In the wake of Pyongyang’s fourth nuclear weapons test and a subsequent long-range rocket test, the U.S. Congress has enacted legislation imposing new sanctions against North Korea.  These provisions have potentially broad extraterritorial effect, and could impact the activities of exporters and importers who do business in Hong Kong, Singapore, or numerous Chinese ports, even if that business has no connection to North Korea.

The North Korea Sanctions and Policy Enhancement Act of 2016 (“the Act”) was signed by President Obama on February 18.  Sen. Cory Gardner (R-CO), the Act’s author, emphasized the Act’s strong bipartisan support, and stated that it “represents a major shift in U.S. policy toward North Korea.”  The Act’s emphasis on mandatory, as opposed to discretionary, sanctions indicates the strong Congressional pressure on the White House to use the new authorities in the Act against not just North Korea, but also its few remaining trade partners.

The Act would implement extraterritorial “secondary sanctions” that could impact a variety of importers and exporters who do business in countries that engage in trade with North Korea, such as China.  The Act also would require enhanced inspections of cargo entering the U.S. that originated in or transited through certain designated third-country ports and airports, and would allow for the seizure of cargo ships or airplanes used to facilitate certain prohibited activities, such as the export of luxury goods to North Korea, or imports of specified materials from North Korea, including coal and various metals.

Measures Targeting Importers and Shippers

Within six months of the date the Act enters into law, and on an annual basis afterwards, the President must submit a report that identifies foreign ports and airports at which inspections of ships, aircraft, and conveyances originating in North Korea, carrying North Korean property, or operated by the Government of North Korea are not sufficient to effectively prevent the facilitation of a number of sanctionable activities, as described below.  In addition to a number of proliferation-related activities, these sanctionable activities include the import and export of coal and certain metals to or from North Korea, and the export of luxury goods to North Korea.

The Secretary of Homeland Security may require enhanced inspections ofany goods entering the United States that have been transported through a port or airport identified by the President in this report. These goods need not originate in North Korea, nor have any nexus to North Korea, other than being transported through one of the identified ports.  Goods subject to enhanced inspection may encounter substantial delays upon import into the United States.

Additionally, any vessel, aircraft, or conveyance used to facilitate any of the activities described above that comes under the jurisdiction of the United States may be seized and forfeited.  As a result, vessel or aircraft owners as well as their insurers would need to understand those risks and develop compliance processes to address potential exposure resulting from the actions of a charterer or insured who operates such a vessel or aircraft.  Logistics companies would need to consider the risk of enhanced inspection and the potential for significant delay in the entry of cargo into the United States as a result.

Greater Risks for Importers and Exporters

The identification of a port or airport as deficient in its inspections of North Korea-related commodities or shipments under the Act has the potential to severely disrupt any shipments transiting through that port, including shipments that have no connection to North Korea.  As North Korea’s main trading partner is China, this provision in particular may have a significant impact on companies whose products originate in or transit through China, and potentially Hong Kong or Singapore.

In addition, the possibility that a vessel or aircraft could be seized if found to have engaged in proscribed commerce with North Korea creates new due diligence obligations not only for shippers, but insurers, freight forwarders, and any other companies involved in the shipping and logistics industries.

Targeted Commodities

Certain of the sanctions provisions target the export to or import from North Korea of specified commodities, primarily luxury goods, coal, and metals.  Companies that export or import these kinds of goods should take enhanced due diligence steps to ensure that none of their trading partners engage in sanctionable trade with North Korea.

“Luxury goods” include a wide range of commodities, such as designer clothing and fashion accessories, jewelry, many consumer electronics, and certain automobiles.

The Act also targets parties who trade in precious metals, graphite, and certain “raw or semi-finished metals,” including coal, aluminum, or steel.

New Sanctions Authorized by the Act

It should be underscored that the sanctions described in this section may impact both U.S. and non-U.S. companies.  In particular, companies in the shipping, logistics, manufacturing, industrial, insurance, and financial sectors will need to bolster their due diligence efforts to minimize potential exposure to sanctions risks under the Act, as will companies with a significant presence in China.

While existing law may have already enabled the President to impose sanctions against many of the entities targeted by the Act, the mandatory nature of many of the new designation authorities may force the White House’s hand in imposing more stringent sanctions, and more quickly.  The entities targeted by mandatory sanctions include persons who knowingly provide support for North Korea’s proliferation activities, human rights abuses, malicious cyber activities, narcotics trafficking and money laundering.  They also include persons who knowingly, directly or indirectly, import, export or reexport luxury goods to North Korea, or raw or semi-finished metals to or from North Korea.

Special thanks to Ari Fridman and Adam Berry for their contribution to this update.