State Department Warns Companies Doing Business in Xinjiang, China is a ‘Reputational Risk’

The Biden State Department continues to pressure American supply chains sourcing from Xinjiang, the far western province where China has built modern-day concentration camps to hold Uyghur Muslims in captivity. The State Department has called the Chinese Communist Party’s (CCP) human rights abuses against the Uyghurs genocide. And on Tuesday, in keeping with a recent trend since the G7 meeting last month, the State Department issued a clear warning to American businesses sourcing from Xinjiang.

The State Department says in its updated Xinjiang Supply Chain Business Advisory that numerous companies in Xinjiang are “complicit in forced labor and other human rights abuses there and throughout China.” Customs and Border Protection (CBP) was recently instructed by the Department of Homeland Security to seize any solar cells or any product made from polysilicon produced by Hoshine Silicon Industry, a company that as recently as January was part of three American mutual fund portfolios managed by Vanguard.

CBP also has Withhold Release Orders out to seize goods sourced from Xinjiang cotton and tomato derivatives.

Tuesday’s notice updates the original Xinjiang Supply Chain Business Advisory issued by U.S. government agencies on July 1, 2020.

The State Department’s 36-page report can be read here.

For Wall Street firms like Vanguard, today’s update puts them on notice. Corporate compliance officers will be very busy.

The advisory lists six activities that are otherwise linked, directly or indirectly, to businesses in Xinjiang that are engaged in international labor violations that may face reputational risks and/or trigger U.S. criminal or civil enforcement and other actions. The list included investment in companies involved in providing surveillance equipment used in Xinjiang.

American firms who provide “financial support, including by venture capital and private equity firms, to Chinese companies that contribute to the Chinese government’s vast and growing surveillance network linked to human rights abuses in Xinjiang” are subject to this latest enforcement action.

The State Department was also clear, without naming specific parts and tariff codes, that American computer hardware and software firms could not sell to entities involved in Xinjiang’s Uyghur detention camps. If it’s a Hikvision camera that monitors jaywalkers in Beijing and is also used to monitor the movement of individuals in Xinjiang’s Uyghur neighborhoods, then selling parts to them is off-limits.

From the report:

Selling or providing biometrics devices; items intended for surveillance; items used for  genetic collection and analysis; microchips and microprocessors; tracking technology, or equipment, software, and technology related to the aforementioned products; providing maintenance or other services in support of such products, including those that have been known to arbitrarily track and control the movements of Uyghurs or others in Xinjiang; or selling or providing any goods, software, or technology used as inputs, or to support the production of inputs, used in the manufacture of the aforementioned products.

One of the six items potentially opens a can of worms for ByteDance, owners of the addictive social media app, TikTok. The company said that it does indeed keep facial recognition from individual users, which then goes into its ability to create deeper, smarter, artificial intelligence from harvested data of TikTok videos. ByteDance, however, is not a Xinjiang-based company, but its in-house data and research and development on facial recognition could be shared or sold to those companies who have Xinjiang on 24-hour surveillance, let alone the rest of urban China.

From the report:

(Anyone) conducting research partnerships with Chinese technology facial recognition firms known to be involved with enabling China’s surveillance activities or inviting such parties to conferences where technical issues on surveillance-related activities will be discussed; or attending conferences related to surveillance activities and facial recognition technology in which such entities play a leading role, such as through organizing or sponsoring these conferences.

Reputational risks are now a financial risk to American multinationals which, until now, have glided along the trade war with very little action to decouple some of their manufacturing from China. While many of the big brands, especially those in the retail apparel space, say they either do not source from Xinjiang cotton or cannot say for sure where their cotton comes from, the U.S. government essentially said today that the onus of proof is on them.

Last month, China polysilicon maker Daqo New Energy, which came to life in 2007 as the Western world began making climate change an economic policy driver, invited journalists to their Xinjiang factories to show they were state of the art, and that no one was working against their will. Despite this obvious media charade by the CCP, one of their subsidiaries in Xinjiang was put on the Commerce Department’s Entity List on June 24.

However, even placement on the Entity List doesn’t deter Wall Street from helping Chinese companies exploit U.S. capital markets. Even today, Daqo New Energy trades on the NYSE. BlackRock, Invesco, Goldman Sachs, Vanguard, and State Street own over 18 million shares combined. BlackRock alone had over $600 million invested in Daqo as of March 30, 2021 as any visit to Yahoo! Finance will show.

China says that its Uyghur policies are part of its domestic war on terrorism. Beijing has chastised Europe for calling it genocide when Europe practiced genocide against the Jews. Beijing says they are not murdering Uyghurs like the Holocaust.

Still, numerous Uyghurs who managed to escape Xinjiang said they, or their family, were subjected to rapes and forced birth control measures to make them infertile.

The dominant ethnic group in China is the Hans. China says the facilities are re-education camps to bring the far west province in line with the Han way of thinking about China.

Moreover, the State Department is now telling companies to be on the lookout for ways in which the CCP hides Xinjiang-related companies and Entity List firms in the province.

Forced labor “graduates” are those involved in “reskilling vocational programs.” For American companies doing due diligence on their Xinjiang outsource partners, look for high profit margins, and very few employees paying the equivalent of Chinese social security and unemployment insurance taxes as a red flag, the State Department says.

Firms operating in Xinjiang use shell companies to hide the origin of their goods or conceal their ownership of the companies. They often write supply contracts with opaque terms, and conduct financial transactions in such a way that it is difficult to determine where the goods were produced, or by whom.

China presents extreme challenges to conducting labor due diligence.  Third-party audits are not a sufficient due diligence program and may not be a credible source of information for indicators of labor abuses in Xinjiang, either, because auditors have reportedly been detained, harassed, threatened, or stopped at the airport. Others have been required to use a government translator who conveys misinformation or does not speak English well enough to give meaningful details. State says that auditor interviews with workers also cannot be relied upon given pervasive surveillance, the threat of detainment if they spoke out of line, and the potential for getting themselves or family members in trouble.

Several audit companies will not conduct audits of labor practices in Xinjiang because of the challenges of obtaining objective assessments, and threats.

Going forward, Xinjiang-based companies will have to prove they are above board. This may even include new clean energy powerhouses like Xinjiang Goldwind Science and Technology Company, best known simply as Goldwind. They have around 44 wind turbines spinning across the U.S., and while no one has ever accused Goldwind of forced labor practices, its Xinjiang location, not to mention its corporate name, instantly puts it in the crosshairs.

Meanwhile, Washington needs to be mindful of Wall Street’s continued backing of these companies and their subsidiaries. Investment companies should be blocked from buying and selling the securities of companies and their parents on the Entity List, or subject to WROs, effective within weeks of the order, rather than years. If not, BlackRock and Goldman Sachs will continue being part of the reason why these companies, and Beijing, consider themselves immune to Washington’s pressure.