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.
Despite recent news of the potential denuclearization of the Korean peninsula, ongoing tensions between the US and North Korea mean that businesses must continue to grapple with sanctions against the Kim Jong-un’s regime.
In March 2018, the US Treasury’s Office of Foreign Assets Control issued new and updated regulations relating to US sanctions against North Korea. These implemented three executive orders signed since 2015 and referenced two federal laws – the North Korea Sanctions and Policy Enhancement Act (NKSPEA), and Title III of the Countering America’s Adversaries Through Sanctions Act (CAATSA), the latter signed by President Trump in August 2017.
These laws and executive orders have all focused on blocking US trade with North Korea in one way or another, placing progressively stricter limitations on business transactions with the country. Title III of the CAATSA, however, takes a new and broader view.
CAATSA Title III Section 321(b) takes the step of banning the US import of goods produced by North Korean laborers abroad – based on the presumption that all goods made by these workers are created in conditions of forced labor since many of them are transferred abroad by the state and ordered to send back foreign currency to help the country’s cash-strapped economy.
With stricter regulation requiring businesses to conduct due diligence across their supply chains, the presence of indentured North Korean workers across several continents and across multiple industries – including technology, seafood and apparel – presents a serious compliance headache for multinationals. Many months after CAATSA was signed, companies are still getting to grips with how to deal with the challenge.
Proving absence of forced labour in supply chains a serious challenge for companies
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.
However, the sanctions under CAATSA Section 321(b) are different because they target a single country’s diaspora. Also, in alignment with the US CBP remit to deny entry to the US of goods produced with forced labour, the law shifts the onus on businesses away from proving that forced labor did occur to proving that forced labour did not occur.
Indications are that CBP has begun to check up on companies’ risk assessment processes as a follow-up to CAATSA in order to verify that they have strategies in place to ensure that North Korean workers are not present across their supply chains.
A rapid response by business is 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 company, industry, and country levels – 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 programs 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 rated 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 sourcing groups with a certificate stating that they do not employ North Korean workers. Internally, businesses can also review their supplier code of conduct and the contractual language in their sourcing contracts.
Companies with critical suppliers that either source materials or have production facilities that are potentially non-compliant with CAATSA Section 321(b) or have not been previously risk assessed, should 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. Otherwise, the costs of inaction could quickly outweigh those of implementation.
Donna Westerman is vice-president, head of consumer and retail, Verisk Maplecroft.