The Unreliability of Social Compliance Audits For Uncovering Forced Labor Explored at Hearing

(Washington)—Representative Chris Smith (R-NJ) and Senator Jeff Merkley (D-OR), the Chair and Co-chair, respectively, of the bipartisan and bicameral Congressional-Executive Commission on China (CECC), convened a hearing this week examining social compliance auditing and certifications of factories and supply chains in the People’s Republic of China (PRC).  At the hearing “Factories and Fraud in the PRC: How Human Rights Violations Make Audits Impossible,” the Commission heard from witnesses about the failure of social audits to identify forced labor in the supply chains of major brands and retailers, including the garment and automaker industries.

The hearing was also attended by CECC Commissioners Senator LaPhonza R. Butler (D-CA), Representative Zach Nunn (R-IA), and Representative James P. McGovern (D-MA), the CECC’s Ranking Member in the House. Commissioner Thea Lee, Deputy Undersecretary for International Affairs at the U.S. Department of Labor, provided testimony at the hearing.The Commission has both legislative and executive branch appointees.     

The hearing builds on previous hearings hosted by the Congressional-Executive Commission on China (CECC) highlighting enforcement of the Uyghur Forced Labor Prevention Act and labor abuses in the PRC’s fishing and seafood processing industries.The hearing was intended to shine a light on the abuses of third-party social audits and certifications in the PRC, and to determine what additional steps need to be taken to uncover human rights violations and labor abuses in supply chains in China.     

 In his opening statement, CECC Chair Chris Smith said that social audits by corporations were “another fig leaf…to signal their virtue to consumers [and] a near fiction when it comes to accurately portraying the state of labor in the People’s Republic of China.”  The Chair said that corporate compliance departments as well as law and accounting firms that sign off on corporate disclosures should “take note” because he intends “to write to the Securities and Exchange Commission…to ask that they review disclosures by publicly traded companies to assess whether they contain any material misstatements or omissions with regard to forced labor in their supply chains – and if they do, to take enforcement action against them, levying fines.” 

CECC Cochair Jeff Merkley said in his opening statement that “the core question” for the hearing was whether “reliable audits are even possible in an environment where the Chinese government does not allow workers to speak freely, harasses auditors conducting due diligence in Xinjiang and prevents auditors from obtaining information needed for their job. If a company cannot say with precise certainty, to our government, to its shareholders, and, most importantly, to American consumers, that its products do not contain forced labor, then it needs to stop doing business there.” The Cochair concluded by saying "the aim is not to punish companies simply because they do business in China [but] to improve the human rights situation in China so that businesses can certify to us that their supply chain is free of forced labor, and that their suppliers provide good working conditions and wages to their workers. And we ask these companies to partner with us in working toward that goal.” 

Thea Lee, Deputy Undersecretary for International Affairs at the U.S. Department of Labor, in her testimony, pointed to the ongoing work of the Department of Labor to address forced labor and amply the ability of workers “to identify and raise concerns and collectively advocate for their rights” but noted that “effective worker voice is impossible when workers are trapped in state-sponsored forced labor, where there are no independent, democratic unions, and where workers continue to face threats and reprisals.”  She concluded her testimony by noting the role the Department of Labor plays on the Forced Labor Enforcement Taskforce to support enforcement of the Uyghur Forced Labor Prevention Act (UFLPA), “a powerful tool to address egregious human and labor rights abuses and to ensure that U.S. workers and businesses have a level playing field. We’ll continue to leverage that tool to protect the integrity of lawful trade and the rights of workers and continue to raise these issues and call for change.”

Adrian Zenz, Senior Fellow and Director in China Studies at the Victims of Communism Memorial Foundation provided detailed testimony about the German automaker Volkswagen’s links to forced labor in the XUAR and its use of a social audit to both cover its complicity in forced labor and "convince index provider MSCI to remove a “red flag notice, declaring the company once again fully investible from a social, environmental and ethical perspective.” Dr. Zenz urged further Congressional investigation into Volkswagen’s “audit-washing practices and the irresponsible behavior of index providers such as MSCI” and recommended legislation “mandating that companies whose supply chains involve an elevated risk of being connected to products made in whole or in part with Uyghur forced labor to disclose their supply chains to the raw material level.” 

Jim Wormington, Senior Researcher and Advocate on Corporate Accountability at Human Rights Watch, provided testimony about the car industry and links between global supply chains in aluminum and XUAR forced labor saying that “global carmakers are currently doing too little to address the risk of Uyghur forced labor in their aluminum supply chains…[though] the risk of links to Uyghur forced labor in supply chains has led some companies, in the car industry and other sectors, to look to social audits to investigate labor conditions. The limitations of social audits, the impossibility of conducting audits in Xinjiang, and the growing concerns about the obstacles to credible audits in the rest of China mean that companies should not rely on audits either as evidence of the absence of forced labor at specific factories or as proof that a supplier is sourcing responsibly. Companies should instead map their supply chains and responsibly disengage from joint ventures, subsidiaries, or suppliers who continue to operate in or source materials or products from Xinjiang." 

Scott Nova, Executive Director of the Worker Rights Consortium said in his testimony that "prominent examples of the failure of social auditing to protect workers can be found in every sector--from apparel, to electronics, to toy manufacturing, to seafood...these failures are the product of flaws inherent in the approach to labor inspections that defines most social audting systems...Corporations do not utilize auditing schemes because they are considering changing the way they operate their supply chains...they utilize these schemes because they want to preserve lucrative sourcing strategies."  Nova suggested the need for regulatory oversight of the social compliance auditing industry syaing that wihtout such oversight, "auditors have strong incentives to avoid inconvenent conclusions and rarely face any consquences for underreporting labor rights violations." 

Opening statements by the Chairs, witness statements, and recommendtions for congressional action, and other statements submitted for the record can be accessed on the CECC's on the CECC's hearing webpage.