Forced Labor in China: Don’t Trust AND Do Verify

The issue of forced labor in China has been in the news recently. In part, this is due to the connection between this issue and the larger human rights crisis in Xinjiang. However, forced labor is hardly a problem confined to Xinjiang, as a recent scandal involving British supermarket chain Tesco shows. Last month, Tesco suspended production of Christmas cards in China after what appeared to be plea for help from a foreign prisoner at Shanghai’s Qingpu Prison was found written on one of the cards.

Predictably, the Chinese government and state media claimed this is all fake news. The Foreign Ministry’s spokesperson said, “After verifying with relevant departments, we know for sure that there is no forced labor of foreign prisoners in Qingpu Prison in Shanghai”. That could well be the case but notice how every other prison in China—not to mention Qingpu Prison’s local prisoners—is uncovered by that denial.

In any case, there is no need to split hairs: Forced labor is a reality in China. And if you source from China, you need to keep close tabs on your supply chain to avoid forced labor becoming a part of it. In addition to the ethical and reputational implications of using forced labor, it can also get you in trouble with the law.  In the United States, for instance, 19 U.S.C. § 1307 prohibits importing goods made using forced labor, defined as “all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily”. U.S. Customs and Border Protection (CBP) may issue withhold release order (WRO) against merchandise it suspects has been made using forced labor.

When it comes to forced labor in China, in order to protect your business, you should take a page from President Reagan, who popularized the Russian proverb “Trust, but verify”. However, you should “Not trust and verify”.

Seriously, you should not trust any claims made by your Chinese supplier regarding forced labor. A few years ago, I was contacted by a Chinese company that was—and still is—subject to a US Customs WRO. After some initial evasive answers, they fessed up to having used labor from a nearby prison in the past but claimed they no longer did. They were keen to undergo an audit that would help demonstrate to CBP that they no longer used forced labor.

It soon became clear, however, that the company did not want a real audit. They sought to place unreasonable time constraints on my team, rushing us into action. As I noted in a contemporary email:

We still don’t have a list from [X] of the facilities to be audited. That is critical, because only based on that can we issue a notification to ensure the audit team has all the necessary access rights, and that all the necessary preparations are made. No sense rushing things if the key preparatory work has not been done. I’ve seen this many times before in China… whether on purpose or an unintended result, a hectic situation is created, which then leads to a half-baked outcome.

As I reiterated my concerns, it became clear that the expectation was that the audit report’s conclusion would be a favorable one, regardless of what my team observed. As far as the company was concerned, all we needed to do was fly in the morning, have a cursory walk around the factory, possibly “interview” one or two cleared employees, and then go back to the airport for our flight back to Hong Kong. Easy as 123.

In the end I declined the work, but perhaps others would have played along. I’ve seen audit reports that say little more than, “we flew up there, we spoke to some of their staff, we walked around—and our report has plenty of caveats”. The point is that you should be wary of any certifications or audits, let alone the word of company staff.

Turning to the “verify” part, that means that you—or a third party you truly trust, who ideally has some skin in the game—carry out the due diligence. If a supplier says your products are being made at a given location, check it out. Make sure your agreements give you—or your authorized third party—the right to carry out such inspections. And remember, even if everything is hunky-dory at a given time, it doesn’t mean that it will remain above board. Suppliers are subject to all sorts of pressures and temptations.

A couple years ago, I was retained by a client (“Y Brands”) to audit a supplier the client suspected of making unauthorized, third shift products. As our client informed the supplier that we were headed to the factory to conduct a social compliance audit, my team and I trooped out to an unlovely city Yangtze River Delta in the dead of winter. Once in town, we proceeded to the address our client had on file for the supplier’s factory.

Our concerns began as soon as we left behind the city’s gritty industrial outskirts and found ourselves in a decidedly agricultural area. The alleged factory was a small building surrounded by croplands. Inside we found some products, but no production lines. Here is how the conversation with the person-in-charge went:

A: We are here on behalf of our mutual client, Y Brands. As per the terms of the agreement between your company and Y Brands, we are here to perform an audit. Y Brands has given advance notice to your corporate office.
P: Uh, okay. What kind of audit?
A: A social compliance audit. Looking at workplace safety and things like that.
P: Ah, I see. Please go ahead. Let me know if you have any questions.
A: Well, to be honest, this doesn’t look like a factory. I only see a few products here and there, and none of them belong to our client. Where is the production line?
P: Oh, we only handle quality control here. The products are made elsewhere.
A: And where would that be?
P: A prison in L City [few hundred miles away].
A: A prison?
P: Yeah, it’s a lot cheaper than a normal factory. Here, these are some invoices we have received from the prison.

Pretty soon, the hapless man realized that, as Depeche Mode warned, the policy of truth is not always the best. Not only was the issue of overproduction still unresolved, but now we had stumbled upon a larger problem for our client. Instinctively, he backtracked:

P: Actually… Y Brands’ products are not made at the prison. Other clients’, yes, but not Y Brands’.
A: And where do you make Y Brands’ products?
P: Uhm, at a regular factory…
A: Located where?
P: L City.

Later that day, I typed up an email to my client that basically said: “I have bad news and bad news. Your products are likely being made in a prison—which by the way is the perfect place to crank out unauthorized goods since, well, you will never know and, even if you did, there’s zero risk of a law enforcement raid.”

Our client demanded that a visit to the “factory” in L City be organized right way, but the supplier refused, without providing an acceptable reason. This was the final straw for Y Brands, who already suspected the supplier of undercutting them by selling directly to retailers, and the relationship was soon terminated.

Forced labor is terrible, and you don’t want to have any part in that nasty business. But in an opaque place like China, it’s not simply a matter of good intentions. You must be proactive and thorough in your due diligence. Better for you to uncover the truth than some kid in London reading a prisoner’s scrawled plea for help.