Attorneys for various states are looking to the United States’ stock market regulator to ensure that companies listed on U.S. exchanges – including potentially Shein – are acting in compliance with U.S. trade law. In an August 24 letter, attorneys general for sixteen states urge U.S. Securities and Exchange Commission (“SEC”) chairman Gary Gensler “to require, as a condition of being listed on a U.S. based securities exchange, that any foreign-owned company certify via a truly independent process that it is compliant with Section 307 of the Tariff Act of 1930,” a federal law that prohibits companies from importing any product that was “mined, produced, or manufactured wholly or in part by forced labor, including forced or indentured child labor.”
While the AGs request would impact all companies that list – and that that me be preparing to list – on stock exchanges in the U.S., the focal point of the letter is Shein, as the Chinese-founded ultra-fast fashion giant is reportedly looking to launch an initial public offering in the U.S. before the end of 2023. (The AGs assert that “although it recently moved its official headquarters to Singapore, SHEIN was founded in Nanjing, China in 2008 and continues to heavily rely on its vast supply chain and manufacturing network in China.”)
In their letter, the attorneys call foul on Shein, stating that its growth into “the world’s largest fashion retailer with an estimated value of $64 billion” has been built on “nefarious business practices,” including “forced labor, human rights violations, stealing other designers’ work, and the peddling of clothing made with potentially hazardous materials.” In addition to allegedly utilizing a loophole in Section 321 of the Tariff Act of 1930 to avoid paying customs duties, the states’ attorneys assert that Shein has been “credibly accused of exploiting forced labor and violating the Uyghur Forced Labor Prevention Act,” which creates a rebuttable presumption that goods from the Xinjiang or an entity on the UFLPA Entity List” are produced using “convict labor or/and forced labor or/and indentured labor.”
More broadly, the attorneys take issue with the ability of companies to rely on self-certification of compliance with U.S. law. As for Shein, in particular, the attorneys assert that the company “refuses to engage with U.S. government officials and is instead touting a purported self-financed and managed certification process that it claims demonstrates compliance with U.S. law.” Such self-certification is “insufficient,” the letter states, noting that not only does Shein have “a documented history of lying about its labor practices,” but an IPO of the “magnitude” of Shein’s, namely, “involving a foreign-owned company that is facing credible concerns about its core business practices, cannot move forward on self-certification alone.
The AGs’ letter follows from a call by two dozen U.S. representatives this spring for the SEC to halt the company’s reported IPO until it verifies it does not use forced labor.
A spokesperson for SHEIN told TFL in response to the AGs’ letter, “SHEIN’s policy is to comply with the trade laws of the countries in which we operate. We have zero tolerance for forced labor, and no contract manufacturers in the Xinjiang region. We will continue to engage with U.S. federal and state officials to answer their questions.”
THE BIGGER PICTURE: The potential for the SEC to adopt a rule that requires foreign-owned companies that are listed in the U.S. to independently certify that they are compliant with Section 307 of the Tariff Act of 1930 is not unfathomable. In fact, the prospect for an additional certification of this nature would be consistent with a provision in Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law in July 2010. Section 1502 of that Act requires certain public companies to provide disclosures about the use of specified minerals from the Democratic Republic of Congo (“DNC”) and/or adjoining countries in furtherance of an effort to address the import of “conflict minerals,” such as such as tin, tantalum, tungsten, and gold, that find their way into various types of products.
Practically speaking, Section 1502 of the Dodd-Frank Act added a new section to the Securities Exchange Act (Section 13(p)), which required the agency to promulgate rules that mandate that public companies must disclose whether any conflict minerals “necessary to the functionality or production of [their] product” originated in the DNC or an adjoining country, and if so, they must provide a Conflict Minerals Report – audited by an independent third-party – that includes “a description of the measures it took to exercise due diligence on the conflict minerals’ source and chain of custody.”
Against that background, Brian JM Quinn, a professor at Boston College Law School, who focuses on corporate law, told TFL that an additional certification that requires companies to verify – via independent auditing – that their products are not tied to forced labor “certainly seems like a realistic possibility.”
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