Risks and strategies in Xinjiang: lessons from the new US government business advisory

On Tuesday, July 1, a group of US government agencies (including the Departments of State, Treasury, Commerce and Homeland Security) published a Xinjiang Supply Chain Business Advisory (PDF) ("the Advisory"), which highlights human rights-related risks for companies doing business in China's Xinjiang province. 

Why Xinjiang?

Xinjiang has held a significant political and enforcement profile in recent months. For example:

1. Congress passed the Xinjiang-focused Uyghur Human Rights Policy Act with strong bipartisan support, and President Trump signed it into law on June 17; and
2. US Customs and Border Protection has detained products that may have been manufactured with forced labor in Xinjiang on July 1, 2020, June 17, 2020, May 1, 2020, and September 30, 2019.

Although the Advisory does not have the force of law, it provides some insight into the US government’s approach to Xinjiang and the business activities in China that could potentially lead to sanctions or other US government enforcement actions. In fact, it has been reported that the US government is preparing to impose sanctions on Chinese Communist Party officials involved with alleged abuses in Xinjiang.

In addition to an overall review of the situation in Xinjiang (summarized below), the Advisory contains some practical points for companies to consider when assessing ongoing operations in Xinjiang. 

Specifically, the Advisory notes that:

• reports by third-party auditors may not be reliable due to Chinese government interference;
• the US government has pointed to specific activities that are of potential concern; and
• a number of industries are singled out as especially high-risk, including textiles and construction.

The Advisory in more detail

The Advisory describes how companies doing business in Xinjiang could be exposed to risks under US laws governing forced labor, sanctions, and export controls, and advises that that companies should be “aware of the risks outlined in this advisory and should implement human rights-related due diligence policies and procedures.”

These laws and regulations include:

• the Uyghur Human Rights Policy Act;
• 19 U.S.C. § 1307 (prohibiting the importation of merchandise mined, manufactured, or produced, wholly or in part, by forced labor, including convict labor, forced child labor, and indentured labor);
• export controls restrictions based on the Department of Commerce’s Entity List;
• sanctions-related actions pursuant to the Global Magnitsky Act (the administration has already sanctioned a Chinese public official under the Global Magnitsky Act at least once - in December 2017, Beijing police official Gao Yan was added to the SDN List, although this designation did not relate to Xinjiang or Uyghur issues);
• criminal provisions of the Trafficking Victims Protection Act; and
• federal acquisition regulations.

The Advisory separately calls out the risk that US financial institutions may decline to do business involving Xinjiang because of their obligations under anti-money laundering laws (i.e. US financial institutions are prohibited from knowingly engaging in transactions involving the proceeds of violations of US laws, such as sales to persons on the Entity List)

According to the Advisory, companies may be especially exposed to risks if they: 

1. sell surveillance tools to Xinjiang authorities (or assist the authorities in developing such tools); 
2. rely on goods and labor sourced from Xinjiang; and/or
3. aid in the construction of internment camps / potential forced labor facilities.

We explore each of these below.

Surveillance

 The Advisory states that the Chinese government has deployed an “unprecedented, intrusive, high-technology surveillance system across Xinjiang, as part of a province-wide apparatus of oppression” and warns that companies could face exposure under US law if they provide cameras, tracking technology, etc., to the authorities in Xinjiang and / or engage in joint ventures to develop such technologies.

Forced labor

According to the Advisory, “[t]here is evidence of forced labor… under the guise of ‘vocational training’ occurring in the internment camps, large industrial parks, as well as residential locations” including at so-called “Educational Training Centers,” “Legal Education Centers,” “Vocational Training Camps,” and industrial parks adjacent to such facilities. 

The Advisory flags “mutual pairing assistance” programs, in which Eastern Chinese municipalities/provinces investing in facilities in Xinjiang, as especially concerning, as well as other potential risk factors (such as a lack of transparency or use of government labor recruiters) that companies with operations in Xinjiang should consider. 

For more specific information, Annex 2 of the Advisory provides a map of the potentially concerning project sites involved in mutual pairing assistance programs. Annex 3 provides a list of industries that the US government has identified as potentially higher-risk for having forced labor in supply chains.

Construction

The Advisory also notes that companies supplying construction materials to Xinjiang may face downstream supply-chain risks – for example, that the materials will ultimately be used to build an internment camp.

To mitigate these risks, the Advisory highlights guidance on conducting human-rights due diligence from the UN, OECD, and International Labor Organization, as well as the US Department of Labor’s Comply Chain and the US Department of State’s Responsible Sourcing Tool.