This week Florida’s two senators, Marco Rubio and Rick Scott, introduced a bill imposing several China specific public disclosure obligations, including disclosures related to sourcing activities related to products utilizing forced labor from Xinjiang, China (“the Bill”). The Bill would apply to all publicly traded companies and supplements the proposed SEC environmental, social and governance (“ESG”) disclosures, discussed here, and the Uyghur Forced Labor Prevention Act (“UFLPA”), which will come into effect in June 2022 (discussed in more detail here). Companies are already prohibited from importing goods produced with forced labor under Section 307 of the Tariff Act of 1930, 19 U.S.C. § 1307, and the UFLPA establishes a rebuttable presumption that all goods mined or produced, wholly or in part, in Xinjiang are made with forced labor. The Bill would take existing obligations one step further to also require that public companies disclose any direct sourcing links to Xinjiang.
Specifically, the Bill would require the SEC to mandate, as part of its evaluation of potential guidance on ESG reporting, that public companies disclose:
- their sourcing and due diligence activities involving supply chains of products that are imported to the US and are directly linked to products utilizing forced labor from the Xinjiang Uyghur Autonomous Region of China (“Xinjiang”);
- transactions with companies that have been: (i) placed on the Entity List by the Department of Commerce; or (ii) designated by the Department of Treasury as Chinese Military-Industrial Complex Companies.
To avoid the risk of potential shipment detention or liability under existing regulations and the UFLPA, any disclosures of supply chains involving products from Xinjiang should rebut the UFLPA forced labor presumption with “clear and convincing evidence” that the relevant goods were not made with forced labor. Given many companies’ lack of visibility into labor practices of their Chinese suppliers and sub-suppliers, this might be difficult to do in practice.
In addition, the Bill would require public companies with facilities in China to disclose, on an annual basis, whether there is a Chinese Communist Party committee in their operations and, if so, a summary of the actions and corporate decisions in which any such committee participated.
Although the Bill does not specify this, it is likely that the law will be enforced by the SEC on par with other, existing disclosure obligations and thus SEC’s standard civil and criminal penalties for false and misleading statements, as well as liability under a variety of state unfair business practices laws, will apply.
The Bill is still in the early stages of review in the Senate and its chances of passage are not yet clear. Currently, the Bill is only backed by several Republican senators; however, it may still garner additional support. The Bill’s co-sponsor, Senator Marco Rubio, stated that since it is already illegal for companies to import goods made with forced labor into the US, “companies must be transparent with their shareholders by disclosing the risks associated with products linked to Xinjiang.”
If the Bill is passed, it will further oblige public companies to map their supply chains, particularly those involving suppliers from China, and conduct supplier due diligence sufficient to identify forced labor risks. Supply chain mapping across supplier tiers could be challenging for companies that do not have processes in place to track and identify supply chain structures. In addition to potential SEC enforcement, disclosures made under the Bill could result in shipment detentions, regulator inquiries, and potential liability under existing laws regulating US imports and dealings with sanctioned or restricted parties (for example, current regulations enforced by US Customs and Border Enforcement, the US Commerce Department’s Bureau of Industry and Security, and the US Treasury’s Office of Foreign Assets Control). The Bill illustrates the broader push towards supply chain transparency and corporate accountability, which is evidenced by the upcoming SEC ESG disclosure regime, and multinational corporations are likely to also become subject to a myriad of sustainability and social compliance related disclosure regimes outside of the US that will similarly require implementation of robust supply chain mapping and due diligence exercises. Companies with global supply chains should assess their supplier due diligence processes (or implement them if not yet in place) to ensure they are prepared to comply with anticipated future legislation.