Recently, the United States once again hyped the topic of "forced labor" and announced that three Chinese companies from the seafood, aluminum and footwear industries would be included in the UFLPA Entity List.

On June 11, 2024 local time, the U.S. Department of Homeland Security (DHS) announced the update and release of the UFLPA Entity List. This update added three Chinese companies: Dongguan Oasis Shoes Co., Ltd., Shandong Meijia Group Co., Ltd., and Xinjiang Shenhuo Coal and Power Co., Ltd.

About the UFLPA Act

Since the U.S. Congress passed the UFLPA on December 23, 2021, the Xinjiang issue has once again become a sensitive topic in Sino-U.S. relations. The bill requires the application of "reverse burden of proof" to products produced in Xinjiang, that is, it is assumed that there is suspicion of forced labor unless the importer can provide contrary evidence. This undoubtedly brings tremendous pressure and uncertainty to many Chinese companies investing in Xinjiang.

It is reported that since the passage of the UFLPA Act, the United States has added 68 entities to the Entity List applicable to the Act. In the past 12 months alone, the Entity List has grown by 240%. The entities included in the list are active in a wide range of fields, including agriculture, clothing, batteries, chemicals, electronics, food additives, household appliances, non-ferrous metals, polysilicon and plastics. China's Ministry of Commerce and other departments have repeatedly made solemn representations to the United States on this matter, criticizing its actions for lacking factual basis, violating WTO rules, damaging the legitimate rights and interests of Chinese companies, and interfering with the normal international economic and trade order. China urges the United States to correct its mistakes immediately and stop its unreasonable suppression of Chinese companies.

About Xinjiang Shenhuo Coal and Electricity Co., Ltd.

Public information shows that Xinjiang Shenhuo Coal and Electricity Co., Ltd. is a wholly-owned subsidiary of Xinjiang Shenhuo Resources Investment Co., Ltd., a subsidiary of Henan Shenhuo Group Co., Ltd. Shenhuo Group is one of the important electrolytic aluminum enterprises in China, with an annual output of 1.7 million tons of electrolytic aluminum, 1.2 million tons of alumina, and 420,000 tons of aluminum sheets, strips, foils and new materials. Among them, Xinjiang Shenhuo Coal and Electricity Co., Ltd. has an electrolytic aluminum production capacity of 800,000 tons.

Impact of being included in the Entity List on enterprises

All items subject to the EAR (including hardware, software, technology, etc.) that are exported, re-exported, or transferred domestically to entities listed on the Entity List must apply for a license from the U.S. Department of Commerce.

(I) Matters that the Entity List entities may still engage in:

1. Already purchased US hardware can continue to be used and processed;

2. Licensed US software can continue to be used within the authorization period;

3. Can continue to provide services to customers (but must not involve the purchase of new US controlled hardware or US original factory services);

4. Maintenance can continue to be provided to customers (but it shall not involve the purchase of new U.S. controlled hardware or U.S. original factory services).

(II) Matters that entities on the Entity List are not allowed to engage in:

1. The purchase of controlled hardware from the United States cannot continue;

2. The controlled software in the United States cannot be further extended, updated, or purchased;

3. The services provided by the original American manufacturer cannot be provided, etc.

(III) Impact of being included in the Entity List on its customers:

The Entity List does not prohibit customers from purchasing equipment or services from entities on the Entity List, and they can still do business with companies on the Entity List.

Solutions for companies to deal with sanctions:

1. Focus on domestic business development, achieve domestic substitution, become self-reliant, and overcome difficulties. Huawei is a successful representative of this approach;

2. Divesting off illegal business segments and reorganizing specific businesses through commercial means such as restructuring, so that US sanctions cannot have any actual effect;

3. Reach a settlement agreement with the US regulatory authorities by paying fines and negotiating, and adopt US-style compliance to continue to accept compliance supervision and management by the US government. This treatment method is represented by ZTE;

4. If the ERC rejects the request to remove an entity from the Entity List, the entity list can file a civil lawsuit in a U.S. federal district court on the grounds that administrative remedies have been exhausted, requesting the court to conduct a judicial review of BIS's actions in accordance with the U.S. Administrative Procedure Act. Cases show that the likelihood of successful removal from such lawsuits is low.

Compared with Chinese entities included in the Entity List, the removal success rate is less than 1%, and it is time-consuming and costly. At present, it is not a purely commercial or legal matter, and there are too many political factors involved. Nevertheless, although there are not many successful cases for reference, it is not an impossible task for companies to apply for removal from the Entity List. As long as they meet the conditions for removal, prepare relevant application documents carefully and professionally, actively and prudently communicate with BIS and other relevant departments, and always be prepared and prepared for the possibility of negotiating and reaching an agreement on the removal conditions during the communication process, they may be removed from the Entity List.