Xinjiang Supply Chain Business Advisory Warns US Firms of Regulatory and Reputational Risks

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On July 1, 2020, the Departments of Commerce, Homeland Security, State, and Treasury published an advisory describing the “risks and considerations for businesses with supply chain exposure to entities engaged in forced labor and other human rights abuses in Xinjiang.” The advisory—an effort to help mitigate reputational, economic, legal, and other risks for US companies—outlines how businesses can better conduct human rights due diligence.

  • The advisory cites specific abuses, such as surveillance and internment of religious minorities and issues a stark warning to US companies with supply chain exposure about the risks of engaging with firms in the People’s Republic of China (PRC) that materially benefit from the forced labor of Xinjiang’s Turkic ethnic Muslim minorities.
  • The advisory highlights potential indicators that a company is using forced labor. Some of these red flags include limited transparency and the use of shell companies to hide the origin of the goods produced, low levels of participation in China’s social security insurance programs, the use of Beijing’s preferred terminology (e.g. educational training centers, poverty alleviation efforts, and reskilling), and the company’s proximity to an internment camp.
  • The advisory indicates that certain types of Chinese businesses present a higher risk to US firms because of their nexus to surveillance activities in Xinjiang. These may be companies that sell or provide biometric devices and equipment with surveillance capabilities, as well as other equipment or software used to arbitrarily track and control the movements of Uyghurs or others in Xinjiang. It also warns about companies involved in joint ventures with the PRC government, firms that provide services to internment camps or the surveillance state, and organizations on the Commerce Department’s “Entity List.”

The advisory encourages US firms to closely examine the end users of their products, technologies, research, and services and implement reasonable human rights due diligence when dealing with companies in the PRC. According to the UN Guiding Principles on Business and Human Rights, the corporate responsibility to respect human rights “requires that business enterprises: (a) Avoid causing or contributing to adverse human rights impacts through their own activities, and address such impacts when they occur; (b) Seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts.”

The recommendations in the advisory strive to help companies avoid involvement with internment camps, PRC surveillance, employment of forced labor from Xinjiang, and human rights abuses—including the forced collection of biometric data and forced relocation of Turkic ethnic Muslim minorities—by highlighting specific steps they can take to mitigate risk. Ultimately, the advisory recommends significant deliberation before engaging with entities in China—especially in the Xinjiang region—that may be involved in human rights abuses because of the unique challenges involved conducting human rights due diligence research in the PRC.

  • Third-party audits are probably not credible because auditors in the PRC are often intimidated and harassed into silence or into providing inaccurate information. Auditors may be required to use government translators, who also could convey misinformation, and interviews with workers may be tainted by pervasive surveillance and fear of retribution.
  • Human rights due diligence best practices typically include the ability to conduct independent onsite inspections and work with suppliers and local law enforcement to remediate forced and abusive labor practices. However, repressive conditions make it unlikely that businesses will have the necessary access to their suppliers in Xinjiang to support meaningful remediation.

The recommendations in this advisory are consistent with our previous assessment on the impact of the Uyghur Human Rights Policy Act of 2020 that was signed into law by President Trump on June 17, and the Trump administration is ready to impose strict sanctions on senior Chinese officials under the Global Magnitsky Act. We anticipated that American firms operating in Xinjiang would face increasing regulatory scrutiny and warned of reputational risks for US companies exposed to entities engaged in human rights violations there.

  • On June 30, Axios reported that clothing sold by US construction equipment manufacturer Caterpillar is produced in two factories in Xinjiang that participate in a forced labor program known as “Xinjiang Aid.” Caterpillar responded to the allegations by claiming that the risk of its operations using forced labor is low, and that the company does not perform on-site audits and asks its suppliers to perform self-assessments.
  • The article acknowledges the difficulty tracing whether Uyghurs working at the two factories that use forced labor and supply clothing to Caterpillar were directly involved in the production of Caterpillar clothing.
  • The media attention will probably result in increased regulatory scrutiny of Caterpillar’s activities in the PRC, as the Trump administration expands its pressure campaign against China. Last year, after the President suggested that some companies should move their operations out of China, shares of several US companies, including Caterpillar, significantly dipped in response. We anticipate that pressure from the White House and the negative publicity about recent Xinjiang labor reports will necessitate an audit of Caterpillar’s Chinese supply chain.

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