United States: U.S. Government Warns About Sanctions Evasion Tactics; Heightens Need For Due Diligence

On July 23, 2018, a variety of U.S. government agencies, namely the Department of State, the Department of the Treasury's Office of Foreign Assets Control ("OFAC"), and the Department of Homeland Security's Customs and Border Protection ("CBP") and Immigration and Customs Enforcement ("ICE"), jointly issued a North Korea Sanctions and Enforcement Actions Advisory (the "North Korea Advisory" or the "Advisory") for purposes of highlighting certain sanctions evasion tactics utilized by the government of North Korea. One of the intended purposes of the North Korea Advisory is to make businesses, including manufacturers, buyers and service providers, aware of tactics that may expose them to compliance risks under U.S. and/or United Nations sanctions authorities. The Advisory is also intended to assist businesses in complying with the requirements of Title III of the Countering America's Adversaries Through Sanctions Act ("CAATSA"). A summary of U.S. sanctions under the Trump Administration, including those against North Korea as outlined in CAATSA, can be found here.

Overview of Key Aspects of the North Korea Advisory

The North Korea Advisory focuses on two primary sanctions risk areas: 1) inadvertent sourcing of goods, services or technology from North Korea and 2) the presence of North Korean citizens or nationals in company supply chains.

According to the Advisory, heightened risk for and potential indicators of goods, services and technology with a North Korean nexus include the following:

  • Subcontracting/consignment firms that shift manufacturing or subcontracting work to North Korean factories without informing the customer or other parties to a transaction;
  • Mislabeled goods/services/technology that disguise the origin of items produced in North Korea via country of origin labels that instead identify a third country (oftentimes China);
  • Joint ventures between North Korean firms and partners from China and other countries in various industries;
  • Raw materials or goods provided with artificially low prices to intermediaries and other traders, providing a commercial incentive for the purchase of North Korean items; and
  • Information technology services sold using a variety of tactics that disguise the North Korean footprint.

The Advisory also focuses on the presence of North Korean overseas laborers whose primary work is overseen/managed by and generates revenue for the North Korean government. The North Korean government typically exports laborers to fulfill a single contract in industries in a variety of countries, particularly China and Russia. Potential indicators of North Korean overseas labor include the following:

  • Wages withheld by the employer, unreasonable pay deductions, late payment of wages and payment of in-kind wages;
  • Contracts established for a two-to-five-year period and which require large upfront payments to the North Korean government;
  • Housing provided by employers for laborers that is often unsafe and unsanitary;
  • Control by employers, and not laborers, over bank accounts, passports and personal documents; and
  • Lack of transparency that makes it difficult to determine the ultimate beneficiary of the laborers' work.
Due Diligence Considerations and Key Takeaways

The North Korea Advisory cautions businesses to closely examine their entire supply chain(s) for North Korean laborers, goods, services and technology, and urges them to adopt appropriate due diligence best practices tailored to the size and nature of the company. It is significant to note there is no carveout for a lack of knowledge of improper practices, thereby heightening the likelihood of investigations and consequent penalties. A company's best practices may be considered as mitigating factors during such government investigations of potential violations of export control and sanctions laws and regulations.

Due diligence best practices have also become increasingly important in light of the Trump Administration's withdrawal from the Joint Comprehensive Plan of Action ("JCPOA"), commonly referred to as the Iran nuclear deal. A summary of the Administration's withdrawal from the Iran nuclear deal and a discussion related to the domestic and international implications of the withdrawal can be found here. As a result of the withdrawal, U.S. sanctions that had previously been lifted under the JCPOA will be reimposed in a staggered manner, with some sanctions taking effect on Aug. 6 and the remainder on Nov. 4. Therefore, U.S. and non-U.S. parties must continue to assess their activities in order to effectively plan for both the reinstatement and a potential augmentation of sanctions against Iran, and must take steps to withdraw from activities that will be prohibited in short order.

Due to these developments as well as other U.S. sanctions laws and regulations, companies should ensure that they have appropriate compliance processes and procedures in place. Such processes and procedures should include engaging in end-use/user due diligence and utilizing end-use/user statements to ensure compliance by other parties to an export/re-export transaction. We will be happy to assist you in developing appropriate processes, as well as with any other questions or concerns you might have.

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.

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