On February 14, 2024, news broke that U.S. Customs and Border Protection (CBP) had detained thousands of Volkswagen Group (Volkswagen) vehicles for alleged nonconformity with U.S. forced labor laws. CBP detained the vehicles after the manufacturer discovered and disclosed to CBP that the vehicles contained a small electronic component that was prohibited from entering the U.S. under the Uyghur Forced Labor Prevention Act (UFLPA).
On March 6, a Wall Street Journal report revealed that the prohibited part was a LAN transformer manufactured by Sichuan Jingweida Technology (commonly referred to as JWD Technology). The U.S. Department of Homeland Security (DHS) added JWD Technology to the UFLPA Entity List, a list of companies whose products are presumed to be made using forced labor, on December 11, 2023. Volkswagen did not have a direct relationship with JWD Technology and was unaware of having the blacklisted company’s products in its supply chain until a supplier informed the car manufacturer of the source of the component. This enforcement action highlights the importance of performing enhanced diligence and understanding each participant in a company’s supply chain, including suppliers of raw materials, to reduce risk under the UFLPA. It also demonstrates how a small component within a much larger and more complex product can block the importation of the entire product if the component meets the UFLPA’s exclusion criteria.
UFLPA prohibitions
The U.S. has long prohibited the importation of goods made using forced labor under Section 307 of the Tariff Act of 1930 (Section 307). In 2021, Congress passed the UFLPA to address concerns that goods were being manufactured using forced labor in the Xinjiang Autonomous Uyghur Region of China (XUAR) and then making their way into the U.S. market.
The UFLPA creates a rebuttable presumption that forced labor was used to produce goods sourced, wholly or in part, from (1) XUAR or (2) entities designated on the UFLPA Entity List (such as JWD Technology). The effect of this presumption is to prohibit such goods from being imported into the U.S. under Section 307, unless importers can show through clear and convincing evidence that forced labor was not used. Importantly, the forced labor presumption applies if any component or material in the product, including raw materials, was sourced from XUAR or a UFLPA Entity List designee at any point in the supply chain.
Other paths to resolution
Under U.S. customs law, voluntary disclosures are often a practical option for seeking reduced penalties for violations. However, voluntary disclosure of a UFLPA violation may not achieve much in the way of relief and may even limit an importer’s options for seeking the release of detained merchandise. Further, the import prohibition is strict: there are no exceptions for de minimis or unknowing violations.
A voluntary disclosure may, however, help open the door to another resolution: replacing the offending component of the product. Volkswagen has stated that it is pursuing this course and is in the process of replacing the LAN transformers produced by JWD Technology in its detained vehicles. The difficulty for importers in relying on this potential solution is that CBP has not published formal guidance on whether or how importers can replace a UFLPA non-compliant part from an otherwise compliant product to secure the product’s release from detention. Further, other importers facing detentions of their merchandise may not have this option for feasibility reasons, such as if the prohibited component is inseparable from the larger product. Despite this uncertainty, early reports of the enforcement action against Volkswagen show that CBP may afford importers some flexibility to cure UFLPA non-compliance while merchandise is detained.
Outlook for UFLPA enforcement
All signs point towards tougher and broader enforcement of the UFLPA going forward. Members of Congress, particularly those on the House Select Committee on the Strategic Competition Between the U.S. and the Chinese Communist Party have pressured DHS to step up enforcement of the UFLPA, particularly in sectors that are at high-risk of using forced labor, such as textiles. On March 6, four U.S. Representatives introduced proposed legislation called the “Americas Act,” which would, among other measures aimed at “countering China’s influence,” strengthen UFLPA enforcement by creating a dedicated UFLPA task force. Expanded enforcement of the UFLPA and the prospect of additional legislation increase the urgency for importers to implement enhanced supply chain traceability and diligence programs.
EU legislators reach provisional agreement on regulation prohibiting products made using forced labor
State of play
The eradication of forced labor is a priority for the EU, which is already active in promoting decent work and freedom from forced labor. For instance, the EU Charter of Fundamental Rights, addressed both to EU institutions and EU Member States when implementing EU law, explicitly prohibits forced labor, and the EU has several pieces of legislation in place that address this issue. Furthermore, in 2021, the European Commission and the European External Action Service issued guidance to assist EU businesses in taking appropriate measures to address the risk of forced labor in their operations and supply chains, based on international standards. Likewise, EU trade policy supports measures against forced labor in both unilateral and bilateral trade relationships as EU trade agreements provide for a commitment to ratify and implement, inter alia, the ILO Forced Labor Conventions Nos. 29 and 105. Finally, all EU Member States have ratified the ILO Conventions on forced labor and, thus, are legally obliged to prevent and eliminate the use of forced labor.
Nevertheless, given the continued prevalence of forced labor in the global supply chain, the EU is taking further steps against forced labor, as discussed in further detail below.
Proposed regulation on prohibiting products made with forced labor on the EU market
A ban on products made with forced labor accompanied by a right of EU Member States’ authorities to detain, seize, and order the withdrawal of such products has been identified as a key pillar of an effective EU legislative framework on forced labor. Based on a proposal drafted by the European Commission in 2022 (COM(2022)453), the European Council and the European Parliament recently reached a provisional deal on a regulation prohibiting products made with forced labor in the EU market.
The core provision of the agreement, which still needs to be endorsed and formally adopted by both institutions, prohibits products made with forced labor from being placed or made available on the EU market and from being exported from the EU. It is noteworthy that the prohibition covers all products of any type, including their components, from all sectors and industries that are made available within the EU market, meaning both products made in the EU for domestic consumption and for export, as well as imported goods. The ban is targeted at all economic operators irrespective of their legal form, size, or location. While the European Commission will be leading investigations outside EU territory, Member States may initiate investigations within their respective territories. The competent authorities shall carry out investigations using a risk-based approach. The criteria to be applied when assessing the likelihood of violations of the regulation include, among other things, (i) the scale and severity of the suspected forced labor, including whether state-imposed forced labor may be a concern, and (ii) the quantity or volume of products placed or made available on the EU market. For this purpose, the European Commission will set up a database containing information about forced labor risks.
Where an investigation concludes that forced labor has been used, the competent authority shall in particular demand that the relevant goods be withdrawn from the EU market. The goods then must be disposed of (i.e. donated, recycled, or destroyed). If parts of products are replaceable, such orders apply to the part concerned, only, and not the entire product. If goods of strategic or critical importance for the EU are concerned, the authorities may order the economic operator to withhold the product until it can demonstrate that forced labor has been eliminated from its supply chains. Decisions taken by a national authority will apply in the other EU Member States based on the principle of mutual recognition. Non-compliance with such decisions will trigger penalties.
The EU’s flagship project: CSDDD
The proposal on the ban of products made with forced labor may be seen in the context with the proposal for a directive on corporate sustainability due diligence (CSDDD), which has been one of the EU’s flagship projects in the field of human rights protection. The CSDDD would introduce specific requirements for companies to carry out due diligence on human rights issues, including forced labor, i.e. in-scope companies would need to address the risks of forced labor in their supply chain. While the CSDDD would include sanctions in the event of non-compliance with the due diligence obligations, the CSDDD would not provide for a general prohibition of the placing and making available of any product on the market. By contrast, the forced labor regulation focuses on products and will not impose additional due diligence requirements on companies. Nevertheless, the legislative proposals are, to a certain extent, interlinked: if a company has carried out effective due diligence on its supply chains, such that they mitigate, prevent, and bring to an end risks of forced labor, this will be taken into account by the competent authorities when they assess whether there is a well-founded suspicion that a product is likely to have been made with forced labor. Following two failed attempts in recent weeks, a revised (and toned-down) text of the CSDDD was finally endorsed by the European Council on March 15, 2024. The CSDDD is now being put forward for a vote in the European Parliament ,which is expected to approve the CSDDD in April 2024.
Forced labor due diligence at the national level
Some EU Member States, such as France and Germany, already have in place supply chain due diligence legislation. For instance, the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz), in force since January 1, 2023, imposes a mandatory obligation on certain companies operating in Germany to establish, implement, and update due diligence procedures to assess compliance with specified fundamental human rights and, to a more limited extent, certain environmental standards in supply chains. The relevant human rights related risks that in-scope companies must assess include, among others, forced labor.
Key takeaways
New frameworks aimed at combatting the use of forced labor around the globe are developing through new legislation and enforcement actions in the U.S. and the EU. Across these jurisdictions, supply chain diligence is a key component of remaining compliant with applicable forced labor laws. Businesses trading goods in and out of the EU can prepare themselves for these developments by pre-emptively conducting enhanced supply chain diligence. In the U.S., CBP has released its Operational Guidance for Importers and other guidance that can help businesses build compliance programs to minimize the risk of violating the UFLPA and other forced labor laws.
For more information, please contact the authors or your usual contact at Allen & Overy.