Latest China Company on Uyghur Law’s Banned List Counts USAA As Investor

The Department of Homeland Security added two new China companies to its banned Entity List as part of the Uyghur Forced Labor Prevention Act (UFLPA) law on Aug. 1.  One of them counts USAA, a banking and insurance group that targets military families, as its biggest American shareholder, according to Morningstar. 

The Forced Labor Enforcement Task Force, a government interagency group, said products from Chinese EV battery manufacturer Camel Group Co., Ltd., Chenguang Biotech Group Co, and its subsidiary Chenguang Biotechnology Group Yanqi Co. will be restricted from entering the United States as a result of the companies’ participation in business practices that target members of persecuted groups, including Uyghur minorities in Xinjiang.  The action is part of the Uyghur Forced Labor Prevention Act which has upended business between Xinjiang-based companies (or companies that benefit from Uyghur forced labor throughout China) and the U.S. since it came into force last year.

Both Camel Group and Chenguang Biotech are publicly traded in Shanghai and Shenzhen, respectively. It is unclear if any U.S. investment funds have Camel Group shares. Morningstar had no information on share ownership.

But Chenguang was held by USAA, a company that is somewhat of a household name in the mutual fund and insurance business. It is a frequent advertiser during prime time television, once featuring NFL legend Rob Gronkowski in its commercials. Their financial products are only open to military service members (current and former) and their families, meaning USAA is now stuck holding a company that Homeland deems a bad actor and believes to be using forced labor or Muslim prison labor.

“The Biden-Harris Administration is committed to holding organizations accountable for their egregious human rights abuses and forced labor practices,” said Secretary of Homeland Security Alejandro N. Mayorkas. “We will continue to work with all of our partners to keep goods made with forced labor from Xinjiang out of U.S. commerce.”

Chenguang is engaged in the processing of agricultural products and herb extracts in China. Its products include natural colorings made from paprika oleoresin, marigold oleoresin, curcumin, red rice red, red cabbage, and red beet. They are also producers of essential oils exported to the U.S. It is unclear how much business they do here.

Export restrictions are one thing. While Homeland is accusing these companies of labor abuses, massive asset managers like USAA are still allowed to invest in them – and that includes investing the money of retired military personnel into Entity List companies.

Florida Senator Marco Rubio: federal government employees and the military should not be putting their retirement savings into China.

Some in the Senate, like Marco Rubio (R-FL) and Jeanne Shaheen (D-NH), have advocated for outright bans on federal employees, including current and former soldiers and officers, from investing in China stocks. They have a bill that would force the Federal Retirement Thrift Investment Board to remove mutual funds and exchange-traded funds holding China from its offerings. While some Senators prefer to ban all China stocks from federal government portfolios, others have argued that Wall Street should divest from Entity List names and be allowed to keep China companies that are not banned.  Companies on the numerous Entity Lists out there in Washington are not closed to U.S. capital markets. Only Treasury maintains a list of a few dozen Chinese defense contractors that are off-limits to all American investment funds.

CPA would like to see that list significantly expanded to cover more of China’s military-civil fusion companies that rival American industry.

A recent Senate vote to remove China from the Thrift Savings Plan program, which is the name of the federal retirement plan, came down 55 in favor and 42 against. Per Senate rules, it needed 60 votes to pass.

This is the first time that Congress has taken a vote on legislation to prohibit federal retirement savings from being invested in China. Although the amendment ultimately failed, it’s notable that a majority of the Senate voted in favor of it.

“We have a lot of people on Capitol Hill who are torn on China,” said Robby Smith Saunders, vice president of national security at CPA. “They want to restrict technology to China, they want to talk tough on China because of Covid or Taiwan or its underground bioresearch labs on U.S. soil as we recently learned about in California. But they are still trying to figure out how to handle capital flows to what they all seem to agree to be our biggest rival. They were fast to ban investing in Russia because of Ukraine. Yet, even as Homeland says these companies are breaking U.S. laws, Congress has not moved to restrict American investors from owning shares in these companies as the Trump and Biden administrations both did with regard to bans on owning a subset of Chinese defense contractors. Wall Street will only divest if made to do so. Until then, they will continue to own Entity List names Homeland, Commerce, and State have deemed bad actors.”

The Uyghur Forced Labor Prevention Act was enacted on December 23, 2021, to strengthen the existing prohibition of some goods by Customs and Border Protection (CBP). For example, CBP has bans on individual companies like Hoshine Silicon Industries (also on the Uyghur Entity List and still allowed access to U.S. capital. Vanguard and BlackRock hold these shares in their mutual funds and ETFs, according to Morningstar.)  CBP also has bans on products such as hair extensions (believed to have been cut from the heads of female prisoners), tomato-based products and cotton, including clothing made from cotton sourced from Xinjiang.

The 2021 law enhanced the Forced Labor Enforcement Task Force, chaired by Homeland, and tasked with devising the strategy for enforcement of Section 307 of the Tariff Act of 1930, as amended (19 U.S.C. § 1307) to prevent the importation into the United States of goods mined, produced, or manufactured wholly or in part with forced labor in China.

Homeland did not say in its press release why Camel and Chenguang were suspected of forced labor violations.