US Worries About 'Origin Washing' of Korean Semiconductors, Intensifies Monitoring

In a recently released report, the U.S. White House directly used the term 'Gyeonggi Semiconductor Belt,' mentioning the possibility of its use for indirect transshipment with China. The report indicated that goods produced in China could be assembled in South Korea, disguised as South Korean products, and then re-exported.

Consequently, South Korea has been classified as a 'Tier 1' group, a primary subject of U.S. export controls. The U.S. acknowledges South Korea's crucial position in the semiconductor supply chain and is wary of situations where Chinese components pass through South Korea for origin washing before export.

The contents of this report suggest that South Korean companies may face stricter regulations and monitoring for their exports to the U.S. Domestic companies, especially in the semiconductor sector, should ensure transparency in the origin of their products and their component supply chains.

This White House report reflects the U.S.'s close scrutiny of South Korea's strategic importance and potential risks in the semiconductor supply chain, rather than indicating any specific wrongdoing by South Korea.

The U.S. Department of Commerce's Bureau of Industry and Security (BIS) has announced enhanced monitoring in South Korea. BIS is the agency responsible for U.S. export controls and possesses strong investigative powers, often referred to as a 'grim reaper' by the industry.

If the U.S. budget for next year passes, BIS plans to establish offices and deploy investigators in South Korea. Currently, BIS's Asian headquarters is located in Taiwan, and the direct deployment of personnel to South Korea is considered an unusual measure.

U.S. semiconductor equipment manufacturer Applied Materials was previously caught attempting to circumvent U.S. sanctions against China's SMIC. Despite warnings against dealing with SMIC, Applied Materials expanded its factory in South Korea, assembled U.S. components there, and then tried to export them to SMIC, disguised as South Korean products.

This attempted illegal export was discovered by U.S. authorities, and Applied Materials was fined approximately $250 million. The incident was recorded as one of the largest crackdowns in U.S. history.

This case clearly demonstrates attempts by China to indirectly acquire U.S. technology and components using South Korea as a transit point. At the same time, it starkly reveals how strict the U.S. stance is on indirect exports through South Korea.

Due to such precedents, U.S. authorities are scrutinizing South Korea, especially the Gyeonggi Province semiconductor industry, even more sensitively. This is the background against which the U.S. BIS is highly likely to intensify its investigations and monitoring activities within South Korea in the future.

Indirect sanction risks are indeed arising from transactions with Russia-related companies. Tracking the equity structure of a specific Russian company revealed that it has deep ties to sanctioned individuals.

This carries the potential to be included in the Ukrainian government's sanctions list and further risks expansion to U.S. and European sanctions lists. Companies must meticulously understand the equity structure and hidden relationships of their trading partners to proactively prevent potential sanction risks.

This company is now classified as having sanction links. Caution is required when transacting with it. The company that owns 100% of this company has several affiliates confirmed to have sanction links.

Earlier this year, the South Korean company JS Research was placed on the U.S. State Department's sanctions list for violating Iran sanctions. The company was sanctioned for activities related to Iran and Syria.

At the time, there was debate among domestic banks on whether to cease all transactions with JS Research. Although State Department sanctions are primarily diplomatic in nature, domestic banks sometimes took action to suspend financial transactions based on their own judgment.

The direct mention of the Gyeonggi semiconductor belt in the U.S. White House report should be taken as a strong warning message to domestic companies. The possibility of the U.S. BIS dispatching investigators and increasing surveillance in South Korea is a realistic threat.

Domestic companies should take practical measures immediately, rather than complacent thinking that they can do better in the future. This is not merely a show of action, but an understanding of the U.S.'s will to impose sanctions immediately if problems arise.

Therefore, it is important for South Korean companies to demonstrate a proactive attitude in correcting wrongs to the U.S. authorities. It is time to be wary of the risk of becoming a potential 'test case' and to prepare thorough countermeasures in advance.

Indeed, a Korean company experienced its assets being frozen in an overseas bank during the process of transporting Iran-related goods. To unfreeze its assets, the company submitted an opinion letter to the U.S. Treasury Department and, after a year of sending all transaction details and explanatory materials for why it was unaware, was able to release the funds.

This process involved immense practical constraints and difficulties, including the cost of hiring U.S. lawyers. This demonstrates the severe impact of fund freezing on a company in the event of a sanction violation and the considerable time and cost required to resolve it.

In the past, the Industrial Bank of Korea, a domestic bank, was fined a large sum due to Iran-related transactions. For this incident, which occurred around 2012-2013, the Industrial Bank of Korea had to pay a fine of approximately $86 million (about 110 billion Korean won) to U.S. authorities.

This case is a prime example demonstrating that financial institutions are not exempt from export controls and sanction violations, and how important it is to comply with international sanction regulations.

Sanction violations by financial institutions can lead to not only massive financial losses but also a decline in international credibility, making thorough internal control systems essential.

Currently, South Korea lacks sufficient data to identify and track the activities of suspicious vessels, known as the 'Shadow Fleet,' operating domestically. It is difficult to ascertain whether these vessels are coming to South Korea or what activities they are engaged in.

There are also suspicions that Russian intelligence officials are on board some vessels, underscoring the urgent need to secure data and establish a monitoring system from a national security perspective.

In the past, three vessels manufactured by Hanwha Ocean (formerly Daewoo Shipbuilding & Marine Engineering) were placed on the European Union (EU) sanctions list. These vessels, managed by Japan's Mitsui O.S.K. Lines, were sanctioned due to suspicions of operating with their Automatic Identification System (AIS) turned off.

Such sanctions demonstrate that illegal activities during the actual operation of a vessel can lead to its sanction, regardless of who the builder is.

This reminds us that even vessels manufactured by domestic shipbuilders can become targets of sanctions if operated in violation of international sanction regulations. Shipbuilders also need to consider sanction risks up to the final operational stage.

Companies have a duty to meticulously verify export control compliance for all transactions. If such efforts are made, even if a problem arises later, the documentation of having 'judged there would be no problem before proceeding' can serve as evidence to prove that it was not intentional negligence.

Conversely, a complete lack of such effort could be deemed intentional negligence, leading to greater risks. In fact, U.S. banks use nine or more export control solutions in conjunction to manage risks.

Now, establishing an internal export control system is no longer merely a recommendation but an essential obligation. This goes beyond legal compliance, serving as a critical risk management strategy for a company's sustainable growth.

Since the war in Ukraine, as sanction risks have surged, the organizational culture of European companies is shifting towards export control. In the past, there was an example of a component company where the export control team was subordinate to the legal team.

However, as the sanction environment changes rapidly, the trend is now towards organizational structures where the export control team holds a higher position than the legal team. This demonstrates that compliance with export controls has evolved from a mere legal issue to a core decision-making factor in corporate management.