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December 9, 2020

CBP Issues Detention Order on Cotton and Cotton Products Originating from the Xinjiang Production and Construction Corps


On December 2, 2020, U.S. Customs and Border Protection (CBP) added to its long list of Withhold Release Orders (WROs), which are issued to stop shipments of goods CBP reasonably believes were made wholly or in part with forced labor. Under the new WRO, shipments containing cotton and cotton products produced by the major Chinese entity, the Xinjiang Production and Construction Corps (XPCC) will be detained at all U.S. ports of entry.1

CBP's action is the latest U.S. government effort to address forced labor in China, particularly against Muslim minority groups in the Xinjiang Uyghur Autonomous Region (XUAR). This marks the sixth enforcement action that CBP has announced in the past three months against goods made by forced labor from the XUAR.2 The U.S. government also issued an unusual advisory in July 2020, to caution the business community about U.S. concerns about forced labor in supply chains in Xinjiang and potential future enforcement actions.3 CBP has focused its enforcement attention in this area almost exclusively on China in the last 12 months, issuing nine WROs and one Finding, from a total of 14 orders in 2020 addressing forced labor issues. This flurry of enforcement activity related to China in the last year is significant, compared to just six WROs issued against Chinese manufacturers between 2016 through 2019.4

XPPC is a major Chinese entity with large-scale cotton operations in XUAR that reportedly account for about one-third of all cotton produced in China in 2018. 5 When the Office of Foreign Assets Control (OFAC) designated XPCC as a Specially Designated National (SDN) under the Global Magnitsky economic sanctions program, so that transactions with XPCC within the United States or by U.S. persons are prohibited, OFAC described it as "a paramilitary organization in the XUAR that is subordinate to the Chinese Communist Party (CCP). The XPCC enhances internal control over the region by advancing China's vision of economic development in XUAR that emphasizes subordination to central planning and resource extraction."6 While estimates vary, XPCC is reported to hold over 862,600 direct and indirect holdings among various industries in China and other countries, including some interests in the United States.7 Because OFAC sanctions flow to all entities owned 50% or more by one or more SDNs, the scale of the impact of OFAC's designation is potentially unprecedented. Despite its massive size, XPCC is known to be a "secretive" organization and many aspects of its operations are not known to the public.8 Therefore, the compliance risks, and the costs associated with determining how far the OFAC designation stretches, are likely significant. For example, any transactions denominated in U.S. dollars, even if between one of the multitude of indirect XPCC subsidiaries and a non-U.S. company would, be considered a violation of the OFAC sanctions if a U.S. bank processed the transaction only as an intermediary bank.

The potential impact of this latest CBP decision is similarly sweeping, given XPCC's size, the scale of its operations, and its workforce. By all accounts, XPPC entities play a major role in cotton, as well as textiles generally, and operate in supply chains around the world. The WRO, coupled with the existing Treasury Department sanctions against XPCC, will no doubt result in increased discussion about how CBP's WRO decision will be enforced, and what effects it will have on the business community.

From an enforcement perspective, the question will arise whether CBP has the staffing and information needed to comprehensively enforce this WRO against an entity so large and opaque. Importantly, under the relevant statute, 19 U.S.C. § 1307 (Section 1307), the forced labor prohibition applies to goods made "wholly or in part" from forced labor. An aggressive implementation of the statute would mean that even if a small amount of cotton fiber was harvested by XPCC, and then processed into a final product (e.g., cotton shirt), the final product would be covered and subject to detention under the XPCC WRO. As Acting Deputy Secretary Cuccinelli of the Department of Homeland Security (DHS) stated on December 2, 2020, the XPCC WRO is "so massive that even though it appears that it's a single company . . . it is equivalent to a regional WRO."9

A WRO of this magnitude obviously poses significant compliance and operational risks to businesses. When CBP detains merchandise under a WRO, the importer has the opportunity to present "proof of admissibility"10 to establish that merchandise is not produced with forced labor, and seek release of the merchandise. It could pose a Herculean task for importers to try to respond to a detention under the new WRO, given the traceability challenges in their supply chains. They also face the risk of accompanying delays in release and delivery of merchandise to customers.

Since the WRO on XPCC has just been issued, it is unclear whether CBP will provide further guidance on how importers should comply with it or on what proof of admissibility will be sufficient to respond to an enforcement action. It remains incumbent on importers to carefully review their supply chains, including their inputs, and develop clear policies focused on ensuring products produced with forced labor are kept out. It is also critical that the policies do not exist only on paper but rather are sufficiently implemented throughout the entire supply chain.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.