Following President Trump’s trip to Asia, sanctions policies for North Korea continue to evolve. The U.S. government has strengthened sanctions through legislation and Presidential Executive Orders. Further, it is enforcing its secondary sanctions against companies doing business with the North Korean regime, thus far targeting banks, businesses and individuals. The UN Security Council has approved resolutions imposing sanctions on North Korea in reaction to its nuclear and missile tests. Aggressive enforcement by the United States and actions by China and other Asian countries in light of the UN resolutions should be expected. Indeed, President Trump recently tweeted that China would be “upping” sanctions against North Korea.
Below is a summary of key pronouncements from the U.S. government, UN, and other countries.
On September 21, 2017, President Trump issued Executive Order (E.O.) 13810, following enactment of the Countering America’s Adversaries through Sanctions Act (CAATSA), which directed the imposition of additional sanctions in connection with Iran, Russia and North Korea.
E.O. 13810 authorizes imposition of secondary sanctions on non-U.S. parties who do business with North Korea. Specifically, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) may designate any person who engages in at least one significant import from or export to North Korea of goods, services, or technology. In addition, OFAC may designate any person determined to operate in almost any sector in North Korea; own, control, or operate any port in North Korea; be a North Korean person; or materially assist or be owned or controlled by any person blocked under E.O. 13810. This designation authority presents particular risks for companies in China, Russia and India who may have historically done business with North Korea and continue to do so. It also can pose compliance challenges for Japanese, South Korean and Southeast Asia companies that do business in China or are exposed to Asian banking, shipping, manufacturing and supply chains.
Secondary sanctions generally mean adding the non-U.S. company to OFAC’s List of Specially Designated Nationals (SDN List). U.S. companies are broadly prohibited from doing business with SDNs and any SDN funds that enter the U.S. financial system are subject to blocking.
E.O. 13810 has additional implications for “foreign financial institutions.” Non-U.S. banks are subject to further sanctions if they are determined to “knowingly” conduct or facilitate (1) any significant transaction on behalf of persons or property sanctioned under the several North Korean Executive Orders or (2) in connection with trade with North Korea. Moreover, OFAC may determine that a North Korean person owns, controls, or has used a foreign bank account, and require the blocking of funds that originate from, are destined for, or pass through that account. This could present complications for non-U.S. companies that assist North Korean entities conduct financial transactions.
In addition, in June, August, September, and October 2017, OFAC enforced secondary sanctions against non-US parties for activities outside the United States. This included banks, companies and individuals operating in Algeria, China, Libya, Russia, Singapore, the UAE, and a number of countries in the Middle East. Significantly, on September 26, 2017, OFAC identified the Central Bank of North Korea as a blocked entity of the Government of North Korea, joining the already-sanctioned North Korea Foreign Trade Bank. Transactions by non-U.S. financial institutions with these banks risk U.S. secondary sanctions.
UN Security Council Resolutions
In addition to the sanctions adopted by the U.S., the UN Security Council (UNSC) has approved two additional resolutions providing for sanctions on North Korea – Resolution 2371 (August 5, 2017) and Resolution 2375 (September 11, 2017). These build on UN Security Council Resolution 2321 passed in 2016.
The UN sanctions include prohibitions or limits on the direct or indirect supply, sale, or transfer (1) from North Korea, by North Korean nationals, or through North Korean flag vessels or aircrafts of coal, iron, iron ore, seafood, lead, lead ore, and textiles (regardless of origin); and (2) to North Korea of oil, petroleum products, and condensates or natural gas liquids (preventing use of the latter two as a substitute for the refined petroleum products). The resolutions also provide for the interdiction of vessels; restrictions on issuing work authorizations for North Korean nationals; and a prohibition on UN Members permitting the operation of all joint ventures (JVs) or cooperative entities (Co-Ops) with North Korean entities or individuals (with certain exceptions). The UN also indicated sanctions designations for several parties.
The UN sanctions are not self-executing; they depend for implementation on member nations taking action to comply with the sanctions. UN member states are responding. For example, on October 16, 2017 the EU adopted autonomous sanctions implementing UNSC 2375, which includes a total ban on EU investment in all sectors of North Korea. In China, the Ministry of Commerce (MOFCOM) has ordered all North Korean companies operating in the country to shut down operations, including joint ventures with Chinese companies. MOFCOM further ordered the closing of all Chinese joint ventures and cooperative entities with North Korea that are operating overseas. Increased China-imposed sanctions may be forthcoming as indicated by President Trump’s statements following his Asia trip.
The recent sanctions enhance the risk of U.S. enforcement for companies and investors who do business in countries with potential exposure to North Korean business and banking. EU, China and other nations also are responding to UN resolutions. This presents compliance challenges as connections to North Korean and its financial activities are often hidden. In the current environment, best practices can include risk assessments, due diligence for business partners, suppliers and customers, and scrutiny of the origin of commodities.