The US Departments of State, Treasury, and Homeland Security warned companies in a new advisory that deceptive practices by North Korea to evade US, UN, and other sanctions could put them at risk of prohibited or sanctionable dealings with the North Korean regime.  The advisory published on July 24, 2018 follows February 2018 guidance from the US Treasury Department’s Office of Foreign Assets Control regarding certain deceptive shipping practices of North Korea to avoid US sanctions (see our prior blog post here).  The new advisory encourages companies to undertake enhanced due diligence within their supply chains to avoid prohibited or sanctionable: (i) sourcing of goods, services, or technology from North Korea and (ii) use of the labor of North Korean citizens or nationals, which is presumed to be forced labor, regardless of where such labor occurs.

1.                  Red Flags for North Korean Involvement

The advisory highlights situations where practices used by North Korea to evade sanctions may place companies at higher risk of prohibited/sanctionable dealings with North Korea. Deceptive practices creating a potential for dealings in North-Korean goods, services, or technology include:

  • Use of sub-contracting or consignment firms potentially located in North Korea;
  • Mislabeling of North-Korean goods, services, or technology;
  • Joint ventures, especially in China, that involve North Korean entities (a list of known North Korean joint ventures organized by sector is included in Annex 2 to the advisory);
  • Sale of North Korean raw materials or goods at below-market prices to encourage their purchase; and
  • Use of front companies, aliases, third country nationals, and freelance job boards to provide North-Korean IT services.

According to the advisory, factors indicating a higher risk for forced labor used to generate revenues for the North Korean regime include:

  • Situations where single contracts for large numbers of workers are used in certain industries (e.g., apparel, construction, footwear manufacturing, hospitality, IT services, logging, medical, pharmaceuticals, restaurant, seafood processing, textiles, shipbuilding).
  • Use of contracted foreign labor in Russia and China, which account for the majority of exported North Korean workers; the advisory also lists numerous other countries in Section II.A, primarily in Africa and Asia, where the risk of North Korean forced labor is higher.
  • Situations with indicia of North Korean forced labor such as:
    • Where wages are withheld from workers;
    • Where large up-front payments are made to the North Korean government for long-term contracts;
    • Laborers are housed separately or in substandard conditions;
    • Employers exercise significant control over workers, such as by limiting access to bank accounts; and
    • Where transparency of contract details is limited as is access to workers by outsiders.

The advisory distinguishes between North Korean labor in third countries working for the North Korean government and individuals who have fled North Korea, including refugees and asylum seekers. The latter category is not targeted by the sanctions that are the subject of the advisory.

2.                  Why Companies (Not Just US Companies) Should Pay Attention

The risks under US sanctions for engaging in business or transactions related to North Korea are not limited to US companies. As noted in the advisory, US sanctions may apply in several ways:

  • “US Persons” (i.e., (i) entities organized under US laws and their non-US branches, (ii) individuals or entities in the United States, (iii) US citizens or permanent resident aliens (“Green Card” holders) wherever located) that engage in prohibited activities involving North Korea could face significant monetary and criminal penalties.
  • Non-US persons could be designated as “Specially Designated Nationals” under US secondary sanctions in connection with many types of activities involving North Korea, including:
    • Engaging in any “significant” importation or exportation from North Korea (and the US Government has wide discretion over what it considers to be “significant”);
    • Engaging in, facilitating, or being responsible for human rights violation or the exportation of workers from North Korea;
    • Violating North Korea-related resolutions enacted by the UN Security Council.
  • US Customs and Border Protection (“CBP”) may seize goods being imported into the United States that are believed to be made with forced North Korean labor and, in cooperation with Immigration and Customs Enforcement (“ICE”) take civil and criminal enforcement actions against the importer.

In addition to legal risks, the reputational risks for dealing in North-Korean goods, technology, services, or forced labor may also be significant and could involve greater harm to a company’s bottom line than potential sanctions penalties.

3.                  What Companies Should Do

The advisory encourages companies to put policies and procedures in place to examine and audit as appropriate their supply chains and identify where the risk of dealings with North Korea may be higher based on the above-highlighted situations and factors. In enforcement matters, the presence or absence of due diligence and compliance policies and procedures are generally taken into account by the US Government if violations occur and can serve to mitigate any penalty that might ultimately be imposed.

Author

Lloyd advises clients on compliance with the International Traffic in Arms Regulations administered by the US Department of State, and the Export Administration Regulations administered by the Department of Commerce. He has assisted in conducting internal investigations and compliance audits, drafting export licenses and Technical Assistance Agreements, developing comprehensive compliance programs and drafting voluntary disclosures. Lloyd also advises on trade sanctions administered by the Treasury Department’s Office of Foreign Assets Control. He has experience drafting license applications for sanctioned countries and parties, conducting internal investigations into potential sanction violations, drafting voluntary disclosures, and conducting due diligence ahead of mergers and acquisitions. A Certified Fraud Examiner and former police detective, Lloyd also conducts complex internal investigations on behalf of clients into potential violations of various regulations. He has interviewed witnesses and subjects, reviewed large volumes of data for relevant evidence, analyzed complex regulatory requirements and prepared investigative reports provided to government agencies.

Author

Mr. Foote’s U.S. customs practice involves advising clients on how to achieve and maintain duty savings, including through valuation- and classification-based strategies, and how to take advantage of preferential rates of duty under free trade agreements and related programs. He also counsels clients on matters related to customs and trade compliance, including country of origin marking requirements, reducing exposure to antidumping and countervailing duties, and import-related regulatory requirements imposed by various government agencies, such as the Food and Drug Administration (FDA), Federal Trade Commission (FTC), and National Highway Transportation Safety Administration (NHTSA). He regularly represents clients before U.S. Customs and Border Protection, including by filing prior disclosures, submitting comments on proposed agency rulemaking, responding to requests for information and dealing with adverse actions, such as seizure and penalty notices. Mr. Foote also advises companies on matters relating to agreements negotiated at the WTO, such as the Environmental Goods Agreement, and the General Agreement on Trade in Services. His advice is oriented around assisting companies in understanding the opportunities emerging from ongoing trade negotiations, and analyzing the implications of foreign government activity under existing WTO law.

Author

Ms. Test advices clients on issues relating to licensing, regulatory interpretations, enforcement actions, internal investigations and compliance audits, as well as the design, implementation and administration of compliance programs. She also advises clients on the extra-territorial application of trade compliance-related regulations in cross-border transactions.