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Volume XII, Number 268

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Enhanced U.S. Government Scrutiny of Supply Chains Increases Compliance Expectations for U.S. Companies that Source from or Operate Abroad

Regulators have sent several recent messages that the U.S. government expects companies to subject their entire supply chain to extensive due diligence, based on state-of-the-art compliance measures. These include the issuance of an unusual briefing by the Departments of State, Treasury, and Homeland Security on the need for supply chain due diligence1, a special advisory from the Department of Homeland Security on supply chain due diligence and compliance best practices, and a seven-figure penalty for a company not engaging in “full spectrum” supply chain due diligence2. The Office of Foreign Assets Control (OFAC) has also implemented multiple sanctions regimes that target the purchase of goods that rely on human trafficking or forced labor, including special sanctions targeted at the Xinjiang region of China. And finally, Customs now is tasked with blocking goods that are the product of forced labor, including with regard to goods from the Xinjiang region of China, which carry a rebuttable presumption that they are the product of forced labor, unless the importer of record can provide specified proof to the contrary. Goods associated with any sanctioned country, company, or person can result in economic sanctions issues, including large potential penalties and even personal liability. As a result, it is important for companies that source from or operate abroad to engage in systematic reviews of their supply chains. These companies should not assume their sourcing from third parties, and not their own operations, will shield them from liability for violations of economic sanctions and other laws that target supply chains. With Customs now also taking actions to cut off imports from companies that benefit from forced labor or human trafficking by blocking such goods at the border, the regulatory and reputational stakes from a flawed supply chain have never been higher.

Companies that source internationally accordingly need to take concrete steps to ensure they are sourcing their inputs from clean sources. Thus, companies that source from or operate abroad should strongly consider putting in place the following compliance measures:

  • Performing a systematic risk assessment to determine their key exposure areas for economic sanctions, forced labor, and human trafficking violations across both the company and at its supply base.

  • Performing a global review of their terms and conditions for all vendors and suppliers to ensure they reflect current forced labor, human trafficking, and economic sanctions regulatory requirements aimed at suppliers.

  • Adopting procedures to require suppliers to sign annual certificates of compliance stating they will comply with all U.S. economic sanctions, forced labor, and human trafficking requirements.

  • Taking steps to verify compliance by suppliers with forced labor and human trafficking requirements, including through requiring suppliers to provide proof of adequate and lawful wages paid, compliance with all U.S., EU, Australian, and other applicable forced labor and human trafficking requirements.

  • Ensuring suppliers promulgate forced labor and human trafficking contractual requirements to all sub-suppliers and take concrete steps to follow through on the effective implementation of these requirements.

  • Conducting supplier audits that include (1) verification of compliance with all forced labor and human trafficking requirements, (2) verification of payment information related to production materials, and (3) the review of supplier bank statements.

  • Providing special scrutiny and oversight of companies that source from high-risk jurisdictions such as China, India, and other areas where respect for the rule of law is lower and violations more common.

  • Implementing internal controls and oversight systems of company operations and supply chains to ensure compliance responsibilities are adequately carried out.

  • Ensuring all screening of suppliers for potential matches to OFAC, EU, and other economic sanctions lists of embargoed persons is occurring regularly, and all suppliers are screening their sub-suppliers for the same type of potential matches.

  • Providing economic sanctions training for key employees in the United States and in foreign operations that source abroad regarding U.S. sanctions regulations and other relevant U.S. laws and regulations.

  • Disseminating typical red flags that might indicate a violation of the economic sanctions, forced labor, and human trafficking regulations.

As a final note, OFAC stresses not only compliance commitment by senior management, including senior executives and the board of directors, but also the commitment of “adequate resources” to compliance. The conduct of supplier audits should not be cursory but rather should be the type of review that is likely to catch issues even by suppliers who might be taking steps to hide their violations. With OFAC and Customs taking concrete steps to enforce these newer supply-side regulations, it is important that companies that source from and operate abroad use risk-based principles to identify areas of primary risk and use this risk assessment to guide their audit teams to conduct appropriate audits.

The importance of monitoring the supply chain for potential forced labor is reinforced by new legislation, effective June 21, 2022, which bans imports of all goods made in whole or in part from any good from the Xinjiang Uyghur Autonomous Region (“XUAR”) in China. This occurs pursuant to the Uyghur Forced Labor Prevention Act (“UFLPA”), which deems all goods mined, produced, or manufactured in the XUAR to be produced by forced labor.

Under the ULFPA, imports of all goods mined, produced, or manufactured wholly or in part in the XUAR, or by entities on the UFLPA Entity List, are presumed to be made with forced labor and cannot enter the United States unless the importer can rebut that presumption. Notably, any goods from China are now under increased scrutiny by Customs, because the Act covers any goods that even “in part” are manufactured using inputs from the XUAR. Because it is common for goods made through Asia to use Chinese components, Customs will be more closely scrutinizing all imports from Asia to determine if they should be seized at the U.S. border.

Customs is emphasizing the importance of U.S. importers of record conducting careful due diligence, effective supply chain management, forced labor compliance checks and audits, and other measures demonstrating that goods originating in China, or even from other countries that use Chinese-origin parts and components, do not come from the XUAR or otherwise benefit from forced labor or human trafficking.

Customs and the Department of Homeland Security have issued two documents to help importers of record follow through on recommended compliance measures:

  • Customs has published “U.S. Customs and Border Protection Operational Guidance For Importers,” which lays out both how Customs will apply the rebuttable presumption that products from the XUAR rely on forced labor, what type of evidence can be used to rebut the presumption, and how Customs will decide when to seize goods that fail to overcome the presumption. Customs also provides details regarding the due diligence, supply chain tracing, supply chain management, and commodity-specific supply chain tracing documentation that is required. https://www.cbp.gov/sites/default/files/assets/ documents/2022-Jun/CBP_Guidance_for_Importers_ for_UFLPA_13_June_2022.pdf.

  • The Department of Homeland Security has issued its “Strategy to Prevent the Importation of Goods Mined, Produced, or Manufactured with Forced Labor in the People’s Republic of China,” which details the U.S. Government’s compliance expectations in the areas of due diligence, effective supply-chain tracing, and supply management measures for companies importing from China. https://www.dhs.gov/sites/default/ fi les/2022-06/22_0617_fletf_ufl pa-strategy.pdf.

Notably, Customs has requested 70.3 million for fiscal year 2023 to add enforcement resources to implement this law. As a result, any companies that import should expect aggressive Customs scrutiny of imports from China – and even from Asia in general – to determine whether the goods contain parts and components with a link to the XUAR. Importers accordingly should carefully review their supply chain compliance measures to ensure that they are compatible with these new legal requirements.

As a final cautionary note, it also is important to note the intersection of these supply-chain-specific requirements with general changes in the OFAC economic sanctions regulations. The invasion of Ukraine, and the response of the United States to implement very strict sanctions on Russia and Belarus, only underscore the importance of the proper management of international supply chains. Russia, in particular, long has been a major supplier of such goods as energy products, aluminum, copper, and other raw materials. Many of these imports are now either blocked for import (e.g., energy products) or can be imported only by scrupulously following the new economic sanctions requirements. Any company that relies on supplies from Russia — even if these goods are not imported into the United States — needs to review carefully all such supply arrangements to ensure their compliance not only with the U.S. import and economic sanctions restrictions but also the coordinated responses of the EU and other governments. All the cautions the U.S. government raises about doing “full spectrum” due diligence apply equally to the new sanctions now in place against Russia and Belarus.


FOOTNOTES

The Department of Treasury (which contains OFAC), the Department of State, and the Department of Homeland Security issued a special advisory titled “Risks for Businesses with Supply Chain Links to North Korea,” which highlights the risks of economic sanctions evasions and sourcing from companies that rely on forced labor. https://www.cbp.gov/sites/default/files/assets/documents/2018-Aug/North%20Korea%20Sanctions%20_%20Enforcement%20Actions%20Advisory.pdf.

2 OFAC announced a $996,080 settlement with a Californian cosmetics company, e.l.f. Cosmetics, Inc. (ELF), for alleged violations of the North Korean Sanctions Regulations based on the company “unknowingly” importing 156 shipments of false eyelash kits from two suppliers in China that contained materials independently sourced by these suppliers from North Korea. https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20190131_elf.pdf

© 2022 Foley & Lardner LLPNational Law Review, Volume XII, Number 199
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About this Author

Gregory Husisian, Foley Lardner, International Export regulation lawyer, Automotive industry Attorney
Partner

Gregory Husisian is a partner and litigation attorney with Foley & Lardner LLP. Mr. Husisian is chair of the firm’s Export Controls and National Security Practice, focusing on international regulatory issues posed by Office of Foreign Assets Control (OFAC) economic sanctions, International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), and Nuclear Regulatory Commission export controls, the Foreign Corrupt Practices Act (FCPA), and the antiboycott regulations. He also represents companies with national security concerns in acquisitions...

202-945-6149
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