Worldwide: CBP Begins Long-Awaited Enforcement Action Against Auto Industry Under UFLPA – Impounds Thousands Of Volkswagen Vehicles

Key Takeaways:

• Customs and Border Protection ("CBP") impounds thousands of Volkswagen vehicles for potential forced labor violations under the Uyghur Forced Labor Prevention Act ("UFLPA").
• The enforcement action was taken after Volkswagen Group itself identified and disclosed the potential violation.
• Significant uncertainties remain about CBP's enforcement procedures.

Customs and Border Protection Impounds Thousands of Volkswagen Vehicles

On February 15, 2024, Volkswagen Group ("Volkswagen") revealed that U.S. Customs and Border Protection ("CBP") had impounded thousands of its Bentley, Porsche, and Audi vehicles under the Uyghur Forced Labor Prevention Act ("UFLPA"). The seizures were made after Volkswagen discovered and voluntarily disclosed to CBP that the vehicles contained a small electronic subcomponent that came from a region in "western China" presumed to be the Xinjiang Uyghur Autonomous Region ("XUAR"). According to two internal Volkswagen sources, Volkswagen was not aware of the origin of this electronic subcomponent, said to be "sourced by an indirect supplier further down its supply chain, until the supplier alerted it to the issue." Volkswagen stated that the company is taking all "allegations of infringements of human rights very seriously, both within the company and in the supply chain" and that the subcomponent at issue is in the process of being replaced.

This detention highlights the growing UFLPA-compliance risks to companies doing business with China-based suppliers, particularly in the automotive space. In addition, depending on the specifics of Volkswagen's disclosure to CBP and the results of CBP's own investigation, this enforcement action may be the first real test of the "exception" process set forth in the UFLPA.

Until now, nearly all UFLPA-related reviews undertaken by CBP have been " applicability reviews," in which importers contend that their goods are not subject to the law (i.e., are not connected to the XUAR or any entity on the UFLPA Entity List). This process does not appear in the UFLPA; rather, it was established by CBP pursuant to its enforcement discretion. Importantly, the clear-and-convincing evidentiary standard does not apply to applicability reviews. That standard governs only the UFLPA's "exceptions" procedure—that is, instances in which an importer seeks to demonstrate that, although the goods do fall within the scope of the UFLPA, they may lawfully enter U.S. commerce because clear and convincing evidence shows that the goods were not made using forced labor.¹ The standard governing "applicability reviews" remains unclear, however, because CBP has not publicly articulated the standard it applies in that context.

The Uyghur Forced Labor Prevention Act

As described in a previous blog post, the UFLPA went into effect on June 21, 2022. Under the UFLPA, all goods produced in whole or in part in the XUAR, or by an entity on the UFLPA Entity List, are presumed to be made with forced labor and prohibited from entry into the United States. As illustrated by the latest CBP enforcement action, there are no de minimis exceptions. The presumption applies to all goods containing any input produced in the XUAR, however small or no matter the stage in the supply chain.

The Sheffield Report

In December 2022, researchers from the Helena Kennedy Centre for International Justice at Sheffield Hallam University released a report ("Sheffield Report") that identified over 200 auto parts makers, mining and processing companies, and international car manufacturers that have sourced directly from the XUAR. This includes at least 38 documented engagements in state-sponsored labor transfer programs. The Sheffield Report documented that major international automobile manufacturers, including Volkswagen, had exposure to suppliers in the region.

The Sheffield Report was widely covered in the press, and CBP has previously indicated that it relies on reputable public reports from non-governmental organizations as part of its enforcement action analysis under the UFLPA. Indeed, CBP recently hired a prominent professor from the Helena Kennedy Centre as a policy advisor. As a result, as predicted in our year in preview, it was widely expected that CBP would begin to target aluminum and auto parts sourced from China.

CBP Review Process Under the UFLPA

As noted above, importers whose goods are detained under the UFLPA have two options to challenge the detention: an "applicability review" and the exceptions procedure. During an applicability review, importers may submit documentation demonstrating that neither the goods nor their components were produced wholly or in part in the XUAR or by an entity identified on the UFLPA Entity List. Additional information on this process may be found in CBP's operational guidance, Best Practices for Applicability Reviews, and UFLPA Strategy guides. CBP's operational guidance also describes the detention and release process and provides information regarding supply chain due diligence, tracing, and management. In addition, CBP periodically answers questions about CBP's process for applicability reviews on their FAQs page.

In instances in which a company acknowledges—or CBP determines—that an import falls within the UFLPA, importers are required to produce "clear and convincing" evidence to rebut the presumption of forced labor use and secure an "exception" to the UFLPA. To date, CBP has not granted such an exception. To our knowledge, no importer has diligently pursued one.

With the source of Volkswagen's subcomponents still unclear (insiders "would not confirm whether the part in question was produced in Xinjiang itself"), it is possible that Volkswagen may seek an "applicability review" in hopes of avoiding the exceptions procedure. But if its disclosure or CBP's investigation establishes that the subcomponent was indeed produced in the XUAR, the company will have no choice but to pursue an exception—a daunting task—or wait to import the vehicles until the problematic part is replaced by one with lawful provenance.

Next Steps and Recommendations

Because a voluntary disclosure appears to have triggered this detention, the enforcement action could—depending on its duration and outcome—discourage companies from disclosing potential UFLPA violations in the future. Beyond the agency's increasingly aggressive enforcement posture, mounting pressures from non-governmental organizations and public institutions have forced auto manufacturers such as Volkswagen to re-evaluate their supply chain relationships.

That said, industry is looking to CBP to provide definition to its evidentiary standard for reviewing UFLPA applicability in the context of imported goods. Companies have especially pushed CBP to issue more detailed guidance and work more closely with importers and their supply chain partners in the development of best practices for forced labor risk management. Ultimately, however, the UFLPA was intended to put the due diligence onus on supply chain participants, and to encourage greater information sharing between regulators, industry, and civil society in the mapping of global supply chain risks.

In attempting to identify potential supply chain breaches and deficiencies, importers must be prepared to provide CBP with documentation showing a due diligence program or process that includes the following:

• Engagement with suppliers and other stakeholders to assess and address forced labor risk;
• Mapping of the supply chain and assessment of forced labor risks along the supply chain from raw materials to production of the imported good;
• Written supplier code of conduct forbidding the use of forced labor and addressing the risk of use of Chinese government labor schemes;
• Training on forced labor risks for employees and agents who select and interact with suppliers;
• Monitoring of supplier compliance with the code of conduct;
• Remediation of any forced labor conditions identified or termination of the supplier relationship if remediation is not possible or is not timely completed;
• Independent verification of the implementation and effectiveness of the due diligence system; and
• Reporting performance and engagement publicly on its due diligence system.

Additionally, importing companies should also be able to provide supply chain tracing and commodity-specific tracing information to demonstrate that the imports do not fall under the purview of the UFLPA because they do not come from the XUAR and are unconnected to sanctioned entities or that the imports are devoid of forced labor practices. The appendix to CBP's operational guidance provides a specific, non-exhaustive list of documentation that may help to demonstrate compliance with UFLPA.

While CBP's operational guidance and other resources serve as a good starting point, companies trying to ensure their supply chains are free of forced labor are navigating a minefield with little room for error, in an enforcement environment where voluntary disclosures still lead to CBP enforcement actions with limited guidance on how issues are to be resolved.

Foley Hoag's International Trade & National Security and Global Business & Human Rights practice groups regularly provide guidance on compliance regarding forced labor laws and regulations, and help clients implement best practices for supply chain management, develop tailored compliance procedures, and advise on the best ways to address compliance issues.

Associate Amanda Gialil co-authored this alert.

Footnote

1. UFLPA, §4(b)(1)

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