24 July 2018
Companies Dealing with Specified Products and Countries Advised of North Korea Sanctions Risk
The United States issued on 23 July an advisory highlighting sanctions evasions tactics used by North Korea that could expose businesses to sanctions compliance risks under U.S. and/or UN sanctions authorities. The advisory lists several activities as constituting heightened risk for and potential indicators of goods, services and technology with a North Korean nexus as well as industries where such activities have taken place.
The U.S. Department of State, in conjunction with the U.S. Department of the Treasury’s Office of Foreign Assets Control, U.S. Customs and Border Protection and Immigration and Customs Enforcement, issued on 23 July an advisory highlighting sanctions evasions tactics used by North Korea that could expose businesses – including manufacturers, buyers and service providers – to sanctions compliance risks under U.S. and/or United Nations sanctions authorities. The advisory is also intended to assist businesses in complying with the requirements under the Korean Interdiction and Modernization of Sanctions Act of the Countering America’s Adversaries Through Sanctions Act.
According to the advisory, businesses should be aware of deceptive practices employed by North Korea in order to implement effective due diligence policies, procedures and internal controls to ensure compliance with applicable legal requirements across their entire supply chains. The two primary risks are (1) the inadvertent sourcing of goods, services or technology from North Korea, and (2) the presence of North Korean citizens or nationals in companies’ supply chains, whose labour generates revenue for the North Korean regime.
The U.S. government is focusing its disruption efforts on the second primary risk, North Korean citizens or nationals whose labour generates revenue for the North Korean government. In most cases, employers pay salaries directly to the North Korean government, which takes between 70 and 90 percent of the total earnings. The North Korean government reportedly earns hundreds of millions of U.S. dollars per year from exporting labour, which supports its weapons of mass destruction and ballistic missile programmes. Use of North Korean citizens or nationals as labourers in supply chains could trigger U.S. sanctions and the issuance of work authorisations for these North Korean nationals is prohibited under UN Security Council resolution 2397 (2017).
On the other hand, the U.S. government is not seeking to disrupt the efforts of North Korean refugees and asylum seekers, who are living and working outside of North Korea, to earn an income to sustain themselves in a personal capacity. Individuals originally from North Korea who obtain South Korean citizenship or any other citizenship are no longer considered North Korean citizens or nationals for purposes of Section 321(b) of the CAATSA.
The advisory lists the following activities as constituting heightened risk for and potential indicators of goods, services and technology with a North Korean nexus.
- Sub-Contracting/Consignment Firms
Third-country suppliers shift manufacturing or sub-contracting work to a North Korean factory without informing the customer or other relevant parties. For example, a mainland Chinese factory sub-contracts with a North Korean firm to provide embroidery detailing on an order of garments.
- Mislabelled Good/Services/Technology
North Korean exporters disguise the origin of goods produced in North Korea by affixing country-of-origin labels that identify a third country. For example, North Korean seafood is smuggled into third countries where it is processed, packaged and sold without being identified as originating from North Korea. There are also cases in which garments manufactured in North Korea are affixed with “Made in China” labels.
- Joint Ventures
North Korean firms have established hundreds of joint ventures with partners from mainland China and other locations in various industries, such as apparel, construction, small electronics, hospitality, minerals, precious metals, seafood and textiles.
- Raw Materials or Goods Provided with Artificially Low Prices
North Korean exporters sell goods and raw materials well below market prices to intermediaries and other traders, which provides a commercial incentive for the purchase of North Korean goods. This practice has been documented in the export of minerals. According to the advisory, a close review of trade data on North Korea’s export of anthracite coal to mainland China from 2014 to 2017 reveals a consistent sub-market price for this export.
- Information Technology Services
North Korea sells a range of IT services and products abroad, including website and app development, security software and biometric identification software that have military and law enforcement applications. North Korean firms disguise their footprint through a variety of tactics, including the use of front companies, aliases and third country nationals who act as facilitators. For example, there are cases where North Korean companies exploit the anonymity provided by freelancing websites to sell their IT services to unwitting buyers.
The advisory also lists 42 locations where North Korean labourers working on behalf of the North Korean government were present in 2017-18 while highlighting that mainland China and Russia continue to host more North Korean labourers than all other countries and jurisdictions combined. With regard to industries, the advisory states that the North Korean government exports large numbers of labourers to fulfil a single contract in various industries, including apparel, construction, footwear manufacturing, hospitality, IT services, logging, medical, pharmaceuticals, restaurant, seafood processing, textiles and shipbuilding.
Finally, the advisory discusses potential indicators of North Korean overseas labour in the areas of wages, contracts, housing, control over labourers and lack of transparency and advises businesses to closely examine their entire supply chain(s) for North Korean labourers and goods, services or technology and adopt appropriate due diligence best practices. This especially applies to those businesses with operations in high-risk countries or who operate in high-risk industries. According to the advisory, while due diligence practices will vary based on the size and nature of the business, well-documented due diligence policies and practices may be considered mitigating factors when the U.S. government determines an appropriate enforcement response.