How to Minimize Trade Risks and Comply with the UFLPA

July 02, 2024
By Jag Lamba

The U.S. Customs and Border Protection’s (CBP) Uyghur Forced Labor Prevention Act (UFLPA) went into effect in June 2022 with the goal of preventing goods manufactured using forced labor from entering the U.S. It’s also aimed at disincentivizing the practice of forced labor in the Xinjiang Uyghur Autonomous Region (XUAR) of China and beyond by cutting off revenue to these manufacturers.

It can be easy to lose sight of where raw materials originate, with so many links in the supply chain. But Xinjiang-sourced materials are more heavily represented in the supply chain than many realize.

Consider the global textile and apparel industries. China accounts for roughly 20 percent of the world’s cotton production and is the largest global producer of cashmere. Ninety percent of China’s cotton production happens in Xinjiang, and the XUAR also produces the third most cashmere by region in the country.

Organizations need to do their due diligence in making sure goods tied to forced labor are not on their import lists or anywhere to be found within their supply chains. If they can’t reliably show that they’ve done so, they could be subject to fines, delays as shipments are held for inspection, or even forfeiture of goods.

CBP has not been shy about rules enforcement. According to the agency’s statistics, from June 2022 through the end of 2023, it reviewed 5,556 shipments and denied entry to more than half of them — 2,669 shipments, totaling US$580 million in value. The burden is on procurement organizations, even if they aren’t directly importing goods, to ensure they aren’t courting unnecessary compliance risks.

Where Compliance Risks May Be Hiding

Compliance takes work to achieve, especially when risk factors might not be obvious to companies’ procurement and supply chain teams. The clearest indication that working with an overseas company is risky is when it appears on the U.S. Department of Homeland Security’s UFLPA Entity List.

But even if a company isn’t on the list, there could still be potential risk. If a supplier directly or indirectly imports or exports with listed entities or is headquartered in or operates in the Xinjiang region, companies receiving goods from that supplier could have shipments held up or seized if CBP determines there is a violation. That an entity is registered and located in Xinjiang province is a signal to the agency that forced labor might be involved. Thus, it behooves organizations to look closely at supplier relationships to avoid such disruptions.

Additionally, subsidiaries and other downstream entities as well as owners or shareholders upstream could house risk that isn’t readily apparent. N-tier supply chain visibility is essential, and companies must do their homework to limit trade risks in their supply chains. Per the UFLPA’s’ requirements, that homework includes (1) detailed supply chain mapping and traceability, (2) thorough documentation, contract management and enforcement regarding the UFLPA, and (3) a demonstrated undertaking of risk-based due diligence.

Lessening Risks and Achieving Compliance

The complexity and breadth of most companies’ supply chain operations make it difficult to ensure UFLPA compliance without careful attention, process transparency and the ability to act when a potential violation is found.

However, there are tools and best practices that organizations can implement to enhance transparency and accountability. Many take advantage of automation features to streamline efforts and encourage the completion of crucial information-gathering and assessment activities. Automation makes the process less time-consuming for those overseeing it and increases the thoroughness of a company’s compliance process.

Steps to take:

1) Develop a UFLPA questionnaire for suppliers. Using supplier management tools to automate the distribution, collection and analysis of these surveys allow you to act quicker upon the results. Ask questions about the transparency of the suppliers’ processes, if they know where all their raw materials and subcomponents come from — and crucially, if they do business with any organizations in the Xinjiang region or are located there themselves. If possible, survey sub-suppliers as well.

2) Review your third parties’ critical supplier names and create a map of key ties. This will help you determine risks further up your supply chain that, even if your organization won’t be held directly reliable, could slow down shipments to your supplier, thus affecting the timeliness of your own shipments. In the past, this step would have required significant legwork on the part of your procurement team. But today’s compliance management solutions can automatically build relationship maps and highlight risks and how they are connected to your business.

3) Screen all disclosed names, both entities and owners, up and down your supply chain, for UFLPA risk and other compliance risks. Check ultimate beneficial owners (UBOs) to see if those entities might be connected to the region or forced labor. Though sometimes a layer of ownership is put in place to obfuscate UBOs, working with an organization owned by an individual or organization with connections to forced labor can still put a company in violation. Supplier management tools that provide ownership information within a supplier’s profile make this easier.

4) Set up ongoing monitoring processes to routinely and automatically assess if compliance is being maintained and/or if new risks have been identified at any point in the supply chain.

In the pursuit of UFLPA compliance, data is a company’s most significant ally, underscoring the need for an integrated data collection, storage and reporting platform. Such platforms are crucial in enabling organizations to not only collect and manage essential supplier information but also to visualize complex supply chain networks effectively.

By leveraging these sophisticated tools, businesses can easily develop an extensive risk map that highlights potential compliance risks and the intricate relationships between suppliers, partners and other entities within the supply chain. Such a comprehensive view assists companies in identifying which areas might be affected by compliance issues, facilitating swift action to mitigate risks and substitute noncompliant suppliers, thus ensuring the integrity and resilience of supply chain operations.

Preventing Forced Labor

The UFLPA represents an important step toward the goal of stamping out forced labor and other human rights abuses. In the two years since the act was implemented, many trade organizations and compliance watchdogs have shared cautious optimism that the UFLPA could make a real difference in preventing forced labor, at least in the region.

Given the CBP’s high level of enforcement when it comes to the UFLPA, there’s little room for error for organizations. Building out the above processes and data capabilities will go a long way toward minimizing risks and providing a clear path when potential violations are found.

These steps will also help organizations more easily comply with similar regulations in the future that require a close look at supplier details and sources — the current global push for increased regulations suggests that this is more of a question of when rather than if.

Organizations that have laid the groundwork for transparency throughout their supply chains and tapped into automation-powered supplier management platforms will find themselves a step ahead of competitors that are less proactive when it comes to UFLPA and similar regulations.

(Photo credit: Getty Images/Mlenny)

About the Author

Jag Lamba

About the Author

Jag Lamba is CEO and founder of Certa, an artificial-intelligence (AI)-powered third-party platform provider.