Forced Labor/U.K. Modern Slavery Act

 

As a consequence of U.S. and UN sanctions on the Democratic People’s Republic of Korea (DPRK or North Korea), companies increasingly need to coordinate compliance efforts across the typically distinct worlds of economic sanctions and import/customs compliance. This is particularly necessary with respect to identifying, and mitigating the risk of DPRK-related labor in supply chains. Below, we summarize first the expanded scope of UN restrictions on the DPRK, including the prohibition on the use of DPRK labor, and then second, how those rules have been implemented and expanded in the United States in increasingly complex ways.

Part I:    United Nations Restrictions:

The United Nations has maintained limited sanctions on North Korea for years, but in 2017 it expanded those sanctions in a number of material ways.  Of relevance to this analysis, the UN Security Council (UNSC) reached a determination that all DPRK labor outside of North Korea poses a high forced labor-related risk.  As a result, the UNSC first required that all new work visas for DPRK citizens be approved by the UNSC, before expanding that restriction in December 2017 (UNSCR 2397) to require all UN Member States to repatriate all DPRK workers currently employed in their territory “immediately but not later than 24 months” (i.e., December 2019).  Therefore, for example Chinese and Taiwanese companies could currently employ DPRK citizens, but they will be required to reduce that employment and ultimately curtail it, or risk violation of UN resolutions.

Part II:   U.S. Restrictions:

In parallel, the United States has implemented a growing array of restrictions that also target DPRK labor.  Below, we summarize the relevant (a) U.S. sanctions prohibiting transactions with the DPRK and (b) a parallel set of import requirements presumptively prohibiting products manufactured with DPRK nationals in the supply chain:

(1) U.S. Sanctions on the DPRK:

The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has maintained a comprehensive embargo on the DPRK since 2017 and more limited restrictions for decades. Today, OFAC prohibits the export of any goods or services to the DPRK  and any transactions with the Government of North Korea or the Workers Party of North Korea.  OFAC generally considers a transaction with a DPRK national ordinarily resident in the DPRK to be prohibited as an indirect export of a service to the DPRK.

Importantly, for this analysis, OFAC also prohibits the importation of any goods or services from the DPRK, even items with only a de minimis percentage DPRK content (e.g., a $10,000 widget produced in Russia with a $2 North Korean origin part would be considered North Korean origin and prohibited entry into the United States).

Over the last few months, we have seen that OFAC has aggressively expanded its enforcement of these provisions, including designation of persons involved in DPRK trade, and issuing advisories to the shipping community about DPRK risks in the supply chain.  See https://home.treasury.gov/news/press-releases/sm458; https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/dprk_vessel_advisory_02232018.pdf; and https://www.treasury.gov/resource-center/sanctions/Programs/Documents/dprk_supplychain_advisory_07232018.pdf.

(2) DPRK-Related Import Prohibitions:

In parallel, since August 2017, U.S. Customs and Border Protection (“CBP”) has maintained a North Korean related import restriction.  Specifically, pursuant to Section 321(b) of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), CBP utilizes a presumption that any “significant goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part by the labor of North Korean nationals or citizens” is produced through forced labor and therefore is prohibited for entry into the United States.  The presumption can be rebutted only through “clear and convincing” evidence that the DPRK nationals are not forced labor (e.g., a demonstration that they are asylees or refugees in a third country).  To assist importers in meeting their “reasonable care” obligation to ensure that goods entering the United States meet these new provisions, the Department of Homeland Security has published CAATSA Section 321(b) Guidance on due diligence steps importers can take, while CBP has noted that the seafood industry presents a high risk of DPRK nationals.  See e.g., https://www.cbp.gov/newsroom/spotlights/cbp-leads-delegation-thailand-discusses-forced-labor-concerns-fishing-industry.

Part III: Significant Points for Importers, Exporters and U.S. Companies

The net result of the overlap of the above restrictions is:

  • All U.S. and non-U.S. companies are prohibited to grant new work permits to DPRK nationals, except DPRK nationals seeking an asylum or refugee status.
  • U.S. companies are prohibited under U.S. sanctions law from directly or indirectly exporting goods or services to the DPRK, including transacting with persons ordinarily resident in the DPRK.
  • U.S. companies are prohibited under U.S. sanctions to import any products produced in whole or in part (no matter how small the percentage) with DPRK origin material into the United States.
  • All products manufactured in whole, or in part, with DPRK national labor are presumptively considered to be produced with forced labor and are therefore prohibited to enter the United States, unless the importer can demonstrate through “clear and convincing” evidence that the DPRK nationals were not forced labor (e.g., by demonstrating they are asylum seekers).

 

On August 17, 2018, U.S. Customs and Border Protection (CBP) published a document entitled, “Responsible Business Practices on Forced Labor Risk in the Global Supply Chain“, which provides details regarding the best practices for importers of goods into the U.S. The agency indicated that the guidelines were published in order to further CBP’s strategic goal to stop the importation of goods produced with forced labor. The Office of Trade also recommends the adoption of the Department of Labor (DOL) Comply Chain principles in order to create a social compliance system. To this end, the DOL has made an APP available for download called Sweat & Toil, which identifies problematic countries, commodities, and types of exploitation.

Finally, CBP’s Responsible Business Practices document recommends that a company review the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises because they provide non-binding principles and standards for responsible business conduct in a global context consistent with applicable laws and internationally recognized standards. These guidelines are the only multilateral and comprehensive code of responsible business conduct that governments have agreed to promote.

For further information regarding Forced Labor and your supply chain please does not hesitate to contact us.

 

On May 18, 2018, CBP issued a Withhold Release Order (WRO) banning the importation of all Turkmenistan cotton or products produced in whole or in part with Turkmenistan cotton. The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) was signed into law P.L. 114-125 on February 24, 2016. It was created to ensure a fair and competitive trade environment. TFTEA prohibits all products made by forced labor, including child labor, from being imported into the United States.

On April 6, 2016, members of the U.S. Cotton Campaign, Alternative Turkmenistan News, and International Labor Rights Forum had submitted a petition to CBP requesting the agency ban the importation of all goods made with Turkmen cotton produced with forced labor under 19 U.S.C. § 1307.  Merchandise made with forced labor is subject to exclusion and/or seizure, and may lead to criminal investigation of the importer(s).

These three groups alleged that the Turkmen government forces public sector employees under threat of punishment, including loss of wages and termination of employment, to pick cotton. Further, the groups claimed that “[i]n the 2017 cotton harvest, in addition to forced mobilization of adults, the government of Turkmenistan forced children 10-15 years old to pick cotton in violation of international and domestic laws,” he added. When information reasonably but not conclusively indicates that merchandise made with forced labor is being imported, CBP may issue a WRO pursuant to 19 C.F.R. § 12.42(e).

CBP’s ban means retailers and brands need to move quickly to identify and eliminate Turkmen cotton from their supply chains.

On April 19, Crowell & Moring’s International Trade Attorneys hosted a webinar on “Trade in 2018 – What’s Ahead?”

Please click here to register and view the webinar on demand.

Summary

From the Section 232 national security tariffs on steel and aluminum imports to the ongoing NAFTA re-negotiation, the Trump administration is seeking to implement significant changes in international trade policy and enforcement. Economic sanctions on Russia continue to expand, the future is far from clear regarding Iran, and perhaps North Korea is coming into focus. A new Asia trade agreement without the United States, and a bumpy road ahead for Brexit all make for uncertainty and the need for enhanced trade risk management. Join us as we identify the international trade risks and opportunities likely to continue and grow in 2018.

Our Crowell & Moring team discussed predictions for the remainder of the year, with cross-border insights from our practitioners in the U.S., London, and Brussels. Topics included likely trends and issues in the U.S. and EU including:

  • Trade policy developments: Section 232, NAFTA renegotiation, and trade remedies
  • Sanctions in Year Two of the Trump Administration: Russia, Iran, North Korea, and beyond
  • Anti-money laundering (AML) and beneficial ownership
  • Supply chain risk management: blockchain, forced labor, the U.K. Modern Slavery Act, and GDPR
  • Europe: Brexit, the EU’s 4th AML Directive, and the EU/U.K. AML enforcement
  • CFIUS: how significant is the new legislation?
  • Export controls: Wither reform?
  • Import and customs

Blockchains and distributed ledger technology (‘DLT’) are becoming increasingly prevalent in industry. A recent Juniper Research survey found that 56% of companies with more than 20,000 employees were either considering deploying, or were in the process of deploying, blockchain solutions.

At its core, blockchain technology is essentially an engine for processing exchanges of information. It is not a static record. A blockchain is a type of distributed database that tracks transactions in assets and exchanges of information. It is a chronological sequence of verified transactions within a certain network. A ‘transaction’ can be the transfer of an asset, the creation of a new medical record, or the entry into a swap transaction. There is not just one blockchain, just like there is not one database. Different blockchains can be created for different needs, with different operating rules.

A distributed ledger is a distributed database that tracks transactions. Multiple participants have access to the same ‘golden record’ – there is no single official copy. The ledger automatically updates when new transactions take place, and so there is prompt verification of completed transactions across the system. Blockchain is an example of a distributed ledger, but distributed ledgers don’t have to be based on blockchain.

Application to Supply Chains

Supply chain management has long sought an efficient, accurate, and paperless process. A system that records each event, is transparent when it needs to be, confidential at other times, designed to meet the regulatory obligations around government filings, commercial demands, insurance claims, and on and on.

One of the touted merits of a DLT supply chain is that it would solve challenges such as provenance (diamonds), sourcing (origin claims), important admissibility issues (forced labor), and even emerging issues such as conflict minerals.

Role of DLT in Tackling Modern Slavery

Modern slavery is a complex crime and it is estimated that 46 million people worldwide are in some form of slavery. DLT could be a powerful tool to address gaps in supply chain data and increase the efficiency of data sharing helping to improve traceability and transparency of supply chain labor standards. For example, DLT could assist companies to verify the working conditions of people involved in production. Increased collection, analysis, and sharing of data would help companies to identify and prevent slavery and could assist law enforcement agencies in tackling this insidious crime.

In circumstances where there is greater focus than ever before on corporate transparency, tracking supply chains and ensuring human rights are protected is increasingly important. The UK Government released new guidance in October 2017 on the Modern Slavery Act 2015 (MSA) which suggests that even companies that do not reach the £36 million turnover threshold should consider voluntarily producing MSA statements and there has also been increased NGO oversight particularly of large UK companies. Blockchains and DLT could provide the traceability and trust that companies need to combat modern slavery while at the same time improving corporate transparency.

What’s next?

In 2018, you can expect to see more implementations, so now is the time to develop a blockchain strategy and to develop a risk profile so that you will be ready to take advantage of the benefits of this new technology.

Crowell & Moring Can Help

Exploring Blockchain

We provide in-house CLE programs and information sessions on blockchain and DLT, helping clients understand both the technology and the regulatory issues of implementing a blockchain or DLT solution, as well as promising use cases in specific industries.

Creating a Blockchain Strategy

We offer in-depth workshop sessions for companies considering implementing a blockchain or DLT network, including identifying regulatory hurdles to adoption, assisting with network diligence, negotiating network agreements, and addressing the full range of issues relating to joining a network.

Ready to Join a Network

And, once you are ready to join a network, our team works to negotiate the legal agreements and provide a deep-dive review of operating procedures, cybersecurity and privacy concerns, and regulatory issues that will impact your success.

Despite increased pressure from the U.S. and the UN Security Council, human rights groups estimate about 16 countries still host North Korean laborers. A recent estimate by the Korea Institute for National Unification in Seoul puts the number of North Korean workers overseas at around 147,000. Most work in China and Russia, but reports continue to surface of North Korean workers even in EU countries.

In Poland for instance, a recent New York Times report found North Korean workers in a number of industries, including agriculture, the manufacture of shipping containers, and even ship construction. The report also includes the names of companies – Armex (reportedly linked to a UN sanctioned company called Rungrado General Trading) and Wonye – that have allegedly been involved in supplying such workers.

It was not until October 2017 that the EU agreed to stop renewing work permits for North Korean labor. However, media reports indicate local governments in Poland continued to approve such permits after the EU’s decision. New legislation took effect in Poland on January 1, 2018, barring new foreign worker permits in Poland, but there is reportedly little coordination between provincial governments and the national government on these permits.

The increased focus on imports produced by North Korean labor in third countries – now subject to exclusion from the United States, as well as exposing U.S. persons to OFAC sanctions – creates a need for enhanced due diligence in supply chain operations. Reports like these can help companies identify such products and transactions, something that is generally very difficult to do.

U.S. Customs and Border Protection has been running year-long investigations into forced and child labor. The agency publicly stated it has been acting on information concerning specific manufacturers/exporters and specific merchandise and was not targeting entire product lines or industries in suspect countries or regions.

However, in practice it has recently come to light that the agency has issued questionnaires to certain industries related to their production in countries named on the Department of Labor’s website as those that use child or forced labor in their production of certain goods.

As of September 30, 2016, the list of goods produced by child labor or forced labor comprises 139 goods from 75 countries. If there is forced labor in any portion of a company’s supply chain, these goods may be excluded from importation into the United States.

Companies should closely examine their supply chains to ensure that goods imported into the U.S. are not mined, produced or manufactured, wholly or in part, with prohibited forms of labor, i.e., slave, convict, forced child, or indentured labor.

For more information, contact: Frances Hadfield

Blockchain and Your Supply Chain

Since our previous Client Alert, distributed ledger technology (DLT), also known as “blockchain,” has continued to find new applications in supply chain security and documentation. DLT provides an “append only” chain of transaction documentation that can be shared widely or narrowly to provide a strong record for import and export supply chain records.  A number of high profile announcements illustrate the resources being devoted to DLT and supply chains.

Creating a blockchain is something that is theoretically possible on a large scale (see https://azure.microsoft.com/en-us/solutions/blockchain/). The question is, is it right for you?

Many supply chain documentation issues can be addressed through DLT; just as ERP software programs such as SAP and Oracle brought enterprise-related transactions into a new era, DLT offers to transform additional aspects of the documentation related to import and export.  Expectations must be managed, however.

DLT is a robust digital record, but as trade agencies begin to rely on blockchain for their operations, importers and exporters must also consider whether to transition their supply chain documentation to DLT. Blockchain is essentially the creation of a strong digital record of both digital (such as signatures) and analog (real world) events. If an importer uses blockchain for declarations to CBP, for instance, the importer will have an advantage in demonstrating the strength of the links in the supply chain, but the underlying analog events remain subject to audit and verification. DLT cannot eliminate fraud in the documents that are appended to the blockchain, so self-audits are still required. But, the DLT can reduce the amount of time and effort that goes into such audits.

Crowell & Moring’s “Blockchain Gang” has been involved in the assessment and development of supply chain applications. Please click here to read about the firm’s recent success in helping establish the world’s largest investment in DLT.

For further information, please contact Jeff Snyder, Jenny Cieplak, Jana del-Cerro

U.S. Forced Labor Update

The most recent Department of Labor report on Goods Produced by Child Labor or Forced Labor lists 139 goods from 79 countries; industries include: agriculture, fisheries, construction, apparel, textiles, footwear, furnishings, and minerals, among others. NGOs are also investigating and reporting on labor trafficking.

Following the amendments to section 307 made by the Trade Facilitation and Trade Enforcement Act (please click here for Crowell & Moring’s Client Alert), CBP made conforming amendments to its regulations. Its website provides the following guidance: “CBP encourages stakeholders in the trade community to closely examine their supply chains to ensure goods imported into the United States are not mined, produced or manufactured, wholly or in part, with prohibited forms of labor, i.e., slave, convict, indentured, forced or indentured child labor.” CBP Guidance on importer due diligence can be found here.

Importers are undergoing investigations now that have not yet reached the “withhold release order” level; now is the time to consider supply chain audits. Crowell & Moring lawyers have experience with supply chain audits and assisting importers undergoing such investigations.

For further information, please contact John Brew, Jeff Snyder, Frances Hadfield, Aaron Marx

North Korea and Forced Labor

Overshadowed by the Russia portion of the new sanctions law, and buried in the North Korea section of the “Countering America’s Adversaries Through Sanctions Act (CAATSA)” legislation, is a provision that creates a rebuttable presumption that most items from North Korea are prohibited because of the use of forced labor. It reads:

‘‘(a) IN GENERAL.—Except as provided in subsection 10 (b), any significant goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part by the labor of North Korean nationals or citizens shall be deemed to be prohibited under section 307 of the Tariff Act of 1930 (19 U.S.C. 1307) and shall not be entitled to entry at any of the ports of the United States.

‘‘(b) EXCEPTION.—The prohibition described in subsection (a) shall not apply if the Commissioner of U.S. Customs and Border Protection finds, by clear and convincing evidence, that the goods, wares, articles, or merchandise described in such paragraph were not produced with convict labor, forced labor, or indentured labor under penal sanctions.
Key terms remain undefined. Although the impact may be negligible given the low volume of imports from North Korea and the existing sanctions, this formulation presents an example of how Congress might use this tool to address imports from other countries.

For further information, please contact Jeff Snyder

Companies are paying increased attention to the Transparency in Supply Chains provision contained in the U.K. MSA, which is aimed at requiring companies to root out modern slavery.  Those obligated to comply must prepare and publish a slavery and human trafficking statement for each financial year. 2017 is the first year when all organisations to which it applies must publish a statement.

The Transparency in Supply Chains provision in the U.K. MSA applies to any commercial organisation in any sector, which supplies goods or services, and carries on a business or part of a business in the U.K., with a total annual turnover of £36 million or more. As such, any company or partnership that does business in the U.K., even if established outside the U.K., must publish a compliant modern slavery and human trafficking statement this year.

The requirement to publish a statement commenced on 29 October 2015, however, pursuant to the MSA’s transitional provisions, businesses with a year-end between 29 October 2015 and 30 March 2016 were not required to publish a statement for that financial year. Businesses with a year-end of 31 March 2016 were the first businesses required to publish a statement for their 2015-16 financial year.

This year is the first year when all companies or partnerships to which the MSA applies must publish a statement, and while there is no specified deadline for publishing a statement within the MSA, the Government guidance states that it expects organisations to publish their statements “as soon as reasonably practicable after the end of each financial year in which they are producing the statement.”

What are the Legal Requirements?

The MSA requires that:

  1. Statements must be published on the organisation’s U.K. website with a link in a prominent place on the U.K. homepage.
  2. Statements should be approved by the board of directors (or equivalent management body) and signed by a director (or equivalent).

The statement must also include “the steps the organisation has taken during the financial year to ensure that slavery and human trafficking is not taking place in any of its supply chains, and in any part of its own business.” If the organisation has taken no steps, the statement should say so.

The MSA also states that the statement may include information about:

  1. The organisation’s structure, its business, and its supply chains.
  2. Its policies in relation to slavery and human trafficking.
  3. Its due diligence processes in relation to slavery and human trafficking in its business and supply chains.
  4. The parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk.
  5. Its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate.
  6. The training about slavery and human trafficking available to its staff.

The U.K. Government has produced guidance to accompany the legislation, which provides further details on how it expects organisations to develop a credible and accurate slavery and human trafficking statement.

What are the Penalties for Non-Compliance?

If an organisation fails to publish a statement for the financial year, the U.K. Secretary of State may seek an injunction requiring compliance. Failure to comply with that injunction could result in an unlimited fine; however, the real purpose behind the Transparency in Supply Chains provision is to increase transparency by ensuring the public, consumers, employees, and investors know what steps an organisation is taking to tackle modern slavery. As such, the true impact of failing to comply is more likely to be reputational with the consequential adverse implications for consumer and investor goodwill.

Final Thoughts

Analysis of many of the Statements published pursuant to the MSA has revealed that a large number of companies are non-compliant. Some statements are not signed; some are not published in a prominent position on the organisation’s website, and others fail to state what steps have been taken to identify and eradicate modern slavery in its own organisation or supply chains. Most only provide information on the optional requirements that the MSA suggests might also be included.

It appears that some organisations have simply rushed to produce some sort of statement and have not carried out any particular due diligence on their supply chains or even on their own businesses. As the former Home Secretary, and now Prime Minister, Theresa May stated in the foreword to the Government guidance on the MSA “it is simply not acceptable for any organisation to say, in the twenty-first century, that they did not know.  It is not acceptable for organisations to ignore the issue because it is difficult or complex. And it is certainly not acceptable for organisations to put profit above the welfare and well-being of its employees and those working on its behalf.”

Recently, a bill sought to amend the MSA by proposing that companies that were not sufficiently transparent about their efforts to protect human rights and, in particular, failed to publish a compliant Statement, be barred from receiving Government business. This has stalled on its way through parliament. However, there remains a degree of government support for some form of amendment in this regard.

Given the potential reputational risks, our advice is that companies not only publish the legally required statements, but also ensure that they have taken concrete steps to assess and address the modern slavery risks within their own businesses and supply chains.

Crowell & Moring lawyers have experience in assisting companies with MSA compliance, and more broadly in auditing and reviewing supply chains for compliance with a range of legal obligations.

For more information contact: Michelle Linderman, Jeff Snyder, Jana del-Cerro, Gordon McAllister