Update on Forced Labor

Detentions

Hosted by

United States Fashion Industry Association (USFIA)

And Crowell & Moring

July 20, 2016

2:00 P.M. Eastern/11:00 A.M. Pacific

Today’s Speakers

Dj Wolff

Counsel

djwolff@crowell.com

Tel. 202.624.2508

Frances Hadfield

Counsel

fhadfield@crowell.com

Tel. 212.803.4040

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Update on Forced Labor Detentions

Dj Wolff

Introductions

Frances Hadfield

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• Forced Labor Estimates and Definition

• News Headlines

• Sanctions and Import Law

• Enforcement - A Continuing Trend

• Do-Gooder NGOs

• Sourcing Considerations

• Predictions

Agenda

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• 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.

Forced Labor estimates:

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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.

Forced Labor – Defined

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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 non-

payment 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consent has been revoked.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.

https://www.dol.gov/ilab/child-forced-labor/What-are-Child-Labor-and-Forced-Labor.htm

Cont…Forced Labor - Defined

• 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.

News Headlines - May 17, 2016 - North Koreans assembling clothes for leading U.S brands in China

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• 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

Current U.S. Sanctions

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“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 DisenoTextil 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.”

Bloomberg News - “Clothing Makers at Risk From Forced-Labor Import Ban”By Llewellyn Hinkes-Jones

February 2016 – Passage of the Trade Facilitation and Trade Enforcement Act of 2015.

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.

Forced Labor - Exclusion

• 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 2 2016, 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.”

Timeline of CBP’s Actions:

In 2015 the Federal Acquisition Regulations (FAR) changed.

Effective March 2015 - 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 carveoutNo 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.

PenaltiesThe 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.

The Act is a Continuation of a Trend….

“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.”

Bloomberg News - “Clothing Makers at Risk From Forced-Labor Import Ban”

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• 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.

CBP’s Mandate:

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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. 107-210; SAFE Port Act of 2006, Pub. L. No. 109-347.

So how does CBP target cargo ?

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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.

CBP’s Automated Targeting System (“ATS”)

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. § 12.42(e).

So what does that practically mean?

CBP - Withhold Release Orders

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Net Result: Apparel importers will likely miss their delivery deadline.

The Apparel/Fashion Timeline Problem –

Length of Detention

CBP Action

0-5 Days CBP may release

5-30 Days Detained

30+ DaysDeemed Excluded (14 U.S.C. 1499(c)May File Protest (request accelerated disposition)

30 Days Protest Deemed Denied

Day 60May File Summons with U.S. Court of International Trade (CIT) (28 U.S.C. 1581(a))

CBP Exclusions

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Net Result: Apparel importers will likely miss their delivery deadline.

The Apparel/Fashion Timeline Problem –

Length of Seizure CBP Action

0-5 Days CBP may release

5-30 Days Detained

30+ Days CBP Seizure (Else deemed excluded

60+ Days of Seizure

Seizure Notice Required

Seizure and forfeiture process in district court

CBP Seizures

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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. §12.42(f).

CBP’s Notice Requirements = Bad Publicity

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.

Supply Chain Audit - Ignorance is not a defense.

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Factory and Social Responsibility Auditing:

• Independent Factory Inspections –

• Societe Generale de Surveillance -http://www.sgs.com/

• Intertek

• Bureau Veritas

• Underwriters Laboratories

Combatting Rogue Vendors and Middlemen

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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) Licensee conducts a passing factory audit of Contractor’s facilities and so certifies;

(b) (b) Contractor executes and delivers to Licensee and Licensor an executed agreement to manufacture in accordance with afforementioned Labor and customs laws;

(c) 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

(d) 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.

Combatting Rogue Vendors and Middlemen

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.

CBP’s Targeting Activities

http://qz.com/650121/us-border-agents-seized-goods-tied-to-forced-labor-for-the-first-time-since-2001/

Do – Gooder NGOs

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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.

Do – Gooder NGOs

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• India and Pakistan are the largest exporters of cotton yarn to China.

• As of July 8, Sales from China’s State Reserve sales totaled 1.184 million tons, with over 97 percent of the cotton offered finding buyers. All of the cotton offered since June 28 has been sold.

Predictions: Where is Your Cotton is Coming From?

Dj Wolff

Counsel

djwolff@crowell.com

Tel. 202.624.2508

Thank You!

Frances Hadfield

Counsel

fhadfield@crowell.com

Tel. 212.803.4040

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