Can audit firms actually credibly audit in Xinjiang? Can they actually credibly audit in China at all?By Andrew SametOctober 03, 2020
For the last quarter-century, companies with international supply chains have relied upon audits to validate labor and human rights, and environmental standards. Audits of factories, mines, and agricultural and fishing operations producing for international brands and buyers are largely outsourced to a complex industry of different providers.
The global audit profession has grown to include large testing and monitoring firms, specialized companies, industry associations, certification programs of all types, multi-stakeholder not-for-profit initiatives, and even the U.N.’s International Labor Organization. No doubt tens of thousands, if not hundreds of thousands, of “social” audits are done annually at a cost of billions of dollars. Most audits follow a similar framework of reviewing an operation against a checklist of standards and issuing recommendations for corrective actions.
Much effort is made by providers to differentiate their audit offerings and approaches in the marketplace — but there is probably more that is similar than different in the services offered. It is, after all, a mature, established industry.
But the recent concern about human rights violations in Xinjiang is in the process of disrupting the audit industry.
The Xinjiang issue includes the broadly researched and reported allegations of forced labor imposed by the Chinese Communist Party on Uyghurs and ethnic Kazaks and Kyrgyz in the Xinjiang Uyghur Autonomous Region (XUAR). The program of forced labor is, among other things, designed to separate these populations from the Muslim religion and the ethnic identity linked to regional nationalism that the CCP finds threatening, and thereby reduce the attendant risk of violent resistance and terrorism.
The program of ethnic suppression involves heavy state control of the population, including sophisticated and invasive monitoring and the type of police presence required to implement such a policy. Human rights violations in Xinjiang have led to a series of sanctions from the Trump administration involving restrictions on technology exports to entities involved in the surveillance program, the blocking of imports tied to forced labor, and prohibitions on transactions with the state-run Xinjiang Production and Construction Corps (XPCC), which is broadly linked to economic and political activity in the XUAR – including the documented human rights violations.
Some sanctions preceded and others followed the release by the U.S. government on July 1 of the “Xinjiang Business Supply Chain Advisory.” This extraordinary document issued by four Cabinet secretaries, including for the Departments of State, Commerce, Treasury and Homeland Security, is framed as a “warning” to U.S. businesses:
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Businesses with potential exposure in their supply chain to the Xinjiang Uyghur Autonomous Region (Xinjiang) or to facilities outside Xinjiang that use labor or goods from Xinjiang should be aware of the reputational, economic, and legal risks of involvement with entities that engage in human rights abuses, including but not limited to forced labor in the manufacture of goods intended for domestic and international distribution.
The risk identified regards both sourcing within Xinjiang, and also to facilities outside Xinjiang that use labor or goods from the region.
When it comes to what businesses should do about this risk, according to the U.S. government they need to undertake “human rights due diligence:”
Businesses with supply chain exposure to entities involved in human rights abuses in Xinjiang or the use of forced labor in Xinjiang should be aware of the risks outlined in this advisory and should implement human rights-related due diligence policies and procedures.
Such due diligence is implemented by the private sector significantly through the audit process. But the advisory also warns:
Third-party audits alone may not be a credible source of information for indicators of labor abuses for the following reasons:
- Auditors have reportedly been detained, harassed, threatened, or stopped at the airport.
- Auditors may be required to use a government translator who conveys misinformation or does not speak in workers’ first language.
- Auditor interviews with workers cannot be relied upon given the pervasive surveillance, and evidence of workers’ fear of sharing accurate information.
In other fora, U.S. officials have been even more explicit that in Xinjiang, audits, a primary due diligence tool and one widely relied upon, are not credible.
A bill recently passed by the U.S. House of Representatives in a 406-3 vote which would require U.S. Customs and Border Protection to bar all imports connected to Xinjiang as tainted by forced labor, absent compelling evidence to the contrary, also states that audits in Xinjiang are unreliable.
As if to validate the government’s position, the Wall Street Journal published a story confirming key firms in the global audit industry will no longer work in Xinjiang. Large inspection companies, including Bureau Veritas, TÜV SÜD, and smaller specialized certification operations such as WRAP (Worldwide Responsible Accredited Production) – all of which previously undertook audits in the XUAR — will no longer do so. It is almost certain that other international audit firms have already or will soon take the same position.
The end of audits in Xinjiang also raises other questions.
If audit firms cannot credibly audit in Xinjiang, can they credibly audit for Uyghur forced labor elsewhere in China? And if not, can they actually credibly audit in China at all?ADVERTISEMENT
At a time when human rights supply chain due diligence requirements are being increasingly (and legally) imposed upon the private sector, the situation in Xinjiang could have far wider consequences for the existing audit paradigm.
Andrew Samet has worked on international trade policy for four decades, including in the U.S. Senate, the Clinton administration, and as a consultant and lawyer.