Update on Forced Labor Detentions

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1 Update on Forced Labor Detentions Hosted by United States Fashion Industry Association (USFIA) And Crowell & Moring July 20, :00 P.M. Eastern/11:00 A.M. Pacific

2 Today s Speakers Frances Hadfield Counsel fhadfield@crowell.com Tel Dj Wolff Counsel djwolff@crowell.com Tel

3 Do you have a question? During the webinar, all attendees will be assigned to listenonly mode. Please use the Questions box on your dashboard to ask a question during the webinar.

4 Q u e s t i o n s? Please use the Questions box on your dashboard on the right side of your screen. You can also ask a question after the webinar. info@usfashionindustry.com Phone:

5 Update on Forced Labor Detentions

6 Introductions Frances Hadfield Dj Wolff 6

7 Agenda Forced Labor Estimates and Definition News Headlines Sanctions and Import Law Enforcement - A Continuing Trend Do-Gooder NGOs Sourcing Considerations Predictions 7

8 Forced Labor estimates: Over 27 million people worldwide are subjected to what the U.S. Government considers human trafficking, and a significant portion of the victimization takes the form of forced/trafficked/slave labor. Forced labor in the private economy is estimated to generate $150 billion in illegal revenue each year. 8

9 Forced Labor Defined All work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily. In General: 1. All work or service: This includes all types of work, service and employment, regardless of the industry, sector or occupation. 2. Any person: This refers to adults and children. 3. Menace of any penalty: This refers to a worker believing he or she will face a penalty if they refuse to work. 9

10 Cont Forced Labor - Defined 4. Voluntary: This refers to workers consent to enter into employment and their freedom to leave the employment at any time, with reasonable notice in accordance with national law or collective agreements. Involuntariness does not have to result from physical punishment or constraint; it can also stem from other forms of retaliation, such as the loss of rights or privileges or nonpayment of wages owed. A worker can be considered to be in forced labor even if his or her consent was given, if that consent was obtained through the use of force, abduction, fraud, deception or the abuse of power or a position of vulnerability, or if the consent has been revoked. Forced labor should never be used for the purpose of economic development or as a means of political coercion, discrimination, labor discipline or punishment for having participated in strikes.

11 News Headlines - May 17, North Koreans assembling clothes for leading U.S brands in China North Korean laborers are alleged to be stitching clothes for U.S. labels like Calvin Klein, Burberry and Levi's in China, according to a report. Media reports that North Koreans are working for Chinese manufacturers with factories not far from the North Korea border. 11

12 Current U.S. Sanctions Fact pattern presents risks under U.S. sanctions 2016 expansion of sanctions U.S. prohibits virtually all transactions by U.S. persons with North Korea United Nations expanded prohibitions on certain persons and products U.S. import prohibitions U.S. prohibits import into the United States of North Korean origin products No de minimis exception (i.e., any product with any amount of North Korean origin material cannot be imported into the United States) Strict liability requirements i.e., U.S. person can be liable even if they have no knowledge or reason to know of North Korean involvement in supply chain Sanctions do not directly affect the fact pattern presented 12

13 Bloomberg News - Clothing Makers at Risk From Forced-Labor Import Ban By Llewellyn Hinkes-Jones U.S. Customs and Border Protection (CBP) restriction on materials produced by Chinese chemical supplier Tangshan Sanyou Group Co. Ltd. because of accusations of use of forced prison labor may have major implications for certain U.S. clothing importers. The implication is that numerous American clothing importers could be selling clothes partially manufactured using forced prison labor (62 ITD, 3/31/16). Supplier to Supplier Tangshan Sanyou is a second-tier supplier a supplier to a supplier to numerous U.S. clothing importers including Wal-Mart Stores Inc., Swedish manufacturer Hennes & Mauritz AB (H&M), Japan's Uniqlo Co. Ltd. and Spain's Industria de Diseno Textil SA, or Inditex best known through its flagship store Zara. A May 2015 report from Jobs with Justice also listed Sritex as a major supplier for clothing brands such as J.C. Penney Corp. Inc., Bershka, Timberland, Sears, Wal- Mart, Guess, Quiksilver, Gymboree, Charles Vogele and Okaidi.

14 Forced Labor - Exclusion February 2016 Passage of the Trade Facilitation and Trade Enforcement Act of Section 307 of the Tariff Act of 1930 (19 U.S.C. 1307) prohibits the importation of merchandise mined, produced or manufactured, wholly or in part, in any foreign country by forced labor including forced child labor.

15 Timeline of CBP s Actions: Prior to Winter 2016, CBP had issued less than 40 withhold release orders (and only one order since 2000). Since March 2016 there have been three withhold release orders. On March 29, 2016 CBP issued its first detention order against Tangshan Sanyou Group and its Subsidiaries for Viscose/Rayon Fiber. On May , CBP announced the creation of a new task force that would focus on the interdiction of imported products using forced labor among other things. Commissioner R. Gil Kerlikowske, in remarks to the Joint Annual Meeting of the American Iron and Steel Institute indicated that CBP had core priorities like interdiction of products manufactured using forced, convict, or child labor. May 20, 2016 CBP issues another detention for Stevia and its Derivatives. On June 1, 2016, Commissioner Kerlikowske warned the public that [i]t is imperative that companies examine their supply chains to understand product sourcing and the labor used to generate their products. Additionally, he stated that CBP is committed to ensuring U.S. values outweigh economic expediency and as part of its trade enforcement responsibilities, will work to ensure products made with forced labor do not cross our borders.

16 The Act is a Continuation of a Trend. In 2015 the Federal Acquisition Regulations (FAR) changed. Effective March the Federal Acquisition Regulations (FAR) changed to mandate that all federal contractors take certain actions related to combating human trafficking and slavery in their supply chains. The rules require a government contractor or subcontractor to, among other things: Prevent severe forms of trafficking and forced labor by taking concrete steps to ensure employees (and subcontractors) do not engage in trafficking-related activities. Cooperate with, and provide access to, enforcement agencies investigating compliance with anti-trafficking and forced-labor laws. Mandatory disclosure (or self-report) upon receipt of credible information that an employee, subcontractor, or subcontractor's employee is violating the new FAR provisions, with severe potential government remedies. Develop and maintain a detailed compliance plan for contracts for supplies (other than for commercially available off-the-shelf items) acquired outside the U.S., or services to be performed outside the U.S., with an estimated value exceeding $500,000. No de minimis carveout No Simplified Acquisition Threshold Exception. The new rules notably included no de minimis carveout. If you do any business with the U.S. government whether that is providing tennis shoes to the army or snacks to U.S. troop - you have to comply except that the compliance plan and certification requirements only apply as outlined above. Penalties The penalties for noncompliance can potentially result in: Suspension/debarment Termination for default of the contract Imprisonment for false certification False Claims Act Liability The FAR rules require companies to ensure their entire supply chain is free from human trafficking and forced labor.

17 Bloomberg News - Clothing Makers at Risk From Forced-Labor Import Ban Sritex, the company sourcing material from Tangshan Sanyou, is an Indonesian textile manufacturer established in 1966 in Surakarta and a subsidiary of PT Huddleston Indonesia, which also produces uniforms for the military forces of Australia, Indonesia, the Netherlands, Norway, Saudi Arabia, Sweden, the U.K. and the U.S. 17

18 CBP s Mandate: Such imported merchandise is subject to: Exclusion and/or seizure, and May lead to criminal investigation of the importer(s). CBP has indicated that it intends to amend the regulations at 19 CFR 12.42(b), which require certain information pertaining to consumptive demand, in order to comport with the updated law. 18

19 So how does CBP target cargo? Throughout the import process: 1. Prior to departure from the country of origin, 2. Before cargo arrives at a Port of Entry ( POE ), 3. At the time of entry, and 4. After the cargo is conditionally released. Since at least 2002, carriers are required to submit manifest data containing an inventory of all goods, supplies, cargo (and persons) on board a conveyance or container in advance of arriving at a Port of Entry for vetting through CBP s Automated Targeting System (ATS). Trade Act of 2002, Pub. L. No ; SAFE Port Act of 2006, Pub. L. No

20 CBP s Automated Targeting System ( ATS ) ATS screens cargo transactions and identifies anomalies based on numerous risk factors. Shipments matching ATS targeting factors are presented to CBP officers and upon arrival of cargo at a Port of Entry, CBP has the authority to perform an exam of the goods; detain, and where appropriate, seize, or request re-export of the goods; or release the goods.

21 CBP - Withhold Release Orders When information reasonably, but not conclusively, indicates that merchandise within the purview of this provision is being imported, the Commissioner of U.S. Customs and Border Protection (CBP) may issue withhold release orders pursuant to 19 C.F.R (e). So what does that practically mean? 21

22 The Apparel/Fashion Timeline Problem CBP Exclusions Length of Detention 0-5 Days CBP may release 5-30 Days Detained 30+ Days CBP Action Deemed Excluded (14 U.S.C. 1499(c) May File Protest (request accelerated disposition) 30 Days Protest Deemed Denied Day 60 May File Summons with U.S. Court of International Trade (CIT) (28 U.S.C. 1581(a)) Net Result: Apparel importers will likely miss their delivery deadline. 22

23 The Apparel/Fashion Timeline Problem CBP Seizures Length of Seizure 0-5 Days CBP may release 5-30 Days Detained CBP Action 30+ Days CBP Seizure (Else deemed excluded 60+ Days of Seizure Seizure Notice Required Seizure and forfeiture process in district court Net Result: Apparel importers will likely miss their delivery deadline. 23

24 CBP s Notice Requirements = Bad Publicity If the Commissioner is provided with information sufficient to make a determination that the goods in question are subject to the provisions of 19 U.S.C. 1307, the Commissioner will publish a formal finding to that effect in the Customs Bulletin and in the Federal Register pursuant to 19 C.F.R (f).

25 Supply Chain Audit - Ignorance is not a defense. Importing into the United States is a privilege not a right. Buttfield v. Stranahan, 192 U.S. 470, 493 (1904). Companies have to examine their supply chains to understand product sourcing and the labor used to generate their products. 25

26 Combatting Rogue Vendors and Middlemen Factory and Social Responsibility Auditing: Independent Factory Inspections Societe Generale de Surveillance - Intertek Bureau Veritas Underwriters Laboratories 26

27 Combatting Rogue Vendors and Middlemen Unauthorized actions can have a lasting and damaging effect on a company s brand. Companies may want to consider Adding a Factory Compliance/Labor Sourcing Clause to their Agreements: Example: Licensee shall not knowingly permit any person or entity engaged in the manufacture or sale of articles violative of any applicable labor law or customs law including but not limited to transshipment, designation of origin, and use of forced or child labor. Licensee may use contractors; however, no contractor shall be engaged until: (a) (b) (c) (d) Licensee conducts a passing factory audit of Contractor s facilities and so certifies; (b) Contractor executes and delivers to Licensee and Licensor an executed agreement to manufacture in accordance with afforementioned Labor and customs laws; Licensee s agreement that the Contractor s compliance will be monitored by Licensee and all costs of compliance, audit, or non-compliance will be born by Licensee; and If Licensor objects to a Contractor because of an action violative of the aforementioned laws, Licensee shall use commercially reasonable efforts to correct the problem or terminate its engagement of such a Contractor.

28 CBP s Targeting Activities CBP has publically stated that it acts on information concerning specific manufacturers/exporters and specific merchandise. The agency claims it does not generally target entire product lines or industries in problematic countries or regions.

29 Do Gooder NGOs 29

30 Do Gooder NGOs Example: The Cotton Campaign - Global coalition of human rights, labor, investor and business organizations dedicated to eradicating child labor and forced labor in cotton production. Goal is to end the state systems of forced labor in Uzbekistan and Turkmenistan s cotton sectors. They advocate to governments, companies, investors, and international institutions. 30

31 Predictions: Where is Your Cotton is Coming From? India and Pakistan are the largest exporters of cotton yarn to China. As of July 8, Sales from China s State Reserve sales totaled million tons, with over 97 percent of the cotton offered finding buyers. All of the cotton offered since June 28 has been sold.

32 Thank You! Frances Hadfield Counsel Tel Dj Wolff Counsel Tel

Update on the U.S. Department of Homeland Security CAATSA FAQ Document

Update on the U.S. Department of Homeland Security CAATSA FAQ Document Hosted by United States Fashion Industry Association (USFIA) and BSI January 10, 2019 2:00 P.M. Eastern/11:00 A.M. Pacific Objectives