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OFAC Due Diligence Warning: North Korean Supply Chain Threat

Aug 07, 2018

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) was joined by several other U.S. agencies on July 23rd in issuing a warning to U.S. businesses of the acute sanctions compliance risks posed by North Korea’s sanctions-evasion system.

Engaging in business with North Korea’s numerous state-controlled enterprises, whether wittingly or not, is a violation of U.S. and United Nations sanctions laws. Penalties can be severe.

The warning singled out manufacturers, buyers, and service providers that may inadvertently source goods, services or technology from North Korea, the proceeds of which trickle back to the North Korean government.

Supply Chain Risks

Businesses must be aware of the deceptive practices employed by the North Korean government and be familiar with red flags, like abnormally cheap goods, to remain compliant. OFAC due diligence policies should be review periodically, especially by companies with large and/or complex supply chains.

North Korea frequently exploits the anonymity provided by freelancing websites to sell numerous IT services and products abroad. Products and services in the IT sphere that have been linked to North Korea include: security software, website and app development, and biometric identification software. The North Korean firms generally disguise themselves by using front companies, conducting business through third party countries, and by using aliases.

Labor Risks

Background checks are an essential component of OFAC due diligence. North Korea exports thousands of labors internationally every year, garnishing their wages and bringing in hundreds of millions of U.S. dollars per year, much of which is used for their weapons program.

It is prohibited to use North Korean citizens or nationals as laborers in supply chains under U.S. sanctions law. The issuance of work authorizations for North Korean nationals is also prohibited under UN Security Council resolution 2397 (2017).

Companies outsourcing work to foreign countries also must be careful. North Korea has exported laborers to dozens of countries (full list available in the link below) where they work in numerous industries, including but not limited to: “apparel, construction, footwear manufacturing, hospitality, IT services, logging, medical, pharmaceuticals, restaurant, seafood processing, textiles, and shipbuilding.”

Penalties for Violations of Sanctions and Enforcement Actions

Persons and businesses that violate U.S. sanctions on North Korea can be subject to “severe civil monetary penalties equal to the greater of twice the value of the underlying transaction or $295,141 per violation, referred for criminal prosecution, or both.”

The warning, published by the U.S. Treasury Department, can be read in its entirety here.

An FAQ of the recently passed “Countering America’s Adversaries Through Sanctions Act” with specific resources for concerned businesses, can be found here.

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