You wake up one morning to an urgent phone call. Your boss tells you that US Customs and Border Protection (CBP) has confiscated a shipment of critical components.
It is not just a documentation error. CBP found that these goods were the product of forced labor. Unless you can prove otherwise, CBP will not release your shipment.
Imagine if this was a critical part of your finished product, and you were single sourcing from one supplier.
How would that impact your ability to serve your customers? What would that do to your reputation? How many of your customers would still want to be customers?
This is a scenario that supply chain, import and procurement professionals are encountering today – and keeping many up at night. And it’s not always easy to ‘unmask’ the risks.
UFLPA — Guilty Until Proven Innocent
We all have an ethical imperative to help eradicate the use of slave labor in manufacturing and supply chains. That is either as the companies that source, make and sell goods, or as consumers who purchase them.
Perhaps more pertinently — it is the law. You have a legal obligation to ensure compliance with the Uyghur Forced Labor Prevention Act (UFLPA).
The US, UK, the Netherlands and others have accused China of human rights abuses in Xinjiang Uygur Autonomous Region (XUAR). This includes:
- Forced labor
- Forced sterilization of women
- Separating children from families
- Genocide
These are severe human rights abuses. Therefore, the US government assumes that goods are made with forced labor in Xinjiang. Furthermore, you must prove that your goods from the XUAR are not made with slave labor. Until you do, CBP will not allow these goods to enter the US.
As of the end of May 2023, CBP has denied over 600 shipments entry to the United States. That represents over $1 billion dollars worth of goods.
If you don’t import goods from China, you may think that you have no risk of violating the UFPLA. But not so fast… Symptoms of supply chain problems are easy to spot. But the root causes may not be so clear. The same is true with supply chain risk.
Known Unknowns and Unknown Unknowns
It is important to understand that the UFLPA does not just impact goods made in the XUAR.
In order to tackle goods made with forced labor and the companies that profit from slavery, CBP has created the Forced Labor Enforcement Task Force (FLETF) developed and published the UFLPA Entity List.
This list currently identifies 31 companies that are in some way complicit with forced labor in the XUAR. CBP has divided the list into four groups:
Group 1
The first group are entities located in Xinjiang. Products from any company in this region that mines, manufactures or produces goods, either wholly or in part using forced labor are not allowed to enter the United States.
Group 2
The second group are companies that work with the government of Xinjiang providing services such as recruitment, transportation, transfers and those that receive forced labor.
Group 3
CBP defines the third group as companies or entities that export goods made by Groups 1 and 2.
Group 4
Group 4 are entities that source material and goods from the XUAR as well as anyone working with the government of the region for any government-labor scheme.
Knowing Your Risk
Unfortunately, it is not as straightforward as ensuring that your Tier 1 suppliers are not one of the 31 companies named on the UFLPA Entity List. You must ensure that Tier 2, Tier 3 and other suppliers in your supply chain do not work with these named companies either.
A second complexity is ensuring that components of goods you procure do not contain some materials that come from the XUAR. For example, one of Xinjiang’s biggest exports is cotton. Around a fifth of the world’s cotton comes from China — and the vast majority of that comes from Xinjiang.
However, cotton producers separate the fiber from the seed, they often mix together cotton from various locations. Therefore, it becomes significantly harder to ensure that any cotton imported from China does not contain cotton from the XUAR.
Other goods present a similar issue. Xinjiang is rich in minerals, such as copper, gold, uranium and iron. Therefore, CBP may stop goods as diverse as electronic components, steel and jewelry from China. Once again, importers will need to provide sufficient documentation to prove the provenance of these goods before they can enter into the US.
Compliance with the UFLPA
As you can see, compliance with the UFLPA is not as straightforward as you might have thought.
However, there are ways you can mitigate your risk.
Know the Rules
Like most global trade regulations, the UFLPA can be difficult to navigate. However, due diligence is a necessity. No matter how complex global trade regulations are, trade dependent companies must comply with them.
Companies need to hire or designate personnel to become the subject matter experts (SMEs) on UFLPA. As a first step, these SMEs should review all of your products to get a clear picture of potential risks and exposure.
Screen in Advance
It is a best practice to screen all suppliers in advance of issuing a purchase order. You will need to vet all suppliers and validate your findings. This means that your procurement department needs to be working hand-in-hand with your trade and customs experts.
Document Your Procurement Policies
You will need to document your procurement procedures. Your legal counsel should review these to ensure that they demonstrate your company has taken “reasonable care” to comply with the UFLPA.
Consider Supporting Technology
Trade dependent companies cannot do without the correct people and processes in place. You can reduce manual work in evaluating suppliers by using technology. Technology makes supplier management more efficient.
Supplier relationship management simplifies the onboarding process for new suppliers, helps you monitor performance and understand risk. Furthermore, this allows you to store critical information, supporting documentation and data in a single place.
In addition, companies need to automate screening against denied party lists. Automated screening can help you identify entities and products that fall foul of the UFLPA.
As we mentioned earlier, sometimes your UFLPA risks may be wearing a disguise. That disguise is invisibility. Not knowing who your supplier’s suppliers are — and further down the supply chain — can put you at risk.
It is worth considering risk mitigation systems that can perform a deep dive on your suppliers.
Not Just Risk, but also Reward
Although supporting technologies can help you comply with supply chain and trade compliance requirements, it is a mistake to think of these as tools that allow you to avoid penalties and fines. Instead they are technologies that also support greater efficiency and agility across your supply chain.
Many companies see trade compliance as a necessary evil. This is an error. With the right people, processes and supporting technology, trade compliance offers a significant scope for competitive advantage:
- Duty savings via free trade agreements or foreign-trade zones
- Improved import controls, accurate landed costs, consistent classification processes and reduced cycle times with import management
- Simplified export controls, export license management and documentation production with export management
- Online access to trade content and automated trading partner screening
- Lower procurement costs and reduced supplier risk
