Government agencies other than CBP are also authorized to investigate allegations that forced labor is used to produce goods imported into the United States. U.S. Immigration and Customs Enforcement (ICE), for example, investigates allegations of forced labor related to overseas manufacturing or mining of items that are exported to the United States. The Department of Labor (in consultation with the Department of State and Homeland Security) maintains and annually publishes a list of products that it believes are produced by forced labor, and this list is used to inform the U.S. State Department’s annual Trafficking in Persons Report.
CBP promises to hold goods and issue the dreaded WRO pending further investigation whenever the “information available reasonably but not conclusively indicates that merchandise” to be imported is subject to the anti-forced or indentured labor provision. CBP has made it clear that the “some reasonable indication” standard for issuing a WRO allows it to base a decision on a risk assessment and does not require clear and convincing evidence. Enforcement actions can be triggered by anyone who reports suspicious activity to a CBP officer who then issues a report to the CBP commissioner. Goods can be detained with the commissioner’s issuance of a WRO even when information reasonably but inconclusively indicates that merchandise was made with forced labor. Once a shipment is seized by the CBP and subject to a WRO, the purchaser or importer must provide a detailed demonstration that the commodities were not produced with forced labor as proof of admissibility into U.S. markets. CBP will then decide whether to release shipments on a case-by-case basis. CBP actively seeks the help of NGOs with feet on the ground, and if CBP ultimately deems the gathered information sufficient to make a determination, the commissioner will publish a formal finding in the Customs Bulletin and in the Federal Register.
Enhanced Internal Reviews and Disclosure
In response, responsible importers are taking steps to enhance their compliance measures. They are undertaking review of all products where they commonly act as the importer of record because that role automatically makes them responsible parties for dealings with CBP. Conducting supply-chain audits and performing supplier due diligence to be sure there is no forced labor at any level is clearly now part of good governance as well as corporate social responsibility. In fact, supply-chain audits and due diligence is a legal requirement for certain American companies and large international companies supplying goods and services (including goods and services online) to consumers in California and a growing number of countries outside of the United States.
What is the proper course of action, however, if a company discovers goods tainted by forced labor as part of its compliance monitoring? Do the company’s legal obligations change before and after accepting those goods and incorporating the tainted ingredient into products placed in the U.S. markets? Certainly, a company that discovers goods tainted by forced labor should immediately consider terminating its supply-chain agreement with the offending importer or at least employ greater diligence before accepting delivery of future, possibly tainted goods at the port of entry. However, does the company have a legal obligation to report its findings to the port director or the commissioner of CBP?
Government contractors are bound by the False Claims Act’s mandatory disclosure rule, which provides that contractors must “timely disclose” whenever the contractor has “credible evidence” of certain criminal law violations or violations of the civil False Claims Act. If the importer is member of the Customs-Trade Partnership against Terrorism and part of the Importer Self-Assessment Program, it is expected to take action to mitigate risk and report noncompliance to CBP.
Self-disclosure under TFTEA still appears to be discretionary, however, at least for now. Revised CBP regulations invite “[a]ny person outside the CBP who has reason to believe that merchandise produced in the circumstances mentioned in paragraph (a) of this section [use of convict, forced, or indentured labor] is being, or is likely to be, imported into the United States may communicate his belief to any port director or the Commissioner to CBP.” Nevertheless, if you ask a representative of the CBP’s Office of Trade whether a company’s discovery of forced labor violations must be reported to CBP, you will hear a resounding “Yes.” I know because I asked. Given the use of the “may” above, rather than “shall” in the new regulation, what is the basis of the CBP position?
Historically, CBP has operated under the twin principles of “informed compliance” and “shared responsibility,” placing the burden on the importer of record to make entries on the required forms correctly. Failure to make accurate statements with respect to imported goods can result in seized entries, lost import privileges, and civil and criminal penalties. The Department of Justice (DOJ) initiates action seeking criminal penalties by using statutory provisions related to customs matters (goods entering into the United States via fraud, gross negligence, or negligence, goods that were falsely classified upon entry, and entry of goods by means of false statements ) or, at its election, through noncustoms provisions (the use of federal provisions regarding the obstruction of justice, the federal conspiracy statute, money laundering, smuggling, and aiding and abetting ), with the noncustoms provisions supporting higher criminal penalties.
On October 2, 2016, the DOJ issued Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations. This Guidance memorialized the policy of the National Security Division (NSD) of the DOJ to encourage business organizations to voluntarily self-disclose criminal violations of the statutes implementing the U.S. government’s primary export control and sanctions regimes. It sets forth the criteria that NSD, through the Counterintelligence and Export Control Section and in partnership with the U.S. Attorneys’ Offices, uses in exercising its prosecutorial discretion in determining the possible inducements it can offer an organization to make a voluntary self-disclosure (VSD). For export control and sanctions cases, the Guidance also implements the September 9, 2015 Deputy Attorney General Sally Yates memorandum (Yates Memo) promoting greater accountability for individual corporate defendants and the November 2015 revisions to the Principles of Federal Prosecution of Business Organizations set forth in the U.S. Attorneys’ Manual (USMA Principles).
The Guidance only applies to export control and sanctions violations, however, and rests on the assumption that all criminal violations of U.S. export controls and sanctions harm the national security or have the potential to cause such harm. This threat to national security informs how the NSD and U.S. Attorneys’ Offices arrive at an appropriate resolution with a business organization and distinguishes those cases from other types of corporate wrongdoing, including violations of import controls. Unlike the exporter that finds itself in breach of export controls and sanctions, if an importer truly had no knowledge of the forced labor violations upon original acceptance of the goods, is the failure to report a subsequent discovery as a result of a comprehensive compliance program or audit a violation of law unto itself, or is the violation the failure to amend the original import paperwork?
Penalties for Misstatements to CBP
Federal law prohibits material false statements, acts, or omissions in connection with imports resulting from the importer’s negligence, gross negligence, or fraud. Some typical examples of false statements, acts, or omissions made by importers with respect to goods include misclassifications, undervaluation, antidumping/countervailing duty order evasion, or improper country of origin declarations, but the prohibited activity could also include misstatements with respect to the absence of forced labor. Upon an importer’s discovery of any false statement made in its paperwork, disclosure before a CBP inquiry or issuance of a pre-penalty or penalty notice might be the suggested course of action, yet prior disclosure to CBP does not appear to be required under current law.
The U.S. Attorneys’ Manual section 9-28.900, “Voluntary Disclosures,” now states: “[T]he Department encourages corporations, as part of their compliance programs, to conduct internal investigations and to disclose the relevant facts to the appropriate authorities.” Although “a prosecution may be appropriate notwithstanding a corporation’s voluntary disclosure,” there are concrete, tangible benefits available to entities that do elect to self-disclose corporate misconduct. Where there is a finding of full cooperation and remediation, the corporation and its principals are eligible for a full range of consideration with respect to both charging and penalty determinations.
Importers may look for guidance from the application of corporate compliance programs addressing audits for possible violations of the Federal Corrupt Practices Act of 1977, as amended (FCPA). The Securities and Exchange Commission clearly has taken the position that a company must self-report misconduct in order to be eligible for a deferred prosecution agreement or a nonprosecution agreement. Although there is no blanket affirmative duty to disclose an internal investigation, disclosure may be required if a publically traded company uncovers facts during the investigation that make prior disclosures false or misleading or material.
The DOJ has similarly clarified what is expected and how self-disclosure will vastly affect the ultimate resolution of any FCPA matter. On November 29, 2017, the DOJ announced a new FCPA Corporate Enforcement Policy that formalizes the prior internal guidance, with a few slight revisions, and makes permanent the pilot program established in 2016 to incentivize companies to self-report FCPA violations. The new policy went a step further than the pilot program by creating a rebuttable presumption that the DOJ will decline to prosecute, or impose any penalties on, companies that voluntarily self-disclose potential violations of the FCPA, fully cooperate with the DOJ investigation, and “timely and appropriately” remediate with each of these elements defined in the new policy. Under the revised FCPA enforcement policy, the self-disclosure must be genuinely voluntary (i.e., prior to the “imminent threat” of disclosure or government investigation) and must be made within a “reasonably prompt time” after discovery of the violation. This creates some potential issues for the directors and officers of a company that learn of potential violations and seek to conduct an internal investigation to gather more information. Companies now have to be concerned that protected (and protracted) investigations may jeopardize their ability to make an effective voluntary disclosure. “Full cooperation” in DOJ terms may include deconfliction, which is a request by the government that a company’s legal team step back during an investigation in order to allow the government to interview witnesses first.
Even before the new FCPA policy, the DOJ’s Criminal Division’s Fraud Section released guidance on how it evaluates the effectiveness of a company’s corporate compliance program entitled Evaluation of Corporate Compliance Programs (the Compliance Guideline). The Compliance Guideline sets forth 11 topics and questions investigators may ask when evaluating the adequacy of a compliance program to determine whether to bring charges and the scope of a negotiated plea or other agreements. One of the 11 factors to be taken into consideration is whether the company has implemented an effective and confidential reporting mechanism that can evaluate the risk level or seriousness of reports. Once a report of a compliance breach arrives, the company must timely respond to the complaint and, if appropriate, involve all levels of senior leadership up to the board of directors. In response to investigation findings which should be documented, when warranted, remediation capable of correcting the source of the violations must occur, and all individuals involved in the misconduct must be disciplined.
Should we anticipate a requirement of full cooperation in enforcement of national and international anti-forced labor initiatives? By analogy with FCPA initiatives, there is growing tension between (i) an importer’s need to comply with expanding international legal initiatives requiring supply-chain audits, due diligence, and periodic public reporting with remediation plans to combat the use of forced labor and (ii) a decision not to report violations to CBP upon discovery. If for no other reason, the newly required public reports of efforts to combat forced labor, if complete and accurate, give CBP ample ground to initiate investigations not only with respect to the publically reported discovered violation, but all those that might have occurred at any time within the prior five-year statute of limitations.
The official policy of CBP is clearly to encourage the submission of disclosures before enforcement authorities find violations. It certainly appears to be the case that parties who advise CBP of noncompliance before CBP or ICE discovers the possible noncompliance can expect reduced penalties (to as low as zero) where no fraud is involved. Valid prior disclosures can save the importer time and money, so assuming there is a decision to self-disclose after finding and publishing a report of a supply-chain violation, what should be disclosed and how?
Since businesses are increasingly global, so too are enforcement actions in response to alleged corporate wrongdoing. A company that reports its internal finding of corporate wrongdoing may find itself the focus of not just one law enforcement body, but of many across the world. In addition to the possibility of multiple enforcement actions, a criminal investigation and/or civil proceedings initiated by the victims of forced labor can be devastating to a company’s operations and reputation. Accordingly, companies struggling to both satisfy the legal requirements of global anti-forced labor initiatives and to meet the timeliness and full cooperation criterion of protected self-disclosure must determine the appropriate scope of their disclosures even if an internal investigation is not complete. It is imperative for a company that has discovered forced labor in its supply chain to assess the potential consequences of strategies and tactics in multiple jurisdictions, preserving, to the greatest extent possible, the attorney-client privilege.
General counsel and general business practitioners throughout the United States let out a collective sigh of relief when the U.S. Court of Appeals for the D.C. Circuit granted a writ of mandamus and overturned the district court decision in United States ex rel. Barko v. Haliburton Co. The district court in Barko had held that documents relating to an internal investigation were not protected from disclosure by the attorney-client privilege. In vacating the district court’s order to produce documents, the court of appeals insisted the lower court’s analysis failed to grasp the scope of the attorney-client privilege that protects confidential employee communications gathered by company lawyers in an internal investigation under the seminal Supreme Court case Upjohn Company v. United States.
Three years and counting after the court of appeals decision in Barko, companies have continued to build and invest in robust compliance programs that include self-investigation of potential regulatory violations under the protection of the attorney-client privilege.
The increasing volume of electronic communications has not made an assessment of the scope of the attorney-client privilege in the world of internal audits any easier, however. Should the privilege apply when employees communicate with fellow employees and copy the company’s general counsel? Does such an e-mail implicitly seek legal advice and thus deserve privilege protection without an explicit request for legal guidance but with the mere inclusion of the lawyer as one of the recipients? In Greater New York Taxi Ass’n v. City of New York, the magistrate found that some but not all of the e-mails at issue fit into the framework of privileged communications when the sender indicated that he was soliciting legal advice or that the communication implicated specific legal issues. A similar case in the United Kingdom came to the opposite conclusion, however, holding that communications by corporate lawyers with third parties (including employees) who are not authorized to seek or receive legal advice, and therefore are not the “client” for privilege purposes, are not covered by legal advice privilege (LAP) or litigation privilege (LP), concepts akin to the U.S. attorney-client privilege.
Keeping New York Taxi and other case law in mind, the best practice would be to adopt an aggressive policy in the hope of securing privilege status for as much of the audit results as possible. Officers of the investigating company should state in writing in advance of any e-mail or other communication that the person giving the initial formal instructions to an internal or external lawyer is authorized by the company to obtain legal advice on its behalf. Any employee and executive participating in an internal supply-chain audit or a specific review of a particular shipment should be directed to title all notes as “Attorney Work Product” and to always copy general counsel or outside counsel, as the case may be, as early as possible, explicitly stating that they seek legal advice in all such communications. In addition, companies and their legal advisers should consider the following practical steps in any forced labor inquiry and any decision making with respect to prior disclosure to minimize the risk of inadvertently waiving or losing the attorney-client privilege.
(i) If in-house or outside counsel must obtain data from within the company, whether e-mails or documents, counsel should make clear and document that the collection and use of such information as part of the internal investigation is for the purpose of providing legal advice and counsel to the client company.
(ii) Counsel should advise in writing and orally those who collect information during the investigation of the confidentiality of the information and the fact that such information is being collected under the company’s privilege.
(iii) The record of the discovered facts should be labeled “Attorney Work Product” and include a statement that, on the information currently available, the drafter entertains a concern that the material gives rise to a real likelihood of a prosecution or other sufficiently adversarial proceeding against the company, and the purpose of the instructions to the lawyer is to give advice to the board (or executive, depending on the stage of the investigation) regarding such concern.
(iv) Counsel should indicate in writing also labeled “Attorney Work Product” whether, on the basis of the information initially provided, there would appear to be a reasonable anticipation of a proceeding by the CBP or some other governmental unit.
(v) If a decision is made to proceed with interviews of personnel, in advance of any such interview counsel should inform the person(s) to be interviewed that the dominant purpose of the interview is to enable the lawyer to provide the company with advice regarding the likelihood of prosecution/litigation, and this statement by counsel should be included in the written record of the interview.
(vi) At every step, counsel and investigators must state unequivocally before any interview that the investigation is being conducted under the privilege, and that it is the company’s privilege so that waiver or any claim belongs to the company and not to any individual.
(vii) Counsel should record in writing within the attorney work product some form of qualitative assessment of what has been said by any person interviewed and his or her thoughts as to its importance or relevance to the legal advice sought.
Attorney-Client Privilege and FAR
An examination of the preservation of the attorney-client privilege under the Federal Acquisition Regulations (FAR) might be helpful in this context. Part 22 of the FAR regulates the application of labor laws to government acquisitions. Subpart 22.1700- 1705, Combating Trafficking in Persons, applies to all federal contracts and represents a policy prohibiting contractors, subcontractors, and their respective agents from conduct including, but not limited to, the following:
(1) engaging in severe forms of trafficking in persons during the period of performance of the contract;
(2) procuring commercial sex acts during the period of performance of the contract; and
(3) using forced labor in the performance of the contract.
Pursuant to FAR Subpart 22.1705, “all solicitations and contracts” are required to include a clause requiring contractors to fully cooperate with the U.S. government by providing access to its facilities and staff to contracting/other responsible federal agencies. The agreed-upon access is to facilitate the federal agencies audits and other investigations to ascertain compliance with the Trafficking Victims Protection Act of 2000 and any other law or regulation restricting the trafficking of persons, the procurement of commercial sex acts, and the use of forced labor. The clause specifies that the requirement for full cooperation does not:
(i) require the Contractor to waive its attorney-client privilege or the protections afforded by the attorney work-product doctrine;
(ii) require any officer, director, owner, employee, or agent of the Contractor, including a sole proprietor, to waive his or her attorney client privilege or Fifth Amendment rights; or
(iii) restrict the Contractor from—
(A) conducting an internal investigation; or
(B) defending a proceeding or dispute arising under the contract or related to a potential or disclosed violation.
Content of Disclosure to CBP
Turning back to importers, once an internal audit uncovers products tainted by forced labor and a decision is made to proceed with a prior disclosure, the importer should be sure to follow up any verbal report to a CBP officer at every port of entry where the disclosed violation(s) occurred in writing within 10 days. The writing should indicate the importer’s name, address, and contact information and should be addressed to the commissioner of CBP with copies to each applicable port. The written disclosure should list all of the concerned ports, identify the class or kind of merchandise, identify the entry number(s), dates of entry, or drawback claims, and specify the previously believed absence of the use of forced labor as a material false statement. The disclosure should go on to include an explanation as to the true and accurate information or data with respect to labor that should and would have been provided if previously known. Every effort must be made to be sure the disclosure is as complete as possible. If necessary, to maximize the intended benefit of the disclosure, the disclosing importer must first determine whether its internal inquiry and resulting disclosure should look back five years to cover those violations, if any, not barred by the statute of limitations.
Notwithstanding the desire to be thorough in the disclosure, efforts can and should be made to preserve the attorney-client privilege to the extent possible. The U.S. International Trade Commission gives only approved parties to an investigation access to business proprietary information (BPI), and even that access is subject to an administrative protective order (APO) designed to protect the confidentiality of the BPI. Information that is privileged, classified, or “of a type for which there is a clear and compelling need to withhold from disclosure” is nevertheless exempt from disclosure and service under the APO. There is a special procedure for a submitter of BPI to follow if he or she considers that any of the information falls within the exempt categories, requesting an exemption from general availability to the secretary. The submitter must file multiple copies of the same documents claimed to be privileged, with their covers and pages clearly marked as to whether they are the “confidential” or “nonconfidential” versions, and the confidential business information must be clearly identified by means of brackets. All written submissions, except for confidential business information, will be made available for inspection by interested parties.
Contract Rights upon Discovery of Tainted Goods
The discussion above does not distinguish between a company’s pre- or post-acceptance discovery of the impermissible use of forced labor in the production or manufacture of goods. Should the company’s decision to report the infraction to the CBP depend upon the timing of the discovery?
If the supplier’s acts constitute the use of forced or child labor, and such acts are discovered by the would-be buyer before acceptance of the goods, disclosure to the CBP would, under such circumstances, not appear to be legally required under current U.S. law because there was no false or misleading information submitted to CBP by the importer. Referring back to the discussion above with respect to the CBP regulations use of the words “may communicate,” rather than the mandatory “shall communicate,” the regulations seem to pose no risk to a buyer that rejected such goods as nonconforming because there is no entry into U.S. markets attributable to that buyer. What if the buyer accepted identical goods from the same supplier historically (anytime in the five-year period of the statute of limitations)? If that is the case, and it probably will be more often than not, disclosure might be problematic, but nondisclosure may be worse. What if the prohibited acts of the supplier are discovered and disclosed by another, and CBP initiates an investigation of all buyers from that supplier in the prior five-year period? After all, once the tainted goods are revealed by another, such an investigation is likely low-bearing fruit for the CBP’s enforcement arm. In fact, a competitor that can secure the protections afforded by full cooperation would have every incentive to damage the brand and operations of less transparent companies in the same space.
If the discovery of the use of forced labor by the importer precedes acceptance of the goods delivered to a port, the importer must also be sure to evaluate its contract rights with its supplier to reject the goods as nonconforming. There will probably be a contractual obligation to notify the supplier of the importer’s discovery and rejection of goods. Although the contract might have a general reference to a supplier’s obligation to adhere to all applicable law, breach of applicable anti-forced labor laws may not be identified as a breach justifying rejection of the goods or termination of the contract. The importer may find itself in the impossible position of having to choose between violating TEFRA and breaching a contract with a supplier, with both alternatives posing operational and reputational risks.
The Uniform Commercial Code Subcommittee of the ABA Business Section is currently working on model contract clauses designed to protect the human rights of workers in international supply chains. By way of reference and incorporation into the supply contract, a breach of the anti-slavery, human trafficking, and human rights policies of the buyer/importer made known to the seller/supplier and required in the supplier’s performance can be deemed a clear material breach of the contract and support rejection of the tainted goods as nonconforming. Putting these provisions in supply contracts will provide support for a company’s desire to prove that it is complying with prevailing international legal developments to assure fundamental freedoms for all workers. Audit rights, if also included in the contract and utilized regularly, would assist the buyer/importer in its efforts to be vigilant in fighting forced labor throughout the supply chain.
The incorporation of such policies into the supply-chain contract will provide a framework for agreed-upon disclosure by an importer/buyer of the supplier/seller’s use of forced labor to CBP, SEC, California, the United Kingdom, France, and the general public. Without such explicit contractual provisions, an importer that discloses its supplier’s use of forced labor to third parties could arguably otherwise be subject to the supplier’s claim that the importer breached standard nondisclosure covenants by revealing confidential supplier information.
Such contractual incorporation of anti-forced labor and general human rights policies has yet another benefit. Contract provisions that refer to anti-forced labor and human rights policies and incorporate such policies throughout the supply chain will allow businesses to self-regulate. Self-regulation might just be more effective at preventing forced labor and other abuses of human rights than laws governmental agencies find difficult to enforce given their limited resources. Corporate policies, audits, and remediation plans that reflect a broad concern for all supply-chain workers could play an important role in prevention not only of forced labor, but also factory collapses and fires, unacceptable living quarters, sub-par medical care for accidents, shift break restrictions, and similar work-related hardships that do not rise to the level of forced labor as that term is defined in the beginning of this article.
Pitiable working conditions suffered by employees of suppliers are not addressed in the scope of current legal requirements, whether national or international, so disclosure upon discovery is rarely, if ever, required. If such working conditions are violations of supplier contract requirements, however, mistreatment of workers could justify rejection (or threatened rejection) of the goods and/or termination of the contract, unless the contract breach is remedied by the offending supplier within the time period provided. The efforts of internal governmental units and NGO investigators would be supplemented across the world by thousands of internal auditors’ feet on the ground, and what has been pervasive for too long might finally change.