A recent ruling issued by U.S. Customs and Border Protection (CBP) provides helpful insight into CBP's review of third-party audit reports in deciding whether to release goods that have been detained on grounds of suspected forced labor. In Headquarters Ruling H317249, CBP concluded that a third-party audit report submitted by a U.S. importer was insufficient to demonstrate that detained goods were not produced using forced labor. The goods were detained under the Countering America's Adversaries Through Sanctions Act (CAATSA), which prohibits the importation of goods produced by North Korean nationals. CBP's detailed analysis of the third-party audit report also provides valuable insight for U.S. importers conducting social compliance audits in anticipation of potential CBP enforcement of other regulations, including those targeting goods suspected of being produced by forced labor in China's Xinjiang Uyghur Autonomous Region (XUAR). 

As background, CAATSA provides a rebuttable presumption that goods made with North Korean labor violate 19 U.S.C. § 1307, and therefore cannot be imported into the United States. Importers whose goods are detained at a U.S. port under CAATSA may only secure release of the goods by providing "clear and convincing evidence" that the goods were not produced using forced labor.¹

Key Facts

• CBP at the Port of Newark detained entries from an apparel importer on the basis that the merchandise was subject to CAATSA. According to the commercial invoices submitted with the entry, the apparel was manufactured by a factory in China.
• The Port requested documentation detailing how the factory employees in China are recruited, identification cards and payroll records or other proof of payment. 
• In response, the importer submitted a third-party audit report which determined that the factory employees were Chinese nationals, along with photocopies of the employees' Chinese Resident Identity Cards.
• The Port determined that the information submitted did not establish by "clear and convincing" evidence that the apparel was not produced with forced labor.
• The importer protested that determination to CBP Headquarters, which upheld the Port's determination. CBP questioned the reliability of the report for several reasons, including:
  • The auditors "only interviewed 10 out of the 49 workers"
  • "Only 45 worker's identification cards" were included in an exhibit of Resident Identity Cards²
  • The photocopies of the Resident Identity Cards were "either too dark or overexposed to discern the authenticity"
  • A photograph included in the audit report showed workers standing next to boxes of personal protective equipment (PPE) that were "identical" to images of PPE boxes featured in an article published by The Guardian, a British newspaper, about North Korean labor in China
  • There were factual inconsistencies relating to the labor force between the audit report and statements in the protest
• CBP also noted that the factory had sought to hire Korean translators – and included a link to the job posting – in support of its determination.

Takeaways  

• The "clear and convincing evidence" standard is a high bar. CBP explains in the ruling that "clear and convincing evidence" is a higher standard of proof than a preponderance of the evidence and generally means that a claim or contention is highly probable. By contrast — and notably for importers concerned about possible detention of goods under Withhold Release Orders (WROs) targeting other products suspected to be produced by forced labor — the required proof of admissibility for shipments detained pursuant to a WRO is not defined. CBP encourages importers to explain how the company has addressed the International Labour Organization's (ILO) 11 indicators of forced labor, does not provide much more guidance.³
• Media reports on forced labor may suffice to set the presumption that goods were produced using forced labor. CBP's citation to The Guardian news article and accompanying photograph makes clear that CBP will consider media reports for purposes of determining whether to issue a WRO and whether to detain a particular shipment if a WRO has already been issued. Companies need to carefully monitor the press and should assume that public reports of forced labor in their supply chains have also come to the attention of CBP. Companies should promptly investigate such reports to gather relevant evidence. When seeking the release of detained goods, importers should consider public reports of forced labor in the supply chain — and how the company could rebut the evidence cited in those reports. 
• Reliable third-party audit reports are likely essential to satisfy the "clear and convincing evidence" standard. Importers may be required to submit third-party audit reports to meet the "clear and convincing evidence" standard under CAATSA and potential future laws governing forced labor in supply chain (see below). Expect CBP to scrutinize those reports and potentially challenge their methodologies in detail. When selecting an audit firm, ensure that the firm is reputable and familiar with CBP enforcement of anti-forced labor laws. Given the increased attention to forced labor in supply chains and uncertainty at the outset regarding audit findings, consider working with audit firms through counsel to preserve privilege and to help ensure that audit methodologies are well-designed to undergo potential CBP scrutiny. Audit reports may be protected by attorney-client privilege in certain circumstances, and engaging audit firms to assist outside counsel in the provision of legal advice will strengthen future claims of attorney-client privilege, should the company not wish to disclose the reports to CBP or other third parties.
• "Clear and convincing evidence" may soon become the standard for Xinjiang shipments if the Uyghur Forced Labor Prevention Act (UFLPA) is enacted. See our prior alert for a detailed analysis of the UFLPA, which was initially passed by the House of Representatives during the last congressional session. The House and Senate have both re-introduced versions of the bill⁴ and a version of the UFLPA is widely expected to be signed into law this year. Both the House and the Senate versions contain a rebuttable presumption that goods produced in the XUAR are produced with forced labor. The House version requires "clear and convincing" evidence to rebut this presumption.

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Miller & Chevalier's Business & Human Rights practice is guiding companies through these new restrictions and enforcement risks in order to ensure full compliance and avoid disruption to their business by:

• Conducting in-depth due diligence on high-risk operations
• Developing and updating anti-forced labor policies and procedures
• Risk mapping and developing assessment and product traceability processes
• Collaborating with specialized forced labor auditors on-the-ground in high-risk regions
• Remediating forced labor indicators identified in audits
• Interacting with CBP regarding WROs to secure reversals
• Developing and updating stakeholder communications regarding forced labor compliance efforts

Please contact us for further details on how Miller & Chevalier's Business & Human Rights practice is helping companies develop strategic approaches to anti-forced labor compliance.

Nate Lankford, nlankford@milchev.com, 202-626-5978

Richard A. Mojica, rmojica@milchev.com, 202-626-1571

Manuel Levitt, mlevitt@milchev.com, 202-626-5921

Mary H. Mikhaeel*

Virginia S. Newman*

Dana Watts*

*Former Miller & Chevalier attorney

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¹19 U.S.C. § 9241a(b). 
²It is unclear exactly how many workers were employed at the time of the audit. The protest indicated 46 employees, but the payroll report showed 49 employees.
³See U.S. Customs and Border Protection, Helpful Hints for Submitting Proof of Admissibility and WRO Revocation/Modification Requests.
⁴S. 65, 117th Cong. § 5 (2021); H.R. 1155, 117th Cong. § 4 (2021).

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