The last few months have seen both significant changes in the law and US Customs and Border Protection’s (CBP’s) enforcement of the US import ban on goods made with forced labor (19 USC. § 1307). While the reputational risks of a forced labor entanglement remain as high as ever, these changes mean that (1) the likelihood of encountering enforcement activity has increased, and (2) the elements of a "compliant" forced labor program are evolving. We have summarized the background, recent developments and our recommendations below.
Background – Import Ban & Loophole
In early 2016, Congress removed a loophole in the near-80 year old statute banning the importation of goods made with forced labor. The effort to remove this loophole was led for many years by Senator Bernie Sanders, and was later championed by Senator Sherrod Brown. The loophole had permitted goods made with forced labor to be imported whenever US demand outstripped domestic supply (the "consumptive demand exception"). The consumptive demand exception resulted in there being little application/enforcement of the import ban for most of its history.
CBP’s Traditional Enforcement Mechanism
Within weeks of the consumptive demand exception being removed, CBP initiated four new enforcement actions under a mechanism the agency adopted in the 1960’s. This older enforcement mechanism allows CBP to issue "withhold release orders" (or WROs) for shipments of articles manufactured by a specific named foreign entity, which CBP has reason to believe may have been produced with forced labor. An importer may challenge the imposition of a WRO, but only on a shipment-by-shipment basis.
The WRO mechanism has shown itself to be a blunt instrument. Companies named in a WRO are likely to suffer significant economic harm, with little-to-no opportunity to review or respond to the allegations before the WRO is put in place. The relative ease with which CBP can impose a WRO (upon information which "reasonably, but not conclusively" indicates the presence of forced labor) corresponds directly with the profound difficulty in having a WRO removed. As we have explained previously, once a WRO is in place, it is difficult to have it removed (the standard for imposing a WRO is relatively low, but for removal is quite high).
Emerging Approach to Enforcement
While the WRO mechanism remains a viable tool for CBP’s enforcement of the forced labor ban, CBP has also begun taking steps to hold US importers more directly accountable for forced labor compliance. Most notably, CBP recently updated its informed compliance publication governing "reasonable care" to specify that importers are expected to have documented controls in place to mitigate the risk of importing goods made with forced labor. Specifically, CBP expects importers to be able to answer questions such as (but not limited to):
Have you taken reliable measures to ensure imported goods are not produced wholly or in part with convict labor, forced labor, and/or indentured labor (including forced or indentured child labor)?
Have you established reliable procedures to ensure you are not importing goods in violation of 19 USC. § 1307 and 19 C.F.R. §§ 12.42-12.44?
Have you obtained a "ruling" from CBP regarding the admissibility of your goods under 19 USC. § 1307 (see 19 C.F.R. Part 177), and if so, have you established reliable procedures to ensure that you followed the ruling and brought it to CBP’s attention?
CBP has broad authority to determine "admissibility" (whether an article presented for importation complies with "the requirements of the laws of the United States") and to detain articles until compliance is confirmed. As a result, importers who cannot answer these questions run the risk of having their goods detained or seized. CBP has also recently begun issuing requests for information (via CBP Form-28s, or informal requests from ISA account managers) asking importers to produce documentation regarding their forced labor policies and controls.
By taking these steps, CBP is laying the groundwork for it to be able to (1) deny entry of merchandise that an importer cannot prove was not made with forced labor, and (2) assess penalties for forced labor violations against companies without adequate controls.
Additionally, law enforcement officials with Homeland Security Investigations (HSI) have recently been increasing their focus on laws which criminalize the transport in interstate commerce of goods made with forced labor (18 USC. §§ 1761–62). These statutes were not frequently utilized prior to these recent changes in the law, but based on public statements by the law enforcement officials involved, investigations and prosecutions may be initiated under these provisions in the near future.
North Korea Forced Labor Presumption
In August 2017, as part of an wide-ranging sanctions bill, the forced labor ban was again modified. The statute now specifies that merchandise made by North Korean laborers, regardless of location, is presumed to be made with forced labor, and, therefore, subject to the import ban. No official guidance has been provided to use in determining whether North Korean laborers may be present in a given supply chain. The risk of North Korean labor appears to be especially high in northeastern China, but North Korean laborers are known to be working in more than a dozen industries across more than 40 countries, according to the US government. Recent statements by US government officials have made it clear that importers are expected to have updated their forced labor (and/or CSR) policies to take this change in the law into account.
In view of these developments, we have the following recommendations:
- Update your CSR/forced labor compliance program to reflect the recent changes in the law, including the presumption with respect to North Korean labor. An effective forced labor compliance program will be tailored to a company’s forced labor risk profile (e.g., industry, area of the world, type of production, direct/indirect sourcing, etc.). It will include updated policies around vendor/factory set-up and audit, and may include revisions to master sourcing agreements, POs and/or vendor contracts. Depending on the risk profile, it may also include changes to sourcing activity.
- Prepare a memorandum explaining your forced labor compliance program to CBP. All importers (and those in certain higher risk industries, such as apparel and footwear, in particular) should anticipate getting a question about their forced labor compliance program and prepare accordingly. While many companies have robust CSR programs (that are hopefully now updated to account for the recent changes in the law – see #1 above), we believe it will be important to “translate” that program into “Customs speak”. Stated differently, if CBP is going to ask about your forced labor controls (an area in which it has little expertise), it is in your interest to have an answer that addresses CBP’s concerns, in a language CBP understands. Just like one should not provide CBP solely with transfer pricing documentation in response to an inquiry about the acceptability of intercompany customs values, one should not provide CBP solely with CSR documentation in response to an inquiry about the admissibility of goods due to forced labor concerns. Producing documentation that recognizes CBP’s concern and summarizes your program from a customs perspective will go a long way to minimizing the interaction; whereas providing just the underlying CSR documentation and hoping CBP finds what it needs will likely prolong it.
- Ensure that any query you receive from CBP relating to forced labor (whether by CBP Form-28 or other means) is reviewed by counsel before it is responded to. In our experience, companies can sometimes be eager to provide information to CBP which they believe it will cast them in a favorable light. There will likely come a time and place for sharing such information with CBP, but doing so comes with risks, particularly if your forced labor/ CSR program has not yet been updated to reflect all relevant recent changes in the law. If you receive any specific queries, please let us know. We are advising several clients on these and related matters, and would be glad to assist.
We are working with several clients to implement these recommendations. We have developed questionnaires to pull together the relevant aspects of a company’s existing CSR program, are updating those programs to account for the change in the law and are preparing reports summarizing CSR programs from a customs perspective (so the clients have a response ready to provide CBP when needed). We are also assisting several clients in responding to both general and specific inquiries from CBP in this area.