November 30, 2017
During the Obama Administration, a number of legal and regulatory developments placed a new premium on the importance of ensuring that supply chains did not include items produced with forced labor or otherwise involve human trafficking. Among these the Administration introduced new requirements for government contractors and their sub tiers to monitor for the use of prohibited types of labor and to report non-compliance. Changes were also made to U.S. customs law to make it easier for U.S. customs officers to enforce existing prohibitions on the import of goods into the United States made with forced or child labor. The growing private sector use of supply chain diligence and monitoring services also created new benchmarks in this area.
The final months of the Obama Administration saw increased enforcement of an unusual U.S. customs provision, Section 307, which allows U.S. Customs and Border Protection (“CBP”) to detain shipments of goods at U.S. ports if those goods were likely produced with forced, child, or prison labor (“labor trafficking”). Observers wondered whether enforcement and policy support would decline under the Trump Administration. Eleven months in, however, converging interests in the Trump Administration suggest Section 307 enforcement will continue and that trafficking in other countries’ labor supplies is becoming the target of other initiatives in trade enforcement actions, trade negotiations, and even U.S. sanctions enforcement. Outside of the United States, reporting laws modeled in part on one pioneered in California, as well as many voluntary, private sector initiatives, suggest a new, globalizing interest in eliminating the use of these forms of labor.
In this client alert we provide background on several policy interests, legal developments, and private sector initiatives that we see converging in the United States and elsewhere in efforts to combat the use of labor trafficking in international trade. In the United States, converging policy interests cut across both the political spectrum and the public and private sectors, with Trump Administration officials, lawmakers, advocates, and private sector leaders all looking for ways to ensure that products entering the U.S. marketplace are not the fruit of these kinds of labor. Convergence is also taking place abroad, with several major U.S. trade partners implementing new disclosure and reporting standards. These many related policy developments are making diligence for labor trafficking in supply chains a new standard, and multi-national companies and others with international supply chains should look for ways to incorporate this kind of diligence into supplier vetting and supply chain management systems.
At least three sets of policy developments are converging in ways that are likely to increase the enforcement of laws that focus on the import of goods produced in part through forced labor trafficking: (1) the early 2016 closure of a loophole in U.S. Customs law and subsequent enforcement actions involving China and other country suppliers; (2) the focus of key players on the Trump Administration’s trade policy team on unfair trade competition in key markets, including China; and (3) Congressional and Executive Branch interest in cutting off financial flows to North Korea from its domestic use and export of North Korean labor.
The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) was signed by President Obama in February 2016. Among other changes, Section 910 of the TFTEA amended the Tariff Act of 1930, Section 307. This amendment expands a potentially powerful enforcement tool. Section 307 originally banned the importation of merchandise “mined, produced, or manufactured wholly or in part in any foreign country by convict labor or/and forced labor or/and indentured labor,” but the prohibition applied only if the merchandise at issue was available “in such quantities in the United States as to meet the consumptive demands of the United States.” The TFTEA strengthened the ban by removing the “consumptive demands” exception.
Before the TFTEA, this “consumptive demands” exception left Section 307 seldom enforced against imports. CBP and its predecessor agency did not issue a single Withhold Release Order (also known as a Detention Order) or Finding between November 2000 and February 2016. After the amendment to Section 307, however, CBP issued four such orders—all against Chinese companies—within six months. These orders are listed in the table below.
The economic consequences of a potential CBP Detention Order or Finding are substantial. They include a disrupted supply chain, the cost (time and money) of mounting an administrative challenge to a Finding, possible forfeiture of the goods at issue, and potential contract claims for breach brought by interested buyers. Additionally, financial costs can pale in comparison to the reputational harm an importer could suffer by association with labor trafficking. Given these costs and the strong public policy interests in play, companies should consider how to enact due diligence to avoid being a party to a Section 307 action, and whether their supply chains might already include items produced through labor trafficking.
Once CBP issues a Withhold Release Order, the importer bears the burden to show documentation certifying a range of facts about the production and shipping of the merchandise. Beyond providing these basic facts, an importer must also “submit a statement . . . showing in detail that he had made every reasonable effort to determine the source of the merchandise . . . and to ascertain the character of the labor used in the production of the merchandise.” Creating such a detailed statement can be a difficult task without scrupulous knowledge of the supply chain.
The CBP has not issued any public Withhold Release Orders or Findings since September 2016. However, the CBP amended the Section 307 regulations in June 2017—allowing “any person . . . who has reason to believe that merchandise” has been produced through forced labor to file a communication to CBP. Coupled with easily accessible governmental reports on problematic goods, these developments will allow and encourage interested parties to pressure the CBP to undertake import investigations.
Moreover, in a development discussed further below, Congress recently amended a provision of the Tariff Act to create a rebuttable presumption that items sourced wholly or in part using North Korean labor are produced with forced and slave labor and should therefore be prohibited from entering the United States under Section 307.
The policy interest in combatting labor trafficking in supply chains that reach into China dovetails with the aggressive policy posture, both in tone and substance, that the Trump Administration has taken against China in other areas of trade.
Candidate Trump frequently assailed China for its trade practices, calling its trade policy the “greatest theft in the history of the world” and stating China was “rap[ing] our country” through its massive trade surplus with the United States. President Trump’s rhetoric on China has tempered somewhat—he executed a limited trade deal with China in May concerning beef, poultry, natural gas, and electronic payment services., However, the President also initiated a Section 232 national security investigation on steel and aluminum imports and has signed several executive orders relating to perceived trade abuses and violations. Trade discussions with China this July ended without any formal agreement, plan, or indication whether discussions would resume.
Several high-ranking members of the Trump Administration share skepticism of—or hostility toward—China’s trade practices. For years, current U.S. Trade Representative Robert Lighthizer has been concerned with “government-organized unfair trade” or “rig[ged] trade” by China. On June 22, 2017, at a hearing in front of the U.S. House Ways and Means Committee, Ambassador Lighthizer suggested that the United States should “aggressively go after people that are engaging in unfair trade and hope that that leads to market efficiency, more economic freedom, and, globally, more wealth.” Similarly, in January, March, and June 2017, Secretary of Commerce Wilbur Ross labeled China “one of the most protectionist” countries in the world.
National Trade Council Director Peter Navarro has expressed negative views concerning China’s trade policies for years. Before his role in the White House, Navarro wrote, produced, and directed a 2002 movie called Death by China, in which “a bread knife with the words ‘Made in China’ is plunged into a map of the United States and animated blood runs out.” More recently, in July 2016, Navarro spoke of the “damage and carnage that China’s trade policies have wrought on the American economic heartland.” Individually and collectively, the Trump Administration’s leaders made clear they will monitor Chinese imports hawkishly.
The Trump Administration’s criticism of Chinese economic policy on familiar matters such as currency manipulation and protectionism is now expanding to the unfair trade that results from labor trafficking. Executive agencies increasingly criticize China for state-sponsored forced and child labor. The State Department’s 2017 Trafficking in Persons Report downgraded China to tier three, the lowest tier, reserved for countries with the most egregious records on human trafficking. Amidst sometimes scathing language, the report noted “government complicity in forced labor,” and stated “[w]omen and children from neighboring Asian countries, Africa, and the Americas are subjected to forced labor and sex trafficking in China.” Secretary of State Rex Tillerson defended this characterization at the formal presentation of the report, stating China “has not taken serious steps in its own complicity in trafficking, including forced labor. . . .” In a press briefing on the report, then-U.S. Ambassador-at-Large to Monitor and Combat Trafficking in Persons Susan Coppedge noted a range of abuses by China, including forced labor of North Koreans, Uighurs, and people in drug treatment facilities, stating “forced labor in China is not one-dimensional.”
In addition, the Department of Labor’s 2016 report on the List of Goods Produced by Child Labor or Forced Labor discussed “state-imposed forced labor” in China, and listed a wide range of goods sometimes produced by forced labor, child labor, or both in China. Though produced and disseminated before President Trump took office, this report represented another public rebuke of China’s forced and child labor policies.
In another significant development, Congress and the Trump Administration are drawing connections between U.S. national security and the exploitation of labor trafficking by rogue regimes such as North Korea. The August 2017 law, the Countering America’s Adversaries Through Sanctions Act (CAATSA), included a chapter giving new tools to the President to prevent the North Korean regime from raising currency through labor trafficking.
Section 321 of CAATSA amended the North Korea Sanctions and Policy Enhancement Act of 2016 (NKSPEA) to require human trafficking determinations and reports and instituted a rebuttable presumption that goods made in connection with North Korean labor are prohibited under the Tariff Act of 1930 and are to be denied entry into U.S. ports. On November 7, the U.S. Customs and Border Protection (“CBP”) announced its commitment to implement CAATSA’s provisions on imports with a nexus to North Korean nationals or citizens. In its announcement, the CBP explained that it will deny entry, an action that could include the seizure of merchandise, of any significant merchandise that has been mined, produced, or manufactured wholly or in part by North Korean nationals or citizens unless the CBP finds through clear and convincing evidence that the merchandise was not produced with a form of prohibited labor. CBP also noted that it would refer any import of merchandise found to have been produced with such labor to Immigration and Customs Enforcement Homeland Security Investigations with a request to initiate a criminal investigation.
In another amendment, CAATSA directs the President to impose blocking sanctions on any non-U.S. person that knowingly employs North Korean laborers. The identification of those that knowingly employ North Korean laborers is delegated under the NKSPEA to the State Department, which is required to issue a report on this topic, among others, every 180 days, to several Congressional committees. On October 26, 2017, the State Department issued the first of its required reports and identified several individuals, a DPRK government agency, and a construction company – Chol Hyun Construction – as entities that export workers from the DPRK to other countries, primarily in the Gulf States and Africa. As of the date of this alert, only the DPRK government agency, the External Construction Bureau, has been designated by OFAC as a specially designated national (SDN), but under CAATSA SDN designations could be applied to Chol Hyun Construction and to any person that make use of its laborers.
Increased scrutiny on labor trafficking in supply chains is not unique to the United States. The United Kingdom continues to raise its compliance standards. In October 2017, the United Kingdom Home Office (interior ministry) issued updated guidance on compliance with the supply chain transparency obligation for commercial organizations contained in the Modern Slavery Act 2015. Under the 2015 Act, a commercial organization carrying on a business, or part of a business, in the UK and having a minimum £36 million annual global turnover was already required to publish on its website an annual statement explaining the steps taken to ensure that slavery and human trafficking is not taking place in any of its supply chains or in any part of its business. Now, even smaller organizations are encouraged to produce the statements voluntarily. October’s guidance recommends that those statements should cover the organization’s internal anti-trafficking policy, due diligence measures in monitoring supply chains, and anti-trafficking training for staff, among other items. The guidance also requests organizations to keep public archives of their annual statements, which would “allow the public to compare statements between years and monitor the progress of the organization over time.”
Several other countries are following suit. In February 2017, Australia announced an inquiry into whether it should enact its own labor trafficking reporting requirement. On October 20, 2017 the Australian Minister of Justice closed a Public Consultation on a reporting regime modelled on the UK act. Similar diligence and disclosure bills have been enacted in France, and have been proposed in other jurisdictions.
In the private sector, civil society groups across the political spectrum support greater scrutiny of forced and child labor. Trade associations, domestic producers, and labor unions strive to limit competition from foreign producers of the same goods, while human rights organizations and religious groups concerned primarily with the plight of foreign laborers emphasize corporate social responsibility. For example, the AFL-CIO—the largest federation of unions in the United States—consistently highlights labor trafficking through the Solidarity Center, and has lobbied governmental agencies for stronger enforcement. In addition, an array of large retailers and manufacturers have joined with The Consumer Goods Forum and pledged to take action against forced labor, including “awareness training, cooperative action, traceability tools and grievance mechanisms.”
In September 2017, the Walmart Foundation announced the results of a Thai fishing industry study it paid to have commissioned by International Justice Mission (IJM), the world’s largest international anti-slavery organization. The 2011 to 2016 survey of migrant fishermen working Thai fishing boats revealed that 37.9 percent of laborers were trafficking victims, 14.1 percent were physically abused, and 31.5 percent witnessed abuse of fellow crew members at sea. To further this effort, the U.S. State Department has also partnered with IJM in Thailand, providing funding to open IJM’s Bangkok office.
Whether opponents to labor trafficking are animated by humanitarian, financial, public image, or foreign policy concerns, support for greater enforcement is increasing and pervading the political spectrum.
As the White House, the United Kingdom, and even big box retailers demonstrate, heightened labor trafficking monitoring is here to stay. Transparency on efforts taken to diligence supply chains for labor trafficking is required in California, the United Kingdom, and France, with other jurisdictions soon to adopt the same standards. Moreover, first movers in the private sector and other stakeholders are setting benchmarks in multiple sectors for supply chain social responsibility.
Diligence and compliance best practices for U.S. importers vary substantially and, for many sectors, are still under development. For example, companies in consumer-facing sectors such as consumer electronics or fashion and apparel may have well-developed diligence and compliance systems because consumer and investor pressures have already driven the costs of non-compliance into their bottom lines. In contrast, many types of federal government contractors, who were only recently introduced to new regulation on combatting labor trafficking, are only now beginning to develop diligence mechanisms for their supply chains that will enable compliance with required certifications and disclosures.
The convergence of policy interests and regulatory prompting have led many large, multinational companies to invest in systems designed to identify and mitigate the use of labor trafficking in the supply chains. However, for most, integrating this type of compliance in existing business processes, and pushing it into sub-tiers that are often many times removed from their direct contracts with immediate suppliers will be both new and a challenge. Looking across sectors, first movers in this area have developed a range of tools to leverage visibility and compliance in their supply chains, including contract provisions, supplier codes of conduct, supplier outreach, monitoring and reporting, and investigation, among others. However, any company looking to amend their disclosures relating to labor trafficking or other areas of corporate social responsibility should proceed with some caution, as plaintiffs lawyers have attempted to use those disclosures as evidence of company awareness of these problems and, therefore, as a basis for liability. Gibson Dunn lawyers can help benchmark and evaluate the risks and opportunities associated with the adoption of these tools, can assist with the integration of these tools with other areas of compliance, and can advise on how to document, verify and report on efforts to keep supply chains free of labor trafficking.
 U.S. Customs and Border Protection, Forced Labor (2017), available at https://www.cbp.gov/trade/trade-community/programs-outreach/convict-importations (accessed Nov. 8, 2017). The CBP commissioner can issue a Withhold Release Order when he or she has “information available [that] reasonably but not conclusively indicates that merchandise within the purview of section 307 is being, or is likely to be, imported . . . .” The CBP commissioner can issue a Finding when information conclusively demonstrates that merchandise at issue was produced by child labor. See Findings of Commissioner of CBP, 12 C.F.R. § 12.42 (2017).
 Binyamin Appelbaum, Trump Taps Peter Navarro, Vocal Critic of China, for New Trade Post, N.Y. Times (Dec. 21, 2016), https://www.nytimes.com/2016/12/21/us/politics/peter-navarro-carl-icahn-trump-china-trade.html.
 Christopher Ruddy, Don’t Like Trump’s Bluster? Sometimes It Works, N.Y. Times (May 4, 2017), https://www.nytimes.com/2017/05/04/opinion/donald-trump-foreign-policy.html.
 Keith Bradsher, U.S. Strikes China Trade Deals but Leaves Major Issues Untouched, N.Y. Times (May 11, 2017), https://www.nytimes.com/2017/05/11/business/us-china-trade-deals.html.
 Judith Alison Lee & Christopher Timura, Competing Interests Weigh Against Broad Import Controls on Steel Imports After Section 232 Public Hearing, Gibson, Dunn & Crutcher (June 9, 2017), http://www.gibsondunn.com/publications/Pages/Competing-Interests-Weigh-Against-Broad-Import-Controls–Steel-Imports-After-Section-232-Hearing.aspx.
 DEPARTMENT OF COMMERCE, Section 232 Investigation on the Effects of Imports of Aluminum on U.S. National Security, available at https://www.commerce.gov/page/section-232-investigation-effect-imports-aluminum-us-national-security.
 David Lawder & Lesley Wroughton, U.S., China Fail to Agree On Trade Issues, Casting Doubt On Other Issues, Reuters (July 19, 2017), http://www.reuters.com/article/us-usa-china-trade-idUSKBN1A40BN.
 Robert E. Lighthizer, Donald Trump is no liberal on trade, Wash. Times (May 9, 2011), http:// www.washingtontimes.com/news/2011/may/9/donald-trump-is-no-liberal-on-trade.
 Andrew Soergel, China Trade, NAFTA Tweaks Loom over Lighthizer Hearing, U.S. News and World Rep. (June 22, 2017, 4:00 PM), https://www.usnews.com/news/articles/2017-06-22/china-trade-nafta-tweaks-loom-over-robert-lighthizer-hearing.
 Commerce Secretary Wilbur Ross Talks Trade, Wall St. J. (June 18, 2017, 10:13 PM), https://www.wsj.com/articles/commerce-secretary-wilbur-ross-talks-trade-1497838380. Toluse Olorunnipa, Ross Backs Trump’s China Criticism With ‘Most Protectionist’ Dig, Bloomberg (Mar. 31, 2017, 1:41 PM), https://www.bloomberg.com/news/articles/2017-03-31/ross-backs-trump-s-china-criticism-with-most-protectionist-dig; David Lawder, U.S. Commerce nominee Ross calls China ‘most protectionist’ country, Reuters (Jan. 18, 2017, 11:10 AM), http://www.reuters.com/article/us-usa-congress-ross-idUSKBN1522BH.
 Steven Mufson, Meet Mr. ‘Death by China,’ Trump’s inside man on trade, Wash. Post (Feb. 17, 2017), https://www.washingtonpost.com/business/economy/meet-mr-death-by-china-trumps-inside-man-on-trade/2017/02/17/164d7458-ea25-11e6-80c2-30e57e57e05d_story.html.
 Tom Phillips, ‘Brutal, Amoral, Ruthless, Cheating’: How Trump’s New Trade Tsar Sees China, The Guardian (Dec. 22, 2016), https://www.theguardian.com/world/2016/dec/22/brutal-amoral-ruthless-cheating-trumps-trade-industrial-peter-navarro-views-on-china.
 Carol Morello, State Department Reprimands China Over Sex Trafficking and Forced Labor, Wash. Post (June 27, 2017), https://www.washingtonpost.com/world/national-security/state-department-reprimands-china-over-sex-trafficking-and-forced-labor/2017/06/27/c55cc80b-3b3d-49f7-827a-52416946c394_story.html.
 Press Release, United States Department of State, Briefing on the 2017 Trafficking in Persons Report (June 27, 2017), https://www.state.gov/r/pa/prs/ps/2017/06/272212.htm.
 Press Release, United States Customs & Border Protection, CBP Combats Modern-Day Slavery with the Passage of Countering America’s Adversaries through Sanctions Act (November 7, 2017), https://www.cbp.gov/newsroom/national-media-release/cbp-combats-modern-day-slavery-passage-countering-america-s.
 U.S. STATE DEPARTMENT, Report on Serious Human Rights Abuses and Censorship in North Korea, https://www.state.gov/j/drl/rls/275095.htm.
 United Kingdom Home Office, Transparency in Supply Chains etc. A practical guide (2017), available at https://www.gov.uk/government/publications/transparency-in-supply-chains-a-practical-guide.
 AUSTRALIAN GOVERNMENT ATTORNEY GENERAL’S Department, Modern Slavery in Supply Chains Reporting Requirement – Public Consultation, available at https://www.ag.gov.au/consultations/pages/modern-slavery-in-supply-chains-reporting-requirement-public-consultation.aspx.
 In March 2017, the Dutch Parliament introduced a new human rights diligence requirement on child labor in the supply chain for companies doing business in The Netherlands that will come into effect in 2020 if adopted by the Dutch Senate. available at https://www.hrw.org/news/2017/03/03/netherlandss-plan-cut-child-labor-out-products.
 For example, see the twenty-four groups—including labor unions, labor rights groups, consumer groups, religious groups, and businesses—that submitted a joint comment to the Department of Labor concerning expanding the Department of Labor’s global efforts against forced and child labor. Comments to the Department of Labor Regarding Notice of Initial Determination Revising the List of Products Requiring Federal Contractor Certification as to Forced/Indentured Child Labor Pursuant to Executive Order 13126 (Dec. 3, 2011), available at http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=2140&context =globaldocs.
 See, e.g., Tula Connell, ILO Labor Protocol in Effect Today, Solidarity Center (Nov. 9, 2016), https://www.solidaritycenter.org/ilo-forced-labor-protocol-in-effect-today.
 See, e.g., AFL-CIO and Solidarity Center, Joint Submission in Response to the Request for Comment on Guidelines for Eliminating Child and Forced Labor in Agricultural Supply Chains (2011), available at https://www.dol.gov/ilab/issues/child-labor/consultativegroup/comment3.pdf; AFL-CIO, Submission to the US Department of Labor on Child Labor, Forced Labor, and Forced or Indentured Child Labor in the Production of Goods in Foreign Countries and Efforts by Certain Countries to Eliminate the Worst Forms of Child Labor (2014), available at https://www.dol.gov/ilab/submissions/pdf/AFL-CIO20140115.pdf.
 Success Stories: Our Members’ Business Actions Against Force Labor, The Consumer Goods Forum (June 21, 2017), http://www.theconsumergoodsforum.com/strategic-focus/social-sustainability/forced-labour-case-studies.
 Consumer Goods Forum Shares Best Practices to Eradicate Forced Labor from Global Supply Chains, Sustainable Brands (June 22, 2017), http://www.sustainablebrands.com/news_and_views/supply_chain /sustainable_brands/consumer_goods_forum_shares_best_practices_eradicate_.
 Anti-Slavery Organization International Justice Mission Announces Grant from Walmart Foundation to Address Human Trafficking in Thai Fishing Industry, Business Wire, (Sept. 21, 2017, 8:15 AM) http://www.businesswire.com/news/home/20170921005137/en/.
 See Perlette Michele Jura, William E. Thomson, Abbey Hudson & Christopher B. Leach, Courts Make Doing Good Abroad Bad For Business At Home, Law360 (Jan. 14, 2016), http://www.gibsondunn.com/publications/Documents/Jura-Thomson-Hudson-Leach-Courts-Make-Doing-Good-Abroad-Bad-For-Business-At-Home-Law360-1-14-2016.pdf.
The following Gibson Dunn lawyers assisted in preparing this client update: Christopher Timura, Judith Alison Lee, Adam Smith, Patrick Doris, Chris Loudon, and Mark Handley.
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