the payment and shipping terms so that the risk of goods transfer to the buyer once the goods is on board of a vessel for an U.S. destination; (2) including relevant representations and warranty clauses in its agreement with suppliers; (3) providing in the force majeure or termination clauses relevant rights and obligations in anticipation of enforcement actions; and (4) such other preparations considering the enterprise’s position within the global supply chain. 

 

Additionally, it may be desirable for an importer to apply for a binding ruling to confirm the non-applicability of, or request an exception to, the rebuttable presumption under the UFLPA as to avoid unexpected enforcement actions at the port of entry into the U.S.

 

Compliance with PRC law


To counter various unfair foreign laws and regulations, PRC has enacted various laws and regulations, including the Law of the People's Republic of China on Countering Foreign Sanctions[14] (the “CFS”) and the Provisions on the List of Unreliable Entities[15] (the “UE Provisions”). The CFS, in its article twelve (12), forbids organization and individual to implement or assist in the implementation of the discriminatory and restrictive measures by any foreign country against any Chinese entities and provide a cause of action for Chinese entities to sue for damages and injunctions against those in violation.

 

Similarly, the UE Provisions provides in its article 2 that the PRC authorities will take corresponding measures (i.e., investigating such foreign entities according to the article 5 and utilizing the measures outlined under the article 10[16] of the UE Provisions) against those terminating transactions with Chinese entities “in violation of regular principles of market transactions”, or using discriminatory measures against Chinese entities, resulting in serious damage to the rights and interests of the same.

 

In ensuring compliance with various foreign compliance laws (e.g., sanctions and etc.), it is not uncommon for enterprises to “over comply” with such laws and regulations outside the PRC, setting the compliance bar so high that would foreclose the possibility to conduct business with certain Chinese entities not targeted by foreign laws and regulations. In doing so, enterprises sometimes take the verbatim policies issued by their headquarter without considering Chinese factors and cease to conduct business with certain entities targeted by U.S. laws and regulations (e.g., SDN list) even when doing so will not be violative of U.S. laws and regulations. Such practices may be viewed by Chinese authorities as “discriminatory” against Chinese entities, and thus in violation of CFS and UE Provisions.

 

To ensure compliance with both PRC and U.S. law, the enterprises’ compliance policies need to be tailored to such enterprises’ Chinese elements as to not “over comply” with the UFPLA, and contractual provisions should be in place with Chinese suppliers to ensure that if such enterprise need to terminate their agreements with its suppliers due to UFLPA, the termination would not be viewed as discriminatory or “violative of regular principles of market transactions”.


NOTES

[1] Pub. L. No. 117-78, 135 Stat. 1525 (2021).

[2] Strategy to Prevent the Importation of Goods Mined, Produced, or Manufactured with Forced Labor in the People’s Republic of China (June 21st, 2022), Homeland Security, https://www.dhs.gov/uflpa-strategy [the “Strategy”].

[3] Uyghur Forced Labor Prevention Act U.S. Customs and Border Protection Operational Guidance for Importers, U.S. Customs and Border Protection (June 2022), https://www.cbp.gov/document/guidance/uflpa-operational-guidance-importers [the ‘Guidance”].

[4] The UFLPA Entity List, mandated by section 2(d)(2)(B) of the UFLPA, shall be updated at least annually, and can be check at: https://www.dhs.gov/uflpa-entity-list.

[5] Guidance, supra note 3, at 13-14.

[6] Guidance, supra note 3, at 14-15.

[7] Guidance, supra note 3, at 15.

[8] Id.

[9] Strategy, supra note 2, at 50-51.

[10] Guidance, supra note 3, at 16.

[11] Id.

[12] Guidance, supra note 3, at 17.

[13] Risks and Considerations for Businesses and Individuals with Exposure to Entities Engaged in Forced Labor and other Human Rights Abuses linked to Xinjiang, China, U.S. Department of State (July 13, 2021),

https://www.state.gov/wp-content/uploads/2021/07/Xinjiang-Business-Advisory-13July2021-1.pdf.

[14] Law of the People's Republic of China on Countering Foreign Sanctions (June 1, 2021) (《中华人民共和国反外国制裁法》) (the “CFS”).

[15] Provisions on the List of Unreliable Entities (Sept. 2020) (《不可靠实体清单规定》) (the “UE Provisions”).

[16] The article 10 provides measures include: restricting or banning import, export, investment, fines and cancelling work permit and etc.