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U.S. Issues Sanctions Risks for Businesses with N. Korean Supply Chain Links

July 24, 2018 by Bruce Zagaris Leave a Comment

On July 23, 2018, the U.S. Department of State, with the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the U.S. Department of Homeland Security’s (DHS) Customs and Border Protection (CBP) and immigration and Customs Enforcement (ICE), issued an advisory to high sanctions evasions tactics used by North Korea that could expose businesses – including manufacturers, buyers, and service providers – to sanctions compliance risks under U.S. and/or U.N. sanctions authorities. The advisory also helps businesses in complying with the requirements under Title III, the Korean Interdiction and Modernization of Sanctions Act of the Countering America’s Adversaries through Sanctions Act (CAATSA). The advisory warns businesses to be aware of deceptive practices employed by North Korea in order to implement effective due diligence policies, procedures, and internal controls to ensure compliance with applicable legal requirements across their entire supply chains.

Multiple U.S. and U.N. sanctions impose restrictions on trade with North Korea and the use of North Korean labor. Annex 1 to the advisory sets forth a more detailed description of the North Korean sanctions prohibitions related to supply chains. 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 labor generates revenue for the North Korean government. The advisory also provides due diligence references for businesses.

The heightened risk for and potential indicators of goods, services, and technology with a North Korean nexus includes:

Sub-contracting/consignment firms [e.g., third country suppliers (Chinese) shift manufacturing or sub-contracting work to a North Korean factory without informing the customer or relevant parties);

Mislabeled Good/Services/Technology: N. Korean exporters disguise the origin of goods produced in N. 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, such as apparel, construction, small electronics, hospitality, minerals, precious metals, seafood and textiles (see Annex 2 of the advisory for a list of known North Kean joint ventures).

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.

Information Technology (IT) Services: North Korea sells a range of IT services and products abroad, including website and app development, security software, and biometric identification software that have military and law enforcement applications.

The advisory also discusses heightened risk for North Korean overseas labor producing revenue for the government of North Korea. The North Korean government exports large numbers of laborers to meet 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. China and Russia continue to host more North Korean laborers than all other countries and jurisdictions combined. The advisory lists 42 jurisdictions hosting North Korean laborers.

The advisory sets forth potential indicators of North Korean overseas labor.

The advisory gives due diligence best practices, namely those businesses closely examine their entire supply chain(s) for North Korean laborers and goods, services or technology, and adopt appropriate due diligence best practices. This especially applies to those businesses with operations in high-risk countries, or who operate in high-risk industries. Well-documented due diligence policies and practices may be considered mitigating factors when the U.S. government determines the appropriate enforcement response.

The advisory reminds businesses of the penalties on individuals and entities for violations of sanctions and enforcement actions and activities that could result in designation by OFAC. The advisory also provides where interested individuals can find additional information on OFAC sanctions.

During the second week of July the U.S. complained to the Security Council North Korea sanctions committee that as of May 30, North Korea had made 89 illicit ship-to-ship transfers of refined petroleum products. The U.S. asked the committee to notify all U.N. member states of the violations of a refined petroleum cap of 500,000 barrels a year – imposed by the council in December – and order an immediate halt to all transfers. On July 19, 2018, China and Russia delayed a U.S. effort for a U.N. Security Council committee to order a ban on refined petroleum exports to North Korea. China and Russia requested more detail on a U.S. accusation that Pyongyang breached sanctions.

In the coming weeks the U.S. will try to both unilaterally and multilaterally strengthen North Korean sanctions unless and until North Korea starts implementing the June 12 “denuclearization agreement” or joint statements to the satisfaction of the U.S. government.

The next issue of the IELR will have additional information on the North Korean sanctions.

U.S. and Brazil Start Permanent Forum on Security

May 23, 2018 by Bruce Zagaris Leave a Comment

On May 22, 2018, the United States and Brazilian governments issued a joint statement following the start of the U.S.-Brazil Permanent Forum on Security.

The initiative arose during a meeting in Brasilia at which U.S. Deputy Secretary of State John J. Sullivan was accompanied by the Assistant Secretary for Economic and Business Affairs Manisha Singh and Acting Assistant Secretary for Western Hemisphere Affairs Francisco Palmieri.

The Acting Minister of Foreign Affairs, Secretary General Marcos Garvão hosted the U.S. delegation in a working lunch and a meeting where they discussed several aspects of the U.S.-Brazil partnership.

The start of the Permanent Forum on Security arises from “consistent cooperation between the United States and Brazil on fighting transnational crime, and based upon the strengthening of collaboration of law enforcement and security agencies in both countries.”[1]

The Brazilian Ministry of Foreign Affairs and the U.S. State Department will coordinate the Forum, which aims to facilitate interagency teamwork and design operating strategies in six pre-defined areas: drug trafficking, arms trafficking, cybercrime, money laundering and financial crimes, terrorism, and institutional cooperation.

The first working meeting of the Forum will occur later this year in Washington, D.C.

During the visit, the two sides also issues related to criminal cooperation, such as space cooperation and defense. They discussed the recent exchange of diplomatic notes completing the process for the U.S.-Brazil Open Skies Aviation Agreement and welcomed the resumption of negotiations on a Technology Safeguards Agreement. They exchanged ideas on regional issues, including the region’s response to the political, economic, and humanitarian crisis in Venezuela.

According to the remarks of Deputy Secretary Sullivan, the U.S.-Brazilian security cooperation has included the Summer Olympics in Rio de Janeiro.

A future IELR article will include a more comprehensive discussion of the Forum, its scope and some of the implications.

[1] State Department, Western Hemisphere: U.S.-Brazil Bilateral Cooperation, May 22, 2018

U.S. Government Needs Better Control on International Arms Sales

March 24, 2018 by Bruce Zagaris Leave a Comment

On March 13, 2018, CATO published a report by A. Trevor Thrall and Caroline Dorminey entitled Risky Business: The Role of Arms Sales in U.S. Foreign Policy.

The report observes that since 2002, the U.S. has sold more than $197 billion worth of major conventional weapons and related military support to 167 countries. In just his first year in office, President Donald Trump signed arms deals at an accelerated rate, generating hundreds of billions of dollars’ worth of potential sales.

According to the report, U.S. government-to-government arms sales since 2002 reveals that the U.S. has repeatedly sold weapons to nations engaged in deadly conflicts, and to those with horrendous human rights records, under circumstances in which the U.S. has not been able to predict where the weapons would end up or how they would be used.

The report argues that economic benefits of arms ales are dubious and that their strategic utility is far more uncertain and limited than most realize. The authors persuasively argue that the U.S. should revise its arms sales policy to improve the risk assessment process, to ban sales to countries where the risk of negative consequences is too high, and to limit sales to cases in which they will directly enhance U.S. security.

The U.S. sells arms to a large number of risky customers in the world, and the U.S. sells weapons to most of them. The data shows that the U.S. does not discriminate between high- and low-risk customers. The average sales to the riskiest nations are higher than those to the least risky nations. Due to the lack of discrimination, these recipient governments have used their U.S. weapons to promote oppression, commit human rights abuses, and perpetuate bloody civil wars.

A result of the lack of discrimination in arms sale is blowback: U.S. troops and their allies have faced U.S.-made weapons in almost every military engagement since the end of the Cold War, including in Panama, Haiti, Somalia, Iraq, Afghanistan, Yemen, and Syria.

Arms sales do not just affect the recipient nation; they also affect and can destabilize the local balance of power, often causing ripple effects throughout the region.

The report recommends the U.S. should reorient its arms sales policy to ensure that sales provide strategic benefits and to avoid producing negative unintended consequences. At a practical level, arms sales must be reduced dramatically, especially to nations with high risk factors

The report made several recommendations, including that “the president should issue a new Presidential Policy Directive reorienting U.S. arms sales policy so that the new default policy is “no sale.” The only circumstances in which the United States should sell or transfer arms to another country are when three conditions are met: (1) there is a direct threat to American national security; (2) there is no other way to confront that threat other than arming another country; and (3) the United States is the only potential supplier of the necessary weapons.”

Other (Non-state-to-state arms sales) –

The latest Issue Brief from the Small Arms Survey—Dribs and Drabs: The Mechanics of Small Arms Trafficking from the United States—analyses a side of the arms trade that is less flashy, less centralized, and even more difficult to stop. It reviews the modes of transport, concealment methods, and smuggling techniques employed by arms traffickers in the U.S. The brief finds strong arms export licensing regimes are necessary but not sufficient for stopping small arms trafficking. “The illicit trade in parts and accessories for small arms is more significant than commonly assumed. Networks that traffic in firearms parts are among the most prolific and geographically expansive of the smuggling operations studied.”

The U.S. is the largest producer of small arms in the world, with more than half of the world’s producers based in the U.S. Many arms traffickers buy relatively inexpensive firearms in the U.S. and resell them on the black market abroad because the penalties are relatively light compared with the penalties for smuggling drugs – and the profit margin is high. Arms brokers bypass regulatory norms and facilitate weapons transfers from states to non-state actors and buyers who could not otherwise obtain them.

The rate of U.S. firearms flowing into Central America, particularly the northern triangle countries of Guatemala, El Salvador, and Honduras, constitutes a major regional security problem.

The United States is one of three countries that have not ratified the Inter-American Convention Against the Illicit Manufacturing of and Trafficking in Firearms, Ammunition, Explosives, and Other Related Materials (CIFTA). The Convention requires parties to criminalize the illegal manufacture, import, or export of high-powered weapons. It also provides for information exchange and cooperation on initiatives including the marking and tracing of weapons and the identification of criminal transit routes. President Bill Clinton signed CIFTA in 1997 and submitted it for ratification to the Senate, but the Senate failed to act. Twenty-nine countries in the Western Hemisphere have ratified CIFTA.

Just as importantly, the U.S. voted in favor of the United Nations’ Arms Trade Treaty (ATT) in April 2013, and it has signed, but not yet ratified the treaty. 93 states participate, including 22 Latin American and Caribbean countries participate in the treaty. The landmark Arms Trade Treaty (ATT), regulating the international trade in conventional arms – from small arms to battle tanks, combat aircraft and warships – entered into force on December 24, 2014.

Strengthening U.S. gun control and participating in CIFTA and the UN Small Arms Treaty will offset widespread regional views that the U.S. remains indifferent to its own role in exacerbating one of Latin America’s most significant challenges.

U.S. Issues Sanctions Risks for Businesses with N. Korean Supply Chain Links

U.S. and Brazil Start Permanent Forum on Security

U.S. Government Needs Better Control on International Arms Sales

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