How to Strengthen Trade and Labor Compliance with Technology Amid Increasing Customs Enforcement
Supply chain constraints, both expected and unexpected, continue to disrupt global trade and appear to be the new normal for the foreseeable future. As the world is slowly recovering from the pandemic and constraints in both materials and labor are creating unprecedented supply chain challenges, recent government actions are also generating often unexpected hurdles in the “last mile” such as unexpected delays and merchandise detentions.
The U.S.,  Australia and Germany have recently proposed or enacted regulations or legislation aimed at ensuring companies take affirmative steps to prevent and eliminate forced labor in both their direct and indirect supply chains. As supply chains have grown more complex with additional tiers, the risk of exposure to potential human rights issues has grown as well. Importers subject to withhold release orders (WROs) often lack complete visibility into their full supply chain and regulators might not specify where their forced labor suspicions lie. This heightened risk is also driven, in part, by geopolitical tensions and global focus on environmental, social and governance (ESG) initiatives. A forced labor investigation may originate internally within the organization wanting to ensure a compliant supply chain, through non-governmental organization (NGO) reporting, or from a regulatory inquiry.
In the U.S., if Customs and Border Protection (CBP) receives information that “reasonably indicates” merchandise intended for importation contains any components that are the result of forced labor, the agency may detain the suspected merchandise at the port of entry under the authority of a WRO. While the specter of forced labor is a legitimate threat, the lack of a transparent process and ongoing trade disputes have led to concerns that WROs could be also used as political tools.
To combat allegations of the use of forced labor with regards to U.S. imported merchandise, the burden of proof is on the importer. If the importer can affirmatively demonstrate that the goods were not produced with forced labor, CBP may deem the merchandise admissible and release it. Importers must provide proof of admissibility, including a certificate of origin conforming to the template set out in 19 CFR §12.43(a), within three months of the importation. While CBP provides scant guidance or information as to why merchandise is detained or how evidence of admissibility is evaluated, practical experience suggests that merely complying with the basic requirements for a certificate of origin and attestation as described in Part 12.43 will likely be an inadequate defense against the agency’s assertions.
To determine if a supply chain is plagued by forced labor activity, CBP uses the International Labor Organization’s 11 indicators of forced labor. After determining that there is sufficient evidence to suggest the presence of these factors, CBP allows evidence to refute the allegations and demonstrate admissibility. CBP suggests four general kinds of evidence that support admissibility to allow release of detained merchandise:
1. Evidence refuting each identified indicator of forced labor;
2. Evidence that policies, procedures, and controls are in place to ensure that forced labor conditions are remediated;
3. Evidence of implementation and subsequent verification by an unannounced and independent third party auditor; and
4. Supply chain maps that specify locations of manufacturers, factories, farms, and processing centers.
However, CBP does not offer specific examples of the types of documents, records, reports or other due diligence that meet or exceed the subjective standard for release from detention. In the absence of sufficient examples of successful release in the public record, importers may struggle to develop appropriate or adequate compliance measures.
Further, despite the regulatory requirement for a “reasonable indication” that the subject merchandise contains forced labor, CBP has a history of issuing WROs covering broadly defined products, including finished goods and raw materials, originating from entire countries and regions, such as the palm oil industry in Malaysia, which has been the subject of labor compliance allegations for several years.,
The number of CBP cargo detentions related to WROs increased by a factor of 27 in FY 2020 over FY 2019, from 12 to 324. Those detentions amounted to a total cargo value in excess of $55.5 million. The steep, upward trend in WRO enforcement has continued thus far in FY 2021 with year-to-date figures indicating 967 cargo detentions representing a total value of over $367 million, a three-fold increase in detentions and six times the import value over last fiscal year (with two months remaining in FY 2021).
Importers caught unprepared have been unable to rebut the presumption of forced labor absent the appropriate evidence and compliance controls attentive to forced labor factors. Given the significant burden to prove the negative, coupled with increasing concerns over supply chain endurance, global companies should be highly motivated to engage with supply chain business partners that can support the required due diligence to defend against forced labor allegations.
Developing or improving trade and labor compliance procedures often requires a multifaceted and customized approach, especially when faced with an ever-changing enforcement landscape. In addition to traditional trade compliance measures such as documentation, due diligence and reasonable care, a robust labor compliance process will also benefit from a more modern, technology-based approach.
For example, blockchain and digital token technology can provide immutable certification throughout the supply chain, which can be independently verified by regulators or a credible third party to trace and validate the origin of materials and labor in addition to real-time logistics tracing. Blockchain solutions have been successfully implemented in similar contexts for supply chain and origin audits and inspections, cradle-to-grave supply chain tracing and global, product tracking to improve regulatory compliance as well as achieve time and cost efficiencies. A combined technology and regulatory approach to compliance can be tailored to improve the traceability of all aspects of the supply chain and designed to create an irrefutable, digital record of compliance. In addition to the regulatory compliance benefits of a traceable supply chain, blockchain demonstrates a company’s efforts to maintain transparency and accountability to its business partners, customers and other stakeholders.
Blockchain technology is often misunderstood. By engaging blockchain experts, organizations can overcome technical challenges and ensure the technology is developed as a unique solution fit for purpose, scale and cost benefits. Companies in an array of industries are implementing blockchain within their supply chains to increase efficiency and transparency.
For example, a global food and beverage company adopted blockchain technology to track its coffee products from bean to cup. Another company implemented a blockchain solution built to trace a product’s travels across the supply chain—achieving insights within seconds, as compared its previous seven-day tracking cycle. Similar applications of blockchain technology can be used to verify and document compliance throughout the supply chain, including validation of workforce compliance, and presented as evidence rebutting underlying allegations of a WRO or in support of the admissibility of merchandise.
Given increasing scrutiny of supply chains and in particular the focus on complete transparency with regards to eliminating forced labor, in addition to importers operating in industries already impacted by existing WROs, all companies should be evaluating their risk and exposure to commodities, regions and countries with a heightened risk of future action. Those who are proactive will maintain a competitive commercial advantage over those who chose to wait until their merchandise is detained and are forced to react to either agency action or public scrutiny over non-compliance.
Without implementing a combination of traceability technology throughout the supply chain and other tools such as third-party audits to ensure compliance, merchandise detained by CBP will not have sufficient documentation to rebut the presumption of a “reasonable indication” of forced labor, which could lead to devastating losses of merchandise, exorbitant storage fees while admissibility is assessed, forced export to non-U.S. markets or costly and protracted litigation. An innovative approach to proactive compliance, including modern technology-based solutions, could be the key to creating an objective record of due diligence in an otherwise subjective space.
Nick Baker is a Senior Director within FTI Consulting. He assists clients with international trade matters including customs, import compliance, export controls and sanctions.
Steve McNew is a Senior Managing Director within FTI Consulting’s Technology segment, where he leads the Blockchain and Cryptocurrency practice. He provides strategic advice and expert services for companies looking to innovate with crypto assets and blockchain technology.
 For example, Chapter 23 of the United States-Mexico-Canada Agreement addresses forced labor rights and compliance in the context of the trade agreement.
 19 C.F.R. §12.43(a)
 ILO Indicators of Forced Labour, International Labour Organization, October 1, 2012. Available at, https://www.ilo.org/wcmsp5/
 CBP Publication #1394-0321 “WRO Modification/Revocation Process Overview,” U.S. Customs and Border Protection. Available at https://www.cbp.gov/sites/
 CBP Issues Detention Order on Palm Oil Produced with Forced Labor in Malaysia, U.S. Customs and Border Protection, September 30, 2020. Available at https://www.cbp.gov/newsroom/
 CBP Issues Detention Order on Palm Oil Produced with Forced Labor in Malaysia, U.S. Customs and Border Protection, December 30, 2020. Available at https://www.cbp.gov/newsroom/
 CBP Trade Statistics, published at https://www.cbp.gov/newsroom/
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