Breaking Developments in Forced Labor Trade Enforcement—the EU’s Proposed Forced Labor Product Ban and Recent Developments in U.S. Customs Enforcement

Breaking Developments in Forced Labor Trade Enforcement—the EU’s Proposed Forced Labor Product Ban and Recent Developments in U.S. Customs Enforcement

September 14, 2022, Covington Alert

There have been several recent developments in international efforts to combat trade in goods made with forced labor, with important implications for responsible sourcing and global trade compliance programs.

On September 14, 2022, the European Commission (“Commission”) published a proposal to ban products made with forced labor from the EU market. The proposal notably goes beyond banning the importation of such products and would also create a ban on the export of products produced with forced labor and require their withdrawal from the EU market.

Meanwhile, enforcement by U.S. Customs and Border Protection (“CBP”) of the U.S. forced labor import prohibition has continued to intensify, including under the Uyghur Forced Labor Prevention Act (“UFLPA”). In early August 2022, CBP clarified the process for updating the UFLPA Entity List. In addition, CBP recently announced that it intends to integrate forced labor compliance requirements into the Customs Trade Partnership Against Terrorism (“CTPAT”) “trusted trader” program.

We discuss these developments and their implications below.

The European Commission has proposed a Regulation prohibiting products made with forced labor from being imported to, exported from, or sold in the EU, following an announcement by Commission President Ursula von der Leyen during her State of the Union address in September 2021.

The Commission’s proposal is the first step in the EU’s formal legislative process. The Regulation will now have to be agreed by the European Parliament and Council to become law, following which there will be an agreed delay—the Commission has proposed two years—before it applies in EU Member States. As it usually takes at least 12 months, and often closer to 18 months, for the European Parliament and Council to agree on a legislative text after a proposal by the Commission is published, it is unlikely that the Regulation will be adopted before the end of 2023, and it is therefore unlikely to become applicable earlier than late 2025.

Notable features of the Commission’s proposal include the following:

• The Regulation is broader in scope than U.S. forced labor trade restrictions. It would ban both the import and export of products made with forced labor, whether produced domestically or abroad. It would also require that such products be withdrawn from the EU market (though the draft Regulation clarifies that the withdrawal mechanism would not require a recall of products already in the hands of end users). This means that companies would be required to destroy products found to be produced with forced labor.
• While the Regulation will apply directly in EU Member States, investigation and enforcement powers will rest with competent authorities designated by each Member State. The draft Regulation includes cooperation channels for such competent authorities as well as a mutual recognition mechanism: all Member States would be obligated to recognize and enforce a determination by the competent authority of any other Member State, at least with respect to products that share the same identification (e.g., description, name, or brand) and the same supply chain.
• The Regulation sets forth various tools that would be available to competent authorities to identify products made with forced labor, including risk assessments and formal investigations. Throughout the process, targeted companies would be given the opportunity to demonstrate that they have due diligence processes in place to identify, prevent, and mitigate forced labor risks.
  • Risk assessments would rely on a variety of sources of information, including information provided by private parties (e.g., NGOs, civil society organizations, or employees, who can make submissions on a confidential basis), a contemplated database of forced labor risks (e.g., in relation to specific geographic areas or products), and a company’s compliance record and human rights due diligence processes.
  • Prior to initiating an investigation, the competent authority would be required to request from the company under assessment information on the actions they take to identify, prevent, mitigate, or bring to an end forced labor risks in their operations and value chains with respect to the products under assessment. Companies would be required to reply to such requests within 15 working days, and the competent authority would be required to take evidence of forced labor due diligence processes into account in reaching its decision.
  • If a competent authority concludes that a substantiated forced labor concern exists, the authority would be required to initiate a formal investigation. A company subject to an investigation would then have to submit extensive information, including information identifying the products under investigation, the manufacturer or producer of those products, and the product suppliers. Competent authorities would also be able to carry out their own inspections, including in non-EU countries provided the consent of the relevant company and country can be obtained.
• In identifying target companies for assessments and investigations, competent authorities are instructed to prioritize companies involved in the steps of the value chain as close as possible to where the risk of forced labor is likely to occur and to take into account the size and economic resources of the company, the quantity of product concerned, and the scale of suspected forced labor.
• Finally, the proposal would provide companies with a right to seek administrative review of adverse decisions and, ultimately, a right to judicial review by national courts.

The proposed Regulation builds on the supply chain due diligence rules the Commission proposed in February 2022 and has important parallels to the proposed supply chain due diligence requirements for deforestation-risk commodities and batteries. More broadly, forced labor is becoming a central concern of the EU’s trade policy. The Commission’s June 2022 Communication about its revised Trade and Sustainable Development (“TSD”) strategy makes clear that labor considerations will feature more prominently in the EU’s enforcement of existing trade agreements and negotiation of new ones. A further concrete indication of this trend is the Commission’s proposed addition of child and forced labor as a ground to revoke trade preferences for low- and middle-income countries under the EU’s Generalized Scheme of Preferences.

Together, these developments highlight the importance for companies with EU operations or supply chains to enhance their human rights due diligence programs to meet these new standards and requirements.

CTPAT Forced Labor Requirements

CBP has incorporated new forced labor elements into its CTPAT program, which will require CTPAT members to take concrete steps to combat forced labor and document their risk mitigation efforts.

CTPAT is a “trusted trader” program in which member companies that demonstrate compliance with certain requirements receive various trade facilitation benefits, which can be worth millions of dollars to large U.S. importers. The program enables CBP to direct enforcement resources to higher-risk importers. Originally, CTPAT was focused on combatting terrorism and promoting security. But in 2016, CTPAT launched its Trusted Trader Strategy, which aimed to incorporate trade compliance elements from the Importer Self-Assessment (“ISA”) program, a voluntary self-audit program that similarly afforded participants certain benefits. The effort to integrate ISA resulted in the March 2020 establishment of CTPAT Trade Compliance, as a complement to CTPAT Security.[1]

In the CTPAT Security program, CBP has made obligatory a previously optional requirement related to forced labor compliance. Specifically, Section 3.9 of the Importers Minimum Security Criteria currently provides that: “CTPAT Partners should have a documented social compliance program in place that, at a minimum, addresses how the company ensures goods imported into the United States were not mined, produced or manufactured, wholly or in part, with prohibited forms of labor, i.e., forced, imprisoned, indentured, or indentured child labor.” As of January 1, 2023, the “should” will become a “must.”[2] To demonstrate compliance, importers will be required to submit “evidence of implementing a social compliance program addressing the prevention of forced labor as well as a copy of the company’s Code of Conduct.”[3]

As for CTPAT Trade Compliance, as of August 1, 2022, CBP is requiring that all new applicants meet forced labor requirements. Existing members will have to meet the same requirements but will have one year to bring their supply chains into compliance. The CTPAT Trade Compliance forced labor requirements were announced by CBP in a webinar and are expected to be confirmed in forthcoming guidance, though the apparent delay in issuance suggests that changes could be possible. The requirements are expected to include the following:

• risk-based mapping of supply chains;
• a Code of Conduct including a prohibition of forced labor in the company’s supply chains, and related policies and procedures (this may require some participants to update their Codes of Conduct);
• evidence of implementation of a social compliance program including program elements such as audits of high-risk supply chains, internal training programs, and other due diligence mechanisms showing that a supply chain is free of the use of forced labor;
• training of suppliers on the requirements of the company’s social compliance program; and
• remediation plans in the event that forced labor is identified in the company’s supply chains, including a process for disclosing the issues to CBP.

Consistent with the above, CBP released an updated CTPAT Trade Compliance Handbook in July 2022, which notes that the updated Trade Compliance Questionnaire asks importers to confirm that they have internal control procedures relating to forced labor risk.

Prospective and existing CTPAT member companies should reassess and consider strengthening their compliance posture to ensure that forced labor risk mitigation is adequately and expressly addressed. Given the potential challenges associated with mapping even a small number of supply chains in their entirety, importers should move soon to conduct forced labor risk assessments of their supply chains and consider how to engage with suppliers and deploy technology-based solutions, as appropriate.

On August 4, 2022, the Department of Homeland Security, as chair of the FLETF, published a notice in the Federal Register explaining the process for revising the UFLPA Entity List. The notice also re-published the Entity List previously posted on June 17, 2022, on the Department of Homeland Security website (see our prior alert discussing the scope of the Entity List).

Additions to the UFLPA Entity List will be decided through an inter-agency process, likely without opportunity for public comment. The notice explains that any FLETF member agency may recommend to the FLETF Chair (the Department of Homeland Security) that an entity be added to the Entity List, and decisions will be made by majority vote of the FLETF member agencies. The notice makes no mention of whether proposed additions will be published in the Federal Register, suggesting that the public will not have an opportunity to review and comment on additions before they are finalized.

Any listed entity may submit a removal request to the FLETF Chair. Removal requests must contain information showing that the entity no longer meets or does not meet the statutory criteria set forth in the UFLPA. As with additions to the list, decisions to remove an entity will be made by majority vote of the FLETF member agencies. Decisions are not appealable, but the FLETF will consider new removal requests containing “new information.”

The notice also makes clear that the UFLPA Entity List is not an “exhaustive list” of entities engaged in the practices set forth in the UFLPA as potential grounds for listing. In this regard, companies should monitor their supply chains for any activity described in the Act and continue to monitor and screen supplier lists against the Entity List.

 If you have any questions concerning the material discussed in this client alert, please contact the members of our firm.