What Happened to Volkswagen?

Examining a rare public episode involving the UFLPA.

Around New Year’s Day 2024, give or take a week, a trade compliance lawyer at Volkswagen headquarters received the sort of email that would fill any in-house lawyer with dread. The message contained a few essential pieces of information: (1) that one of Volkswagen’s direct suppliers of “control units” used across an array of vehicles under the Porsche, Audi and Bentley nameplates, had (2) sourced a tiny electrical component from a company that (3) was sanctioned by the United States under the Uyghur Forced Labor Prevention Act (UFLPA) Entity List.

As the matter was further examined, it was confirmed that this component was already installed, as a part of that control unit, in more than $150 million of vehicles already loaded on vehicle transport ships en route to the United States. This component likely cost much less than 0.1% of the value of the finished automobiles. Nevertheless, by operation of law, the inclusion of the component made the finished goods presumptively inadmissible into the United States.

What happened next offers remarkable insight into the impact of the UFLPA, how companies are trying to comply with the law, and offers valuable lessons for stakeholders throughout the ecosystem concerned with forced labor trade enforcement. This account is based on previous reporting about the incident by the Financial Times, the WSJ, and MotorTrend, my knowledge of U.S. trade laws and regulations, and an official comment from a spokesperson for Volkswagen AG whom I contacted with questions regarding this piece. Volkswagen is not a client.

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Stories about the impact of the UFLPA and other forced labor trade laws are inherently intriguing. These are laws aimed at combatting the worst externality of globalism—deliberate human exploitation. The UFLPA is both an outgrowth of the economic and geopolitical competition between the United States and China, and also a clear-eyed legal affirmation of the inalienable nature of human rights. But the fact that this particular story involves Volkswagen only adds to the intrigue.

There are only a handful of western companies that are presently directly invested in the Xinjiang region of China, and Volkswagen is one of them. The company has been under considerable pressure from human rights activists over the last couple years to divest from its joint venture in Xinjiang (which it co-owns with partner SAIC). The activists argue that any such venture is, at the very least, ethically compromised by proximity to China’s programs of social control targeting ethnic minorities within the region.

Working through the ethical ramifications of this particular business investment has proven difficult for Volkswagen. In late 2023, the company commissioned a German consulting firm to audit employment at the JV’s Urumqi facility, and evaluate whether any forced labor was involved. The report came back clean: no forced labor observed. The report was roundly criticized by rights groups which argued that any attempt to conduct human rights due diligence within the confines of Xinjiang is fundamentally flawed, at a conceptual level. Within a week, senior staff at the consulting firm were publicly backtracking from the report.

In recent weeks, the plot has continued to unfold on the front pages of German newspapers. On February 13, 2024, German business newspaper Handelsblatt published research from Dr. Adrian Zenz indicating that Uyghur workers in alleged forced labor conditions had been used to construct a test track facility in Xinjiang currently owned by the Volkswagen-SAIC JV. On February 14, 2024, Volkswagen announced that it is in discussions with SAIC over the future of their partnership.

It is against this backdrop that the Financial Times dropped its bombshell report on February 15, 2024, that “about 1,000 Porsche sports cars and SUVs, several hundred Bentleys, and several thousand Audi vehicles” are currently sitting at U.S. ports awaiting replacement parts related to a UFLPA “issue”.

Whether you think that Volkswagen’s struggle to navigate the question of its ongoing investment in Xinjiang is an understandably challenging business decision, or an unconscionable breach of public trust probably depends a lot on where you sit, and where your sympathies lie. It also probably heavily influences how you interpret the UFLPA story, whether you read about it previously, or are learning about it here for the first time now.

A lot of stakeholders are interested in better understanding this event, including Congress. So let’s set aside preconceptions, and circle back to that early-winter day when a trade compliance lawyer at Volkswagen received the fateful email. What can we ascertain about how the company responded? A few key features of the episode stand out.

First, while the exact source of the component is not yet publicly known, we can be almost certain that this information surfaced as a result of Volkswagen’s work to map and trace its supply chain, and its work in communicating with its supplier base about developments in U.S. law (for example, additions to the UFLPA Entity List).

For companies engaged in international trade during the forced labor trade enforcement era (that is, since 2016, and especially since 2022), supply chain mapping and tracing are the novel trade compliance obligations. No company automatically knows information about its sub-tier suppliers. So whenever a company identifies (let alone discloses publicly) information about entities deep within its supply chain, you can be sure that discovery was the result of intentional effort. In that regard, the fact that Volkswagen identified the issue is almost certainly a credit to the compliance systems it has in place.

Second, while we don’t know the exact date on which Volkswagen received this information, we do know that it must have been received too late to prevent the shipment(s) from leaving the port(s) of exportation. If there had been any way to avoid having this component assembled into the affected control module (or to prevent the control modules from having been installed in the vehicles), surely that would have been done. Alternatively, if there had been any way to discreetly replace the affected units before the goods were loaded on vessel to the United States, that too would have been the path taken.

Instead, the company had to face an ineluctable result: if Volkswagen was going to avoid importing goods that were presumptively inadmissible as a result of the UFLPA, it was going to have to improvise a solution. From the time the issue was discovered, the cars were due to arrive in U.S. territorial waters in a matter of weeks, if not days. Upon arrival, they couldn’t be brought into the country for repairs before distribution, because the cars themselves are presumptively inadmissible. And you can’t just park several thousand cars at a U.S. port of entry and conduct a bunch of repairs without raising some questions.

Which brings me to the third and probably most important point. Volkswagen brought this information to CBP’s attention, and not the other way around. The Financial Times does state this in its report (“VW notified US authorities as soon as it was made aware of the part’s origin”). But the sequencing of what actually transpired is muddled by the opening sentence of the article, which declares that “thousands of Porsche, Bentley and Audi cars have been impounded in US ports . . . .” To the casual reader, “impounding” sounds a lot like “detaining”, which is what CBP does when it enforces the UFLPA. Hence the confusion. A quick google search reveals that most of the “secondary reporting” about this story has taken for granted that Volkswagen’s vehicles were detained by Customs.

I contacted Volkswagen to ask for a confirmation that I was reading the article correctly and this merchandise was not, in fact, detained by U.S. Customs and Border Protection. A company spokesperson confirmed that “media have reported that vehicles in the U.S. have been ‘impounded’ by customs. These reports are inaccurate.”

So what really happened?

It appears that the in-house trade counsel who received that fateful email sprang into action. Procurement teams were deployed to find a replacement part. Letters were drafted to notify U.S. Customs and Border Protection about the nuances of the incoming shipment. A plan was devised to voluntarily sequester the merchandise at the port of entry, probably under CBP supervision, and likely while the vehicles were physically confined to a bonded area. This would allow them to sit without the official filing of a customs entry for consumption into the United States. In turn, that would prevent even the temporary importation of merchandise containing a part presumed to be made with forced labor. CBP apparently agreed to the plan; replacement modules are already being installed in a process due for completion by late March.

Meanwhile, per the FT, the company initiated an investigation into the supplier that delivered the control module in question, to better understand the causes of the noncompliance. Per a company statement, vendor noncompliance may result in “the termination of a supplier relationship if our investigations confirm serious violations” occurred. And then, rather than try to keep the matter confidential, and certainly with full knowledge knowing that this development would be interpreted (probably unfavorably) in light of recent events, Volkswagen attempted to level with both customers and the public about what transpired.

I regret to inform you: this is the gold standard of trade compliance. It is everything the most compliant companies would do under similar circumstances, and much more than less compliant companies would do. It is action oriented around a single goal, shared with CBP: ensuring that merchandise made wholly or in part with specifically defined content (i.e., content produced or manufactured by a UFLPA Listed Entity) is not imported into the United States. Moreover, we only know about it because the company chose to operate with a degree of transparency uncommon in the world of business, let alone trade compliance.

I anticipate a few reasonable questions about this assessment, which I’d like to address preemptively.

Why didn’t Volkswagen know that its supplier was sourcing components from a listed entity?

There are a few possible answers to this, but perhaps the most obvious is that the UFLPA and its Entity List are dynamic. Maybe the component in question was manufactured by a company that, on December 10, 2023 it was perfectly lawful to do business with, and a day later, it was catastrophically disruptive to be doing business with. Hard to be certain based on currently available information.

But even if this event was not precipitated by a recent Entity Listing, the reality of supply chain mapping and traceability is that you’re wresting information from sometimes reluctant participants. In many instances, the only reason a supplier will consent to the disclosure of its own upstream supply chain information is because—thanks to the forced labor import ban and UFLPA—doing so is now a condition of accessing the U.S. market. As a result, information can turn up at unexpected moments, and companies have to be prepared to respond responsibly, no matter the setting.

Given the situation Volkswagen is currently facing in Xinjiang, isn’t the timing of this development a little suspect?

Absent some truly Machiavellian contrivance, there is no reason to believe there is any direct connection between Volkswagen’s ongoing discussions with its JV partner and this development under the UFLPA. If one event had any impact on the other, the most plausible explanation would be that the company’s current posture, recent history, and distant history have combined to produce a present state company prepared to take unprecedented steps to ensure compliance with applicable law.

How confident are you about this assessment?

Confident enough to write this essay! Essentially all of the relevant details are already contained in the FT and WSJ reporting, and the company’s own statement (published in MotorTrend). The biggest wrinkle is the question of alleged “impoundment” which Volkswagen confirmed to me in a written remark on the record.

How much is Volkswagen paying you?

Nothing! This is not sponsored content. Volkswagen is not a client; they didn’t really want to talk with me about this all that much, other than to clarify that their vehicles weren’t impounded.

Then why are you writing about this?

Because for all the endless chatter about UFLPA enforcement, and strengthening enforcement and expanding enforcement, this episode constitutes a remarkable example of what compliance looks like under the UFLPA, which is something most stakeholders lack the understanding to imagine vividly. For a whole host of reasons, this law is an uncommonly difficult law to comply with. The sheer breadth and impact of the compliance solution Volkswagen devised here, on the fly, in cooperation with authorities, sparing no expense, and at tremendous reputational risk of misinterpretation struck me as extraordinary, and worthy of attention.

And of course, I write for the same reasons I always write at FLT. I want to help illuminate the power and potential, and also the shortcomings and misfires of the most interesting law in the world. I feel duty-bound to my forebears in the realm of international trade. The progenitors of the global trading order gifted us a rules-based system. We should not be swift to discard it.

How could Volkswagen be a model of UFLPA compliance, when it has failed to exit the Xinjiang region for so long?

The best answer to this question is quite simply that importing goods containing a component made by a UFLPA Listed Entity is prohibited by U.S. law. Being invested in a joint venture in Xinjiang is not.

There’s a lesson here about the much vaunted proposals for mandatory human rights due diligence (HRDD). In response to a mandatory HRDD law now in effect in Germany, Volkswagen has both been under pressure to conduct human rights due diligence and aggressively ratcheted up its analysis of “human rights impacts” under that law. Only to discover that no one actually wanted them to analyze human rights impacts, they wanted them to exit Xinjiang. Results TBD. Under the forced labor import ban and UFLPA, however, the compliant response was as swift as it was decisive.

If HRDD laws seek to engage the corporate prefrontal cortex, demanding thoughtful self-examination and high minded evaluations of one’s own conduct and character, then forced labor trade laws trigger the corporate immune system, a response so autonomic, a trade compliance lawyer can start churning out antibodies even before the c-suite gets read in.

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I’d like to propose a few takeaways, for stakeholders across the ecosystem.

If you’re a company with import activity at risk of UFLPA enforcement, you might not get a better case study than this. How would your organization respond to a comparable challenge?

Suppose that after certain shipments of goods have been cleared for export to the United States, your trade compliance team receives information that some component or material used in merchandise destined for the United States had definitely been made by a UFLPA Listed Entity. How will your organization respond? Keep in mind that not every offending part will be found in a replaceable module.

For years, I’ve been saying (to anyone who would listen) that the single worst enforcement reality a company could confront under the UFLPA is to have a critical tier two supplier added to the Entity List. Because, immediately after listing, all downstream merchandise containing any content from that Tier 2 supplier is immediately presumptively inadmissible into the United States. Overnight, a single UFLPA Entity Listing can blow a hole in $150 million of goods. And that might just be goods on the water. Facing that reality, Volkswagen improvised a solution. Could your team? When the UFLPA Entity List hits its rapid expansion phase (rumored later this quarter or next), this question might no longer be hypothetical.

If you’re an activist or policymaker, take a deep breath. This story presents an opportunity to reconsider the power of the law. If you want a company to do (or not do) a certain thing, and you’re finding yourself unpersuasive, maybe your problem is the law. I’m all for engaging the corporate prefrontal cortex, but consider the uncompromising swiftness of the immune response.

If you’re a trade enforcement official, consider how important it is to get your pieces of the puzzle correct. For FLETF, the real life consequences of your listing activity could not be more evident. When you list entities, you should disclose the basis for listing. (Recent Federal Register notices have begun to recognize this imperative.) When you list entities, given the consequences involved, it is prudent to be absolutely certain you’ve identified a company responsible complicit deliberate human exploitation. When FLETF publishes regulations to govern the UFLPA Entity Listing process—and it should—features like public notice of proposed action, periods for public comment and wind down periods would all be sensible features.

For CBP, the takeaway barely needs mentioning. CBP knows that responsible importers use reasonable care to ensure that they comply with the law. Enforcement resources—like issuing UFLPA detentions—are best reserved on the hunt for non-compliant actors.

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Thank you for reading.