Uyghur Forced Labor Disclosure Act reintroduced – will disclosures relating to China sourcing become a requirement for public companies in the U.S.?

Jennifer Wexton (Democrat - Virginia) and Carlos Giménez (Republican - Florida) recently introduced the Uyghur Forced Labor Disclosure Act in the U.S. House of Representatives. The Act would require companies that are publicly traded in the United States to disclose information regarding links their products may have to China’s Xinjiang Uyghur Autonomous Region. Congresswoman Wexton introduced a similar bill in 2021.

The Act is expressly intended to build on the Uyghur Forced Labor Prevention Act. The UFLPA establishes a presumption for purposes of section 307 of the U.S. Tariff Act that goods produced in the XUAR, or with labor linked to specified Chinese government-sponsored labor programs, are produced using forced labor and therefore not entitled to be imported into the United States. The presumption took effect slightly more than a year ago. Since then, U.S. Customs and Border Protection has detained more than 4,600 shipments pursuant to the UFLPA.

Annual reporting

Under the proposed Uyghur Forced Labor Disclosure Act, the U.S. Securities and Exchange Commission would be required to adopt rules requiring issuers to indicate in their annual report or proxy statement whether, during the covered fiscal year, the issuer or any of its affiliates directly or indirectly engaged with another entity to use or source goods from the XUAR or mined, produced or manufactured wholly or in part by specified entities on the entity list published pursuant to the UFLPA.

For applicable goods, the issuer would be required to disclose (1) whether the goods have supply chain links to facilities that employ forced labor, (2) the nature and extent of the commercial activity, (3) the gross revenue and net profits, (4) the alternative sourcing options, (5) a description of the measures taken by the issuer to exercise due diligence on the source and chain of custody of the goods and (6) other entities and facilities affiliated with the facility employing forced labor, including the physical location of the facilities and the supplier’s headquarters. Under the Act, any labor in the XUAR, as well as certain other state-sponsored labor programs, would be presumed to be forced labor unless otherwise designated by applicable U.S. authorities.

The issuer also would be required to disclose whether it or any of its affiliates was directly or indirectly involved in the development or provision of surveillance goods, services or technologies used to facilitate gross human rights abuses.

New exchange listings

The SEC also would be required to adopt rules requiring an issuer, in connection with a new listing on a U.S. securities exchange, to include in its application and file with the SEC documentation indicating whether the issuer or any of its affiliates has in its supply chain goods (1) sourced from the XUAR, (2) mined, produced or manufactured wholly or in part by specified entities on the entity list published pursuant to the UFLPA or (3) produced by an entity engaged in labor transfers from the XUAR or forced labor. The issuer would be required to list the name, address and quantities sourced from each entity mining, producing or manufacturing the goods.

The issuer would be required to obtain independent verification by a third-party auditor of the documentation submitted. The issuer would be required to maintain the confidentiality of the auditor’s identity, unless waived by the auditor. The issuer also would be required to establish policies to respond to reprisals against the third-party auditor.

If an issuer fails to meet the foregoing requirements, the applicable securities exchange would not be permitted to approve the issuer’s listing application and the issuer would not be able to refile the application for one year.

Will the act become law?

 As noted above, a similar bill was introduced in 2021. That bill never made it out of committee. Will this time be different?

On the one hand: 

• Criticism of China on human rights and national security grounds has popular support on both sides of the U.S. political aisle. Advocating for enhanced China-related disclosures by public companies seems to have little downside political risk, and upside potential.
• The 2023 Uyghur Forced Labor Disclosure Act has a Republican co-sponsor. All of the sponsors of the 2021 bill were Democrats.
• In December 2021, the UFLPA passed with near unanimous support in Congress.
• Over the last few months, the bi-partisan House Select Committee on the Chinese Communist Party has sent requests for information to several companies, including most recently in the financial services sector. Among other things, the requests have been focused on human rights and national security.
• In April 2022, Republicans introduced the Transaction and Sourcing Knowledge (TASK) Act in the Senate. That act proposed to among other things require companies publicly traded in the United States to disclose sourcing and due diligence activities related to products utilizing forced labor from the XUAR and transactions involving certain Chinese companies.
• There is precedent for legislation that requires the SEC to adopt rules that seek to advance social goals, such as relating to conflict minerals and resource extraction transparency.
• The SEC is on its own increasing its focus on China-related disclosures. In July, the SEC published a sample letter to companies focused on among other things (1) risk factor disclosure concerning oversight and discretion of the Chinese government over issuers’ operations and (2) MD&A disclosure regarding how issuers’ businesses are impacted by the UFLPA.

On the other hand: 

• The Act’s primary goals appear to be unrelated to the SEC’s long-standing three-part mission: (1) to protect investors; (2) maintain fair, orderly and efficient markets; and (3) facilitate capital formation. In the press release announcing the introduction of the bill, the focus was on providing transparency to consumers and users of goods and promoting human rights, although transparency for investors also was mentioned.
• Although legislation has been enacted requiring the SEC to adopt rules that advance human rights goals – as noted above relating to conflict minerals and resource extraction transparency – those rules have been widely criticized and challenged by Republicans.
• A recent bill introduced by House Financial Services Committee Republicans – the Guiding Uniform and Responsible Disclosure Requirements and Information Limits (GUARDRAIL) Act – seeks to clamp down on ESG disclosures that are not financially material.
• Although the 2023 Uyghur Forced Labor Disclosure Act has a Republican co-sponsor, all of the other current supporters are Democrats.

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