Despite the promise of a Trump-Kim summit in May, tensions between the United States and North Korea continue to run high, and businesses have found themselves in the crossfire. A number of clauses targeting business transactions with North Korea were included in the Countering America’s Adversaries Through Sanctions Act (CAATSA), signed by President Trump in August 2017.
One of these clauses bans the US import of goods produced by North Korean workers, based on the presumption that all goods made by North Koreans involve the use of forced labour. With stricter regulation requiring businesses to conduct due diligence across their supply chains, the presence of indentured North Korean workers across many countries and multiple industries – including technology, seafood and apparel – presents a serious compliance headache for multinationals. Many months after the Act was signed, companies are still grappling with how to deal with the challenge.
Sanctions under CAATSA shift onus to disproving labour violations
The targeting of imports produced under conditions of forced labour is nothing new for the US government, or indeed for business. During President Obama’s second term, changes made to the Trade Facilitation and Trade Enforcement Act (TFTEA) of 2015 granted US Customs and Border Protection (CBP) broader powers to regulate the import of goods linked to forced labour.
The sanctions in CAATSA are different because they target a single country’s diaspora, and shifts the onus on businesses away from proving that forced labour did occur to proving that forced labour did not occur.
We have conducted an investigation into the North Korean labour diaspora and found that businesses operating in numerous sectors across Europe, Africa and Asia are exposed to the presence of indentured North Korean workers in their supply chains. These workers are often contracted to work for foreign companies by North Korean state-run enterprises and they have to send most of their wages back home to boost state coffers.
China accounts for the largest number of North Koreans working abroad (estimated at between 20,000 and 80,000), though workers are also employed in manufacturing hotspots across South-East Asia, including Vietnam and Thailand.
A rapid response by business essential
The introduction of CAATSA underscores the need for businesses to make their risk management practices more robust. This is something that will benefit companies more broadly given the global tightening of legislation around the presence of forced labour in supply chains. And they should waste no time in setting the wheels in motion.
Firstly, procurement departments need to gather more granular evidence – at a company, industry and country level – and with greater frequency, in order to assess actual and potential risks. Secondly, they need to review and strengthen their mitigation strategies to both improve their oversight of key suppliers and develop responses to the potential discovery of forced labour. This might mean running more regular or more in-depth audits, developing worker-voice programmes to improve communications, upgrading supplier training, and using horizon scanning tools or scenario planning exercises.
Companies that can quickly identify, diagnose and resolve issues in their supply chain will be in the best position to address disruptions brought on by new regulatory requirements. The key is to develop a comprehensive due diligence system, which incorporates identifying suppliers in countries ranked high risk for the presence of North Korean indentured labourers and engaging in social compliance audits.
It is imperative that suppliers in high-risk countries provide your sourcing group with a certificate stating that they do not employ North Korean workers. Internally, this is a good time to have an independent review of your supplier code of conduct and the contractual language in your sourcing contracts.
Recommended risk management process
- Engage stakeholders and partners
- Assess risks and impacts
- Review codes of conduct and contractual T’s & C’s.
- Communicate risks, train internal stakeholders, and identify next steps
- Monitor compliance
- Report on compliance and performance
Take action with critical suppliers
Suppliers ranked as critical to your supply chain require more immediate engagement in order for your business to:
- Ensure continuity of supply from your tier 1 suppliers and beyond
- Avoid potential reputational damage, lawsuits and reduction in shareholder value
- Continue to meet customer requirements
Companies with critical suppliers that either source materials or have production facilities that are potentially non-compliant with CAATSA or have not been previously risk assessed, must conduct a comprehensive assessment of their operations, policies and financial health. This assessment can determine the actual and potential risks and highlight the next steps required for the business to remediate and report compliance with the Act.