* Samsung says found evidence of suspected child labour
* Monday's step first by Samsung on allegations of illegal labour practice
* U.S. activist group says China supplier uses child labour
By Se Young Lee
SEOUL, July 14 (Reuters) - Samsung Electronics Co Ltd said it halted business with a supplier in China over suspected use of child workers, the first time it has taken such a step, after criticism that its monitoring of labour practices at suppliers was inadequate.
The decision, announced on Monday, comes less than a week after U.S.-based China Labor Watch said it found "at least five child workers" without contracts at the supplier and called Samsung's monitoring process to halt such practices "ineffective."
Samsung, the world's biggest smartphone maker, said it conducted three audits since 2013 of the supplier, a wholly owned subsidiary of South Korea's Shinyang Engineering Co Ltd , the latest of which ended on June 25.
But another investigation prompted by the watchdog's report led to evidence of what Samsung called suspected child labour, pointing to holes in the tech giant's ability to enforce its labour guidelines for Chinese suppliers.
"The Chinese authorities are also looking into the case," Samsung said in its statement on Monday.
It said it would permanently cut all ties with the supplier if the allegations were true, in line with its zero-tolerance policy on child workers.
Dongguan Shinyang Electronics and Shinyang Engineering could not be reached for comment despite multiple attempts to contact them by phone on Monday.
LABOUR PROBLEMS PERSIST
Labour practices at Samsung suppliers have come under scrutiny since 2012, when China Labor Watch said seven children younger than 16 were working for one of the electronics giant's China-based suppliers.
Chinese labour law forbids hiring workers under 16.
The South Korean firm later said it found no evidence of child labour following those accusations, although acknowledging other problems including overtime hours in excess of regulations.
In November 2012, Samsung established a code of conduct for suppliers in line with standards set by the Electronic Industry Citizenship Coalition. It also asked suppliers to sign a compliance agreement to prevent child labour.
Samsung also demands that suppliers adopt a strict hiring process that includes face-to-face interviews and the use of scanners to detect fake IDs to ensure no child labourers are employed. In its annual sustainability report, published on June 30, the firm said a third-party audit of 100 Chinese suppliers found no instances of child labour.
The report cited other problems, however, with minors of legal working age but 18 or younger found working with chemical handling processes at 48 suppliers and a majority of suppliers not complying with China's laws on overtime.
Samsung said it demanded immediate action to correct such behaviour.
But China Labor Watch Executive Director Li Qiang said last week that Samsung's social responsibility reports were an "advertisement" and that its efforts so far had failed to bring improvements for workers.
"What Samsung says is not important; what's important is their actions," Li said.
The watchdog's report says the child workers it found working at Dongguan Shinyang were being paid about two-thirds of what adult employees would be paid in weekly wages despite doing the same work. The child workers also had trouble eating proper food at the factory cafeteria due to their night shift hours.
It reported that some of the child workers at Dongguan Shinyang said the supplier's personnel did not follow a mandated facial recognition system meant to verify whether the applicant's face matched the ID provided.
The use of child labour isn't rare in China. Other multinational tech companies including Apple Inc have been plagued by revelations of exploitation.
Underage workers have previously been discovered at Foxconn, the trading name of Taiwan's Hon Hai Precision Industry and the supplier for some of the world's biggest tech brands.
Samsung declined to comment on details of its investigation and whether confirmation of use of child labour would affect its existing relationship with parent Shinyang Engineering, which is also a Samsung supplier.
"Samsung will strengthen its hiring process not only at its production facilities but also at its suppliers to prevent such (cases) from reoccurring," the company said.
Chung Sun-sup, chief executive of corporate monitoring company Chaebul.com, said Samsung appeared to be growing more proactive in dealing with allegations of impropriety in response to growing scrutiny of corporate practices in South Korea.
"In the past allegations of corporate wrongdoing may have been overlooked if authorities didn't spot them, but now such issues will emerge in some shape or form," he said. (Editing by Stephen Coates and Tony Munroe)