Tattletale: Supply Chain Investigations and the Attorney-Client Privilege

The impact of the Trade Facilitation and Trade Enforcement Act of 2015’s removal of the “consumptive demand” exception to the United States Tariff Act of 1930 has yet to be felt. California’s Transparency in the Supply Chain Act of 2012 and a growing number of countries outside of the United States, however, now require large companies supplying goods and services to annually disclose corporate efforts to combat forced labor in their supply chains. With enhanced human rights audits and remediation plan transparency, this article examines the likelihood of more investigations and import bans under Withhold Release Orders from U. S. Customs and Border Protection (“CBP”), the expectations of CBP upon an importer’s internal discovery of goods tainted by forced labor, and the preservation of the attorney-client privilege.

Goods Tainted by Forced Labor

The global fight against child labor and forced labor has been led for decades by the International Labour Organization (ILO). The ILO’s most recent estimate is that 25 million people around the world, including millions of children, are currently subjected to forced labor. Under U.S. law, section 307 of the Tariff Act of 1930 prohibits the importation of merchandise mined, produced, or manufactured, wholly or in part, in any foreign country by convict, forced, or indentured labor. This law gave the U.S. Customs Service (now CBP) the authority to seize commodities imported into the United States where forced labor was suspected to have been used anywhere in the supply chain.

The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) removed the “consumptive demand” exception to the United States Tariff Act of 1930, which was a commonly exploited loophole to the prohibition against importing products of forced labor. Since the passage of TFTEA, CBP has issued seven new Withhold Release Orders (each a WRO) on specific goods from China, Turkmenistan, and all tuna and tuna products from a specific vessel, Tunago No. 61. Although 2017 and 2018 saw more antidumping and countervailing duty orders and intellectual property rights protection activity under TFTEA, there were only two published detentions in 2018 and one in 2019 to date. CBP has, nevertheless, pledged to the U.S. Congress that more import bans under section 307 are forthcoming.

Enhanced Internal Reviews and Disclosure

In response, importers are taking steps to enhance their compliance measures. They are undertaking review of all products where they act as the importer of record and become responsible parties for dealings with CBP. Conducting supply chain audits and performing supplier due diligence to be sure there is no forced labor at any level are clearly now part of good governance as well as corporate social responsibility. In fact, supply chain audits and due diligence are legal requirements for certain American companies and large international companies supplying goods and services (including goods and services online) to consumers in California and a growing number of countries outside of the United States.

What is the proper course of action, however, if a company discovers goods tainted by forced labor as part of its compliance monitoring? Certainly, a company that discovers goods tainted by forced labor should immediately consider terminating its supply chain agreement with the offending importer or at least employ greater diligence before accepting delivery of future, possibly tainted goods at the port of entry.

Government contractors are bound by the False Claims Act’s mandatory disclosure rule, which provides that contractors must “timely disclose” whenever the contractor has “credible evidence” of certain criminal law violations or violations of the civil False Claims Act. Self-disclosure under TFTEA still appears to be discretionary, but the failure to disclose may be a material misrepresentation (by omission) and a direct violation of the California Transparency Act or one or more of the recently enacted human rights laws of another country (the UK Modern Slavery Act of 2015, France’s 2017 Duty of Vigilance, Australia’s 2018 Modern Slavery Act, the Netherlands’ 2019 Child Labor Due Diligence Act, etc.).

CBP Expectations

Historically, CBP has operated under the twin principles of “informed compliance” and “shared responsibility,” placing the burden on the importer of record to make entries on the required forms correctly. Failure to make accurate statements with respect to imported goods can result in seized entries, lost import privileges, and civil and criminal penalties. The Department of Justice (DOJ) initiates action seeking criminal penalties by using statutory provisions related to customs matters (goods entering into the United States via fraud, gross negligence, or negligence, goods that were falsely classified upon entry, and entry of goods by means of false statements) or, at its election, through noncustoms provisions (the use of federal provisions regarding the obstruction of justice, the federal conspiracy statute, money laundering, smuggling, and aiding and abetting), with the noncustoms provisions supporting higher criminal penalties.

Attorney-Client Privilege

General counsel and general business practitioners throughout the United States let out a collective sigh of relief when the U.S. Court of Appeals for the D.C. Circuit granted a writ of mandamus and overturned the district court decision in United States ex rel. Barko v. Halliburton Co. The district court in Barko had held that documents relating to an internal investigation were not protected from disclosure by the attorney-client privilege. In vacating the district court’s order to produce documents, the court of appeals insisted the lower court’s analysis failed to grasp the scope of the attorney-client privilege that protects confidential employee communications gathered by company lawyers in an internal investigation under the seminal Supreme Court case Upjohn Company v. United States. After the court of appeals decision in Barko, companies have continued to build and invest in robust compliance programs that include self-investigation of potential regulatory violations under the protection of the attorney-client privilege.

The increasing volume of electronic communications has not made an assessment of the scope of the attorney-client privilege in the world of internal audits any easier, however. Should the privilege apply when employees communicate with fellow employees and copy the company’s general counsel? Does such an e-mail implicitly seek legal advice and thus deserve privilege protection without an explicit request for legal guidance but with the mere inclusion of the lawyer as one of the recipients? In Greater New York Taxi Ass’n v. City of New York, the magistrate found that some but not all of the e-mails at issue fit into the framework of privileged communications when the sender indicated that he was soliciting legal advice or that the communication implicated specific legal issues. A similar case in the United Kingdom came to the opposite conclusion, however, holding that communications by corporate lawyers with third parties (including employees) who are not authorized to seek or receive legal advice, and therefore are not the “client” for privilege purposes, are not covered by legal advice privilege (LAP) or litigation privilege (LP), concepts akin to the U.S. attorney-client privilege.

Keeping New York Taxi and other case law in mind, the best practice would be to adopt an aggressive policy in the hope of securing privilege status for as much of the audit results as possible. Officers of the investigating company should state in writing in advance of any e-mail or other communication that the person giving the initial formal instructions to an internal or external lawyer is authorized by the company to obtain legal advice on its behalf. Any employee and executive participating in an internal supply chain audit or a specific review of a particular shipment should be directed to title all notes as “Attorney Work Product” and to always copy general counsel or outside counsel, as the case may be, as early as possible, explicitly stating that they seek legal advice in all such communications. In addition, companies and their legal advisers should consider the DOJ’s April 30, 2019 release of a guidance document entitled “Evaluation of Corporate Compliance Programs” and the value of cooperation credit in any forced labor inquiry. Decision-making with respect to disclosure at every juncture has to be deliberate to minimize the risk of inadvertently waiving or losing the attorney-client privilege.

Susan A. Maslow (LAW ’82) is a founding partner and corporate attorney at Antheil Maslow & MacMinn LLP (AMM), vice chair of the ABA Business Law Section’s UCC Subcommittee Working Group to Draft Human Rights Protections in Supply Contracts, and vice chair of the Subcommittee to Implement the ABA Model Principles on Labor Trafficking and Child Labor. The content above is an excerpt from an article of the same name published by the Am. Bar Ass’n: Bus. L. Today (April 19, 2018). The views expressed herein are her own and should not be attributed to AMM, its clients, the ABA, or its Subcommittees.

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