China’s MOFCOM Investigation of PVH Illustrates the Complications of Multinationals’ Compliance Operations

Overview

In September 2024, China’s Ministry of Foreign Commerce (MOFCOM) launched an investigation into the business activities of PVH Corp. (the parent company of Calvin Klein and Tommy Hilfiger among other brands) under the allegation that the company violated normal market trading practices in China. MOFCOM suspects that PVH severed contracts between itself and cotton manufacturers in the Xinjiang region without due cause. If MOFCOM finds PVH Corp. at fault for the allegations, the Ministry has stated that it will place PVH on China’s Unreliable Entity List (UEL). The UEL targets foreign entities that disrupt market rules and violate Chinese laws. The conflict between MOFCOM and PVH Corp. illustrates the complexities of corporate governance in today’s global environment as multinational companies must strike a balance between different, and often conflicting, regulatory frameworks.

Background

According to UNCTAD, the Unreliable Entity List (UEL) was introduced by MOFCOM in May 2019. The regulation aims to establish a framework for “restrictions or penalties on foreign entities that are considered to endanger the national sovereignty, security, or development interests of China or that seriously harm the legitimate rights and interests of Chinese enterprises, organizations, or individuals.”[1] Additionally, suspending “normal” transactions or applying discriminatory measures against a Chinese enterprise, other organizations, or individuals in a way that violates normal market transaction principles and causes significant damage to the interests or rights of the enterprise would also land a company on the UEL.[2] Penalties for companies placed on the list include prohibitions on trade with Chinese entities or restrictions on investing in China.

Lockheed Martin Corporation and Raytheon Missiles and & Defense were the first to be placed on the UEL in February 2023. In May 2024, General Atomics Aeronautical Systems, General Dynamics Land Systems, and Boeing Defense, Space & Security were placed on the list for allegedly selling arms to China’s Taiwan region. As a result, these companies were restricted from engaging in any China-related import-export activities and were forbidden to engage in new investments in China.[3] PVH would be the sixth company to be added to the list, and the first to be unrelated to the defense industry.

Why is PVH Corp. Under Investigation?

The United States the EU have both implemented ESG regulations for corporations to follow ethical guidelines within their supply chains. An example of these regulations is the EU’s Corporate Sustainability Reporting Directive (CSRD) which requires large companies with any operations in the EU to disclose information on their ESG performance annually. As a result, companies from the U.S. and the EU now must discover how to strategize and find success amid regulatory conflict between the countries in which they operate.

A spokesperson from PVH stated that the company still “maintains strict compliance with all relevant laws and regulations in all countries and regions in which we operate.” [4] Including those of China in which they must comply with rules of non-discrimination, including in Xinjiang.

China’s MOFCOM suspects that PVH is “boycotting cotton products from China’s Xinjiang Uygur autonomous region without any factual basis and terminating normal transactions with Chinese companies, as well as other organizations and individuals.” If found at fault for these actions after investigation, PVH will be placed on the Unreliable Entity List and subject to prohibitions regarding doing business in China.

What does this Mean for Corporate Compliance?

Conflicting information and regulatory environments have created a new strategic challenge for multinational corporations. If they favor the Chinese market, they risk the potential for boycotts or regulatory barriers in their home countries. If they favor their home markets, they risk the same in China. A spokesperson from MOFCOM stated, “We welcome foreign companies to come and visit Xinjiang themselves and stand ready to provide support for companies from all countries to trade and invest in Xinjiang.”[5] The suspension of business relationships in the region due to international allegations is now at a risk not only of consumer backlash but also of trade regulations.

According to Sean Stein, Chair of the American Chamber of Commerce in China, “the investigation may target the textile sector, but now this door has been opened, companies in every sector are looking at this case and doing risk assessments of their own.”[6]

If PVH Corp. is placed on the UEL at the end of the investigation, it will be subject to prohibitions on its business activities in China. Such an action will be a signal to both American companies and EU firms under ESG pressure to create new company strategies in compliance with a difficult and legal environment. Companies must remain flexible and have a strong legal team to help them comply with changing and conflicting international business regulations.

[1] https://investmentpolicy.unctad.org/investment-policy-monitor/measures/3562/china-releasing-details-on-the-unreliable-entity-list-

[2] https://www.pillsburylaw.com/en/news-and-insights/china-publishes-unreliable-entity-list.html

[3] http://english.scio.gov.cn/pressroom/2024-05/20/content_117200330.htm

[4] https://www.cnn.com/2024/09/25/business/china-calvin-klein-sanctions-xinjiang-boycott-hnk-intl/index.html

[5] https://www.chinadaily.com.cn/a/202103/26/WS605d4b89a31024ad0bab1ce8.html

[6] https://www.taipeitimes.com/News/biz/archives/2024/09/26/2003824352