U.S. Government Issues Xinjiang Supply Chain Advisory

On July 1, the U.S. Departments of State, the Treasury, Commerce, and Homeland Security issued a detailed advisory. This is in response to the various types of regulatory exposure companies could face when dealing with suppliers and vendors in China’s northwestern Xinjiang region, given substantial allegations of forced labor and other human rights abuses.

The focus of the Advisory is on what the government identifies as the three key risk factors:

1. Assistance in the transfer of surveillance technology to the Chinese government.
2. Relying on labor sourced to the Xinjiang region, which may be among other things, forced.
3. Aid in the construction of internment facilities for various minorities, such as the Uyghurs and other Muslim minority groups, including the Kazakhs.

The issues cited by the July 1 Advisory have various potential applications under U.S. trade law, including sanctions and export controls. A number of Chinese companies and government entities have in recent months been added to the Department of Commerce’s Bureau of Industry & Security (BIS) Entity List.  

According to the Advisory, broad swaths of sectors are affected by the issue of forced labor, from mobile phones to cleaning supplies, food processing, and textiles, among many others.  

The advisory also touches on a number of other compliance-based issues for a broad range of businesses, including financial institutions.

What’s the takeaway?

The obvious lesson here is that the Xinjiang region has certain risks for U.S. companies, both legally and reputationally. However, there are two other issues here:

1. Region-specific risks. In some ways Xinjiang highlight risks in the Advisory are like geographic compliance risks in other regions, for example in the Middle East (regarding Syria, Iran, Russia) or Latin America (Cuba and Venezuela).
   
2. The drive towards more sophisticated risk-based, detailed compliance programs. Over the years it has been made increasingly clear that compliance programs are not “check the box” exercises and government enforcement agencies are giving these programs increasing scrutiny in order to assess their efficacy. Laws change, and so do risks. Accordingly, it makes sense to incorporate measures to protect against evolving risks like those detailed in the Advisory. These changes will help prevent dynamic risks like those related to sourcing and dealing in Xinjiang. Add to this the increasing number of risk advisories issued by agencies like OFAC, and it becomes clearer that periodic evaluation and assessment is critical.

Companies doing business in Xinjiang or with vendors from the region should take note and dig deeper beyond the advisory, understanding the particular risks of their respective sectors, and with their specific counterparties.

About Farhad Alavi

An international trade compliance (sanctions, export controls, customs, anti-corruption) and defense lawyer.