On February 18, 2016, President Obama signed into law the North Korea Sanctions and Policy Enhancement Act of 2016. This measure significantly expands the existing North Korean sanctions program in response to North Korea’s recent nuclear weapons test and rocket launch. This legislation also imposes secondary sanctions, which target third country companies that do business with North Korea. The aim of secondary sanctions is to cut off North Korea from international commerce, and they will largely affect China as the main trading partner of North Korea. Such secondary sanctions are a significant step and were very effective in placing pressure on the Iranian economy in recent years. This legislation will not directly affect U.S. companies significantly, as they are already largely prohibited from doing business with North Korea.
We have summarized below the main economic sanctions provisions of the legislation, as well as key takeaways for U.S. and non-U.S. companies.
The law makes mandatory certain sanctions that are currently discretionary, including against persons found to have:
- Supported (including training, advice, and significant financial transactions in support of) North Korea’s ballistic missile and nuclear programs.
- Sold or exported industrial commodities such as coal or steel to North Korea, or facilitated such activities.
- Engaged in cyberattacks against U.S. entities.
- Imported luxury goods into North Korea.
- Enabled censorship efforts or continuing human rights abuses.
- Engaged in money laundering or narcotics trafficking.
Sanctions under these provisions could include asset blocking, denial of licenses, penalties under IEEPA, forfeiture of property, denial of government contracts, and visa denials to designated persons and corporate officers or principal shareholders of designated persons. In addition, the legislation includes the following provisions:
- Restricts access to the U.S. financial system for entities found to be aiding North Korea.
- Requires enhanced inspections of ships and aircraft arriving from ports and airports that fail to meet their international obligation to inspect North Korean cargo carefully.
- Requires the President to investigate sanctionable conduct involving North Korea upon the receipt of credible information that a person or entity has engaged in such activity, including the proliferation of weapons of mass destruction, arms-related materials, luxury goods and counterfeit goods.
- Requires the Treasury Department to determine whether North Korea is a "primary money laundering concern." If such a determination is made, the Treasury must block North Korean banks from direct or indirect access to the U.S. financial system, and impose "special measures" against designated persons, North Korean government entities and banks that provide financial services to entities found to have engaged in sanctionable conduct.
The law allows a temporary suspension of sanctions if Korea takes significant steps toward disarmament and reform. The sanctions may be terminated only if North Korea is determined to have undergone a fundamental change of governance toward an open, free and peaceful society.
This sanctions legislation was passed in both houses of Congress with bipartisan support, reflecting a growing frustration with the provocative conduct of North Korea and its leaders. President Obama also signed the bill even though it makes certain sanctions mandatory, which limits the President’s discretion in matters of foreign affairs.
The continued use of secondary sanctions (after recent use against Iran and Russia) also indicates Congress’s view that existing sanctions against North Korea have not been sufficient. Since China is North Korea’s main trading partner, the effect of this law will likely be felt mostly by Chinese companies that do business with North Korea. U.S. companies are already largely prohibited from doing business with North Korea. The goal of secondary sanctions is to force Chinese companies to decide between dealing with North Korea and maintaining access to U.S. banks and U.S. business. Congress and the Obama Administration apparently believe that China, despite any protests, will comply with these new U.S. sanctions and pull out of North Korea, just as many companies pulled out of Iran in recent years. However, it remains to be seen how China will comply, and if they do not, how and when the Administration will impose secondary sanctions on Chinese companies.