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Companies Dealing with Specified Products and Countries Advised of NK Sanctions Risk

Tuesday, July 24, 2018
Sandler, Travis & Rosenberg Trade Report

Businesses with operations in industries and/or countries identified in a new U.S. government advisory as being at high risk of violating sanctions against North Korea should closely examine their supply chains and adopt appropriate due diligence practices. This advisory highlights sanctions evasion tactics used by North Korea and notes that well-documented due diligence policies and practices to counter these tactics may be considered mitigating factors when enforcement responses are determined.

Existing Sanctions

The U.S. maintains a wide range of restrictions on trade with North Korea, including prohibitions on the exportation or reexportation to, or importation from, North Korea of any goods, services, or technology; a ban on imports of goods, wares, articles, and merchandise mined, produced, and manufactured wholly or in part by North Korean citizens or nationals; and any approval, financing, facilitation, or guarantee by a U.S. person of a transaction by a foreign person that would be prohibited if performed by a U.S. person or within the U.S. Those who violate these sanctions can be subject to civil and criminal penalties as well as denial of entry, seizure, and forfeiture of imported goods.

In addition, United Nations member countries are required to (a) prohibit imports from North Korea of 21 categories of goods, including textiles, seafood, metals, food and agricultural products, machinery, electrical equipment, wood, and vessels; (b) prohibit all joint ventures with North Korean entities and individuals; and (c) repatriate all North Koreans earning income no later than Dec. 22, 2019.

Identified Risks

According to the advisory, one of the primary risks of violating these sanctions is the inadvertent sourcing of goods, services, or technology from North Korea, which has been associated with the following.

- Third-country suppliers shift manufacturing or subcontracting work to a North Korean factory (e.g., for embroidery detailing on garments) without informing the customer or other relevant parties.

- North Korean exporters disguise the origin of goods produced in North Korea (e.g., seafood and garments) by affixing country of origin labels that identify a third country.

- North Korean firms have established hundreds of joint ventures with partners from other countries in industries such as textiles, apparel, construction, small electronics, hospitality, minerals, precious metals, and seafood. Companies should carefully review the list of JVs in annex 2 of the advisory to ensure they are not working with these companies, though it should be noted that this list is not comprehensive or up to date.

- North Korean exporters sell goods and raw materials (e.g., minerals) well below market prices to intermediaries and other traders.

- North Korea sells a range of information technology services and products abroad, including website and application development, security software, and biometric identification software that has military and law enforcement applications.

Another sanctions violation risk is the presence in companies’ supply chains of North Korean citizens or nationals whose labor generates revenue for the North Korean government. Affected industries include textiles, apparel, construction, footwear, hospitality, IT services, logging, medical, pharmaceutical, restaurant, seafood processing, and shipbuilding. The advisory identifies 42 countries where North Korean laborers working on behalf of the North Korean government were present in 2017-2018, including Cambodia, China, Indonesia, Malaysia, Nigeria, Peru, Poland, Russia, Singapore, Taiwan, Thailand, the United Arab Emirates, and Vietnam.

Businesses should use due diligence best practices to guard against these risks. For more information on such practices or assistance in implementing them, please visit the ST&R website or contact Elise Shibles at (415) 490-1403 or Marilyn-Joy Cerny at (212) 549-0161.

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