US Advisory North Korea Sanctions July 2018

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US authorities including OFAC issued a new North Korea Sanctions and Enforcement Actions Advisory on 23 July 2018.

The Advisory highlights sanctions evasion tactics allegedly used by North Korea that could expose businesses to sanctions compliance risks under US and/or UN sanctions authorities. The Advisory urges businesses (US and non-US alike) to be aware of those alleged deceptive practices and to implement effective due diligence policies, procedures, and internal controls to ensure compliance with applicable legal requirements across their entire supply chains.

A number of US and UN sanctions impose restrictions on trade with North Korea and the use of North Korean labour. According to the Advisory the two primary risks are: (1) 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 government.

Potential Indicators of Goods, Services, and Technology with a North Korean Nexus
The Advisory identifies the following potential indicators of goods, services, and technology with a North Korean nexus:

Sub-contracting: Third-country suppliers shift manufacturing or sub-contracting work to a North Korean factory without informing the customer or other relevant parties.

Mis-labelled 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.

Joint Ventures: North Korean firms have established hundreds of joint ventures with partners from China and other countries in various industries.

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.

Information Technology (IT) services: North Korea sells a range of IT services and products abroad, disguising their footprint via tactics including the use of front companies, aliases, and third country nationals who act as facilitators.

Potential Indicators of North Korean Overseas Labour
Use of North Korean citizens or nationals as labourers in supply chains could trigger US sanctions, and the issuance of work authorizations for these North Korean nationals is prohibited under UN Security Council Resolution 2397 (2017).

The Advisory identifies a number of potential Indicators of North Korean Overseas Labour :

Heightened Risk for North Korean Overseas Labour Producing Revenue for the Government of North Korea:

The Advisory reports that the North Korean government exports large numbers of labourers to fulfil a single contract in various industries, including but not limited to apparel, construction, footwear manufacturing, hospitality, IT services, logging, medical, pharmaceuticals, restaurant, seafood processing, textiles, and shipbuilding. In 2017-18, North Korean labourers working on behalf of the North Korean government were present in 42 other countries and jurisdictions. China and Russia host more North Korean labourers than all other countries and jurisdictions combined.

Potential indicates include:
Wages: Indicators include the employer withholding wages, making unreasonable pay deductions, paying wages late, and making in-kind payments.

Contracts: Labourers producing revenue for the government typically are hired under two-to-five year contracts that require a large upfront payment to the North Korean government.

Housing: Labourers often reside in costly, unsafe and unsanitary conditions provided by the employer, often in collective housing and isolated from labourers of other nationalities.

Control over Labourers: Labourers often have no access to or control over bank accounts. Employers retain passports and/or confiscate or destroy labourers’ personal documents (e.g. visas). Labourers will generally have official documentation, including government-issued passports which may be retained by employers or recruiters.

Lack of Transparency: Contract details are often hidden, as is the ultimate beneficiary of financial transactions. Third parties are limited from conducting worksite inspections. Labourers typically can’t be interviewed without a “minder” present.

Due Diligence Best Practices

The Advisory recommends that businesses closely examine their entire supply chain(s) for North Korean labourers and goods, services, or technology, and adopt appropriate due diligence best practices.

Penalties for Violations of Sanctions and Enforcement Actions

OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R Part 501, Appendix A details potential consequences for engaging in or facilitating prohibited or sanctionable conduct. Persons can be subject to civil monetary penalties equal to the greater of twice the value of the underlying transaction or US$295,141 per violation, and/or criminal prosecution.

US Customs and Border Protection and Immigration and Customs Enforcement departments enforce the prohibition against importing goods made with forced labour through civil and criminal enforcement actions, including denying entry of goods, civil penalties, seizing and forfeiting associated goods and/or proceeds, fines or incarceration.

Activities that Could Result in Designation by OFAC

OFAC may impose sanctions on any person determined to, among other things:

• operate in the construction, energy, financial services, fishing, information technology, manufacturing, medical, mining, textiles, or transportation industries in North Korea;
• have engaged in at least one significant importation from or exportation to North Korea of any goods, services, or technology;
• have engaged in, facilitated, or been responsible for an abuse or violation of human rights by the government of North Korea or the Workers’ Party of Korea or any person acting for or on their behalf;
• have engaged in, facilitated, or been responsible for the exportation of labourers from North Korea, including to generate revenue for the government of North Korea or the Workers’ Party of Korea; or
• have sold, supplied, transferred, or purchased, to or from North Korea or any person acting for or on behalf of the government of North Korea or the Workers’ Party of Korea, metal, graphite, coal, or software, where any revenue or goods received may benefit the government of North Korea or the Workers’ Party of Korea.

Additionally, if it is determined that a foreign financial institution has knowingly conducted or facilitated significant trade with North Korea, or knowingly conducted or facilitated a significant transaction on behalf of a designated person, that institution may, among other potential restrictions, lose the ability to maintain a correspondent account in the US.

Annex 1 of the Advisory provides an overview of US/UN North Korea Sanctions Prohibitions Related to Supply Chains

Annex 2 sets out a list of Joint Ventures that have operated or are currently operating in North Korea established prior to 2016.