In an advisory titled: Risks for Businesses with Supply Chain Links to North Korea, the U.S. State Department, the U.S. Treasury Department Office of Foreign Assets Control, and the U.S. Department of Homeland Security Customs and Border Protection and Immigration and Customs Enforcement (the "agencies") warned of tactics used by North Korea to evade sanctions.
The agencies warned businesses that falling for attempts by North Korea to evade U.S. and UN trade and labor sanctions could subject those businesses to legal liability. The agencies emphasized two primary areas of risk for businesses: (i) unintentionally sourcing services, goods or technology from North Korea and (ii) having North Korean citizens or nationals, whose labor produces revenue for the North Korean government, in a company's supply chains.
The agencies urged businesses to implement necessary due diligence best practices, and to review their supply chains for North Korean laborers, goods and services.
Commentary
This interdepartmental advisory highlights specific deceptive practices used by North Korea to evade U.S. and UN sanctions, and also names industries and countries in which those practices are most commonly employed. For financial institutions, the advisory should be read in conjunction with FinCEN's November 2017 advisory on North Korea's use of the international financial system, which provides financial red flags related to North Korea's deceptive use of third-country financial representatives, as well as China-based front or shell companies, trading companies, and financial institutions operating in the China-North Korea border area.
The current advisory elaborates on North Korea's sanctions-evading practices, including the use of mislabeled goods identified as being sourced from another country, the sale of raw materials at artificially low prices to incentivize dealings with Pyongyang, and the provision of labor under harsh conditions with unusual or non-transparent financial arrangements (e.g., withholding of wages, payment in kind, and strict control over workers). The advisory also identifies industries in which North Korea is most active – including agriculture and aquaculture, apparel, information technology and mining – and the countries of greatest concern: most importantly, China and Russia.
Financial institutions and other firms should ensure that their due diligence procedures are sufficient to identify and address these risks. As the advisory makes clear, if a sanctions violation does occur, "well-documented due diligence policies and practices may be considered mitigating factors when the U.S. government determines the appropriate enforcement response." The converse also is undeniably true, and enforcement agencies will not look kindly on those who ignore their warnings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.