Shein IPO: Lawmakers scrutinize forced labor

Lawmakers are ramping up their scrutiny of Shein after it confidentially filed to go public last week.

One congressman who sits on a key committee is even threatening to pursue legislation to bar the retailer from trading if the U.S. Securities and Exchange Commission doesn’t reject its application.

Rep. Blaine Luetkemeyer, R-Mo., issued a video address Tuesday saying Shein “warrants extreme caution from regulators, customers and investors” as the fast-fashion powerhouse sets the stage to start trading on U.S. exchanges as soon as next year. 

In an interview with CNBC, he contended the SEC needs to “do their job” and prevent Shein from trading on U.S. exchanges because of allegations the retailer uses forced labor and exploits U.S. trade laws. 

“Urge the SEC to apply maximum scrutiny to Shein’s business and management before letting it anywhere near our capital markets,” Luetkemeyer said in the video, viewed by CNBC. 

“Accessing U.S. markets and capital is a privilege and we rely on the SEC to root out undeserving companies,” he added. “I sincerely hope the officials at the commission will review Shein to ensure American capital does not fund crimes against humanity.”

Luetkemeyer suggested to CNBC that Congress could take a number of other actions to crack down on Shein if the SEC allows its public offering to move forward. They include legislation that would block Shein from trading in the U.S. or bar its shipments from coming into the country. 

“Everything’s on the table, let’s put it that way, and I think we’ll see what action Shein wants to engage in,” said Luetkemeyer. 

Luetkemeyer sits on the newly formed and GOP-controlled House Select Committee on the Chinese Communist Party. A legislative aide told CNBC the committee’s chairman, Rep. Mike Gallagher, R-Wisc., “shares Rep. Luetkemeyer’s concerns about companies gaining the benefits of America’s capital markets despite clear and present concerns about human rights abuses and national security risks.” Gallagher is also interested in pursuing reforms to the trade loophole known as the de minimis provision and expanding enforcement of the Uyghur Forced Labor Prevention Act, the aide said.

The committee is investigating Shein over its use of forced labor and de minimis — probes that are ongoing, Luetkemeyer said.

Under the de minimis provision, packages valued under $800 are not charged import duties and aren’t subject to the same oversight from U.S. customs, which is tasked with screening packages to ensure items from banned regions don’t come into the country.

Shein often ships its products directly to American consumers through its network of Chinese suppliers, which allows it to typically avoid that oversight. The company has said it supports de minimis reform but has not detailed what those changes should look like.

“We want to make sure that we get to the bottom of this and expose what’s going on, and document it in a way that the SEC can’t ignore,” said Luetkemeyer. 

The SEC told CNBC it doesn’t comment on individual entities. 

The Republican’s push to bar Shein from trading in the U.S. comes as lawmakers from both parties ramp up their criticism of the Chinese-founded retailer. Rep. Jennifer Wexton, D-Va., also called for more scrutiny of Shein. She said in a statement last week that lawmakers “must take action to hold Shein accountable” because products made from forced labor “have no place in the American marketplace.”

While the IPO filing has sparked more scrutiny of Shein, it is unclear whether the full Republican-controlled House, or the Democratic-held Senate, would have enough support to pass a bill restricting the company’s ability to trade or do business in the U.S. Luetkemeyer said the concerns around Shein are “not partisan” issues, and he expects legislative action against the company would have wide support.

Last week, people familiar with the matter said Shein has confidentially filed to go public in the U.S. and could be ready to start trading next year. 

The company, last valued at $66 billion, has enjoyed a meteoric rise in recent years, but it’s facing increasing scrutiny from lawmakers who suspect the company is able to offer its low prices because it uses forced labor and exploits de minimis. It has spent the better part of a year on a charm offensive in an effort to reverse those narratives and win over regulators and Wall Street.

Shein has said in the past that its inventory-light business model and its ability to spot burgeoning trends drive its low prices. But it has acknowledged that some of its raw materials have come from banned regions known for forced labor.  

“SHEIN has a zero-tolerance policy for forced labor. We take visibility across our entire supply chain seriously, and we are committed to respecting human rights. To comply with U.S. law, we require our contract manufacturers to only source cotton from approved regions. As of November 2023, only 1.7% of our cotton tested positive for unapproved cotton,” a Shein spokesperson told CNBC.

“According to global supply chain tracing firm Oritain, these amounts are much lower than the industry average of 14%,” the spokesperson added. “In infrequent cases when cotton from unapproved regions is detected, we take immediate action such as suspending production, halting shipments to the United States and removing U.S. product listings.” 

When asked if those shipments are also halted and removed from product listings in other parts of the world, a Shein spokesperson said “our policy is to comply with the customs and import laws of the countries in which we operate.”

The U.S. has banned the import of cotton and other products made in Xinjiang, China, since 2021 because of evidence of genocide, torture and forced labor against the Uyghur ethnic group in the region. Other countries have not yet implemented the same kind of regulations. 

— CNBC’s Chelsey Cox contributed to this report.

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