Were it not for an obscure provision of the Dodd-Frank Act, we would not have learned last week that some of America’s largest corporations have been indirectly subsidizing North Korea by buying gold supplied by its Central Bank.
Dozens of companies disclosed over the last week that their suppliers use gold refined by North Korea’s central bank. These companies include Hewlett-Packard Co., Ralph Lauren Corp., International Business Machines Corp., Rockwell Automation Corp. and Williams-Sonoma Inc. IBM, for example, disclosed that the North Korean gold was used to make its memory storage systems. [Wall Street Journal]
The revelations raise both legal and public-relations risks to the companies concerned — with good reason, as I’ll explain later in this post.
Among the 1,277 U.S. companies that reported before yesterday’s deadline, 68 listed the Central Bank of the DPRK in their filings with the Securities and Exchange Commission. [....]
Claigan Environmental, a corporate-compliance firm, compiled the data showing dozens of companies listing North Korea’s central bank as a supplier and shared its findings with Bloomberg. International Business Machines and Hewlett-Packard were among those reporting that North Korea was in their supply chain.
“In January, upon learning that the Central Bank of DPRK may be used by a small number of HP suppliers, we took immediate action to launch investigations,” said Michael Thacker, a spokesman for HP. “To date, the information we have received indicates no minerals obtained from Central Bank of DPRK were included in HP products.”
IBM’s filing said North Korea processed gold that may be used in its products. Douglas Shelton, a spokesman for the company, declined to comment, saying only that IBM expects suppliers to “procure minerals from responsible sources.”
Gold is commonly used in consumer electronics because it’s a high-quality conductor for connecting components such as SIM cards in mobile phones. Minerals covered by the rule, as mandated by the Dodd-Frank Wall Street reform law, are gold, tantalum, tin and tungsten. They’re all mined in the war-torn Democratic Republic of Congo, where human-rights violations sparked an international backlash and prompted U.S. government reform. [Businessweek]
Williams-Sonoma, asked to comment on the disclosure, said it was investigating the report. Ralph Lauren claims that the disclosure was in error and that it would amend its report.
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The newspapers covering this story have reported that the provision in question is a requirement to report so-called “conflict minerals.” On closer examination, however, the conflict minerals provision, Section 1502, covers only the Democratic Republic of Congo and “adjoining countries.” This unexpected windfall of information instead comes from Section 1504, which the SEC itself summarizes this way in a notice of proposed rule-making:
Section 1504 added Section 13(q) to the Securities Exchange Act of 1934, which requires the Commission to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, or by a subsidiary or another entity controlled by the issuer, to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals. Section 13(q) requires
a resource extraction issuer to provide information about the type and total amount of payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments made to each government.
In addition, Section 13(q) requires a resource extraction issuer to provide certain information regarding those payments in an interactive data format, as specified by the Commission. [75 Fed. Reg. 80978]
The SEC wrote and published these regulations as federal agencies charged with implementing federal statutes usually do, to define potentially vague terms or terms of art, and to resolve any potential ambiguities in the law’s reach. The term “issuer” means an issuer of securities, such as a publicly traded corporation.
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Why is using North Korean gold such a bad thing? First, to the extent that that gold is imported into the United States, it’s a felony. In relevant part, Executive Order 13,570, signed by President Obama on April 18, 2011, states as follows:
Except to the extent provided in statutes or in licenses, regulations, orders, or directives that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the date of this order, the importation into the United States, directly or indirectly, of any goods, services, or technology from North Korea is prohibited.
“Any” means any. Violations of this order are punishable under Section 206 of the International Emergency Economic Powers Act, which provides for 20 years in prison, a $1 million fine, and civil penalties. No wonder corporate compliance officers must be worried about these disclosures. Manufacturers can also get into trouble simply for “indirectly” transacting with the Central Bank of North Korea without a license from the Office of Foreign Assets Control, although this seems a harder charge to prove.
Second, buying North Korean gold is morally reprehensible, because a significant portion of North Korea’s gold is mined with slave labor, according to reports by the Committee for Human Rights in North Korea.
Camp 15 survivor, author, and journalist Kang Chol-Hwan reports that there was a gold mine in the political prison camp where his family was sent when he was a child. Conditions in Camp 15 are horrific. I’ve compared them to the Nazi concentration camp at Mauthausen.
Another unidentified prisoner claimed that he was assigned to work at a gold mine inside the now-closed Camp 77, in South Hamgyeong Province, “where some 2,000 out of roughly 7,000 to 8,000 prisoners died of mining accidents, malnutrition, and malnutrition-related diseases during the two years” he was imprisoned there, in the late 1980s. A third camp, Camp Number 3 near the northwestern city of Sinuiju, also mined gold. At this camp, prisoners who attempted to escape “were brought back for public execution, after which their corpses would be displayed for a day.”
Even gold mines that were not prison camps used what was, functionally speaking, slave labor. A fourth prisoner, Kim Young-Sun, says that she and her family were “assigned” to work at a gold mine near the northeastern city of Chongjin after her release from Camp 15. (The lucky few prisoners who live long enough to be released from the camps are typically assigned to the least desirable work and areas of residence, and monitored closely. It’s safe to assume that Ms. Kim’s family had no choice in the matter of her employment, and that her wages and rations were barely enough to live on.)
Here are some images of Camp 15 and its gold mine, which David Hawk identified in The Hidden Gulag as early as 2003, based on information from Kang and other survivors. The imagery isn’t particularly clear, but it evidences earth-moving operations on a modest scale, unlike the large coal or copper mines that can be viewed elsewhere in North Korea.
Because of gold’s high price, one need not necessarily move large volumes of earth to generate substantial income. I spent several summers working in gold mines myself, and gold can be mined profitably at grades as low as .02 ounces per ton (if the ore is soft and close to the surface) to as high as an ounce per ton.
Gold is a fungible commodity whose origins are, for obvious reasons, difficult to trace. Although prosecution is unlikely for unknowing violations — that is, if there really were any violations — the breadth of the executive order should cause compliance officers to strengthen their certifications that North Korean gold is not used in their supplies. That, in turn, will mean that North Korea will lose suppliers who want to continue to do business with manufacturers who sell to the United States. Of course, there will always be a market for gold somewhere, but compliance with the new law will make it more difficult for North Korea to find buyers, will increase the risk premium on gold sales, and will cut into North Korea’s profits.
It will be interesting to see how Section 1504 impacts North Korea’s mining industry. One thing we learn from this report is the value of such public disclosure provisions. The Iran Threat Reduction and Syria Human Rights Act of 2012 requires issuers to report substantial investments in Iran, and the original version of the North Korea Sanctions Enforcement Act also had similar provisions, borrowed from the ITRASRA. Those provisions, sadly, were removed from the draft that passed the House Foreign Affairs Committee recently, but then, the speed at which a bill moves through Congress is inversely proportional to the bill’s length, and the number of committees sharing jurisdiction over it.
It may have been necessary to sacrifice these provisions to save the larger bill. Maybe next year. Especially given the regularity with which Congress asks, “What else can be done to sanction North Korea?” I will never lack for answers to that question.