• The US Government has imposed secondary sanctions on non-US person trade with North Korea, similar to 2010 secondary sanctions imposed on Iran
  • Non-US companies doing business in market areas where North Korea produces should consider extra due diligence

Although the United States has had effective economic sanctions on North Korea for many years, the temporary softening of US sanctions in 2000 has given way to ever-increasing sanctions since 2008. These US sanctions are not unilateral: the United Nations has also increased the list of sanctioned individuals in North Korea, banned all weapons trade with the country, and required countries to inspect all cargo going in or out of North Korea to ensure no contraband is being transported.

So why did the world take notice when the US Government put North Korean leader Kim Jong Un and other North Korean officials and entities on the Specially Designated Nationals (“SDN”) list onJuly 6, 2016?

Well, it’s always a big deal when the US Government places another country’s leader on the SDN list. Others who have been placed on the list include Robert Mugabe (Zimbabwe) and Saddam Hussein (Iraq). North Korea is not happy about the sanctions, calling them tantamount to a declaration of war and cutting off its only diplomatic communication channel with the United States (a United Nations channel in New York).

What’s more, the July 6 designations are just the latest in a series of efforts by the US in 2016 to curb North Korea’s human rights abuses and nuclear ambitions. During the first half of 2016, the US Government has enacted and signed a law authorizing the imposition of sanctions on North Korea and issued two Executive Orders expanding on those sanctions.

These new laws and executive orders have enabled the US Government to impose secondary sanctions (those that apply to non-US persons outside the US on wholly non-US conduct of business with North Korea), in a manner resembling how the US Government imposed secondary sanctions on Iran beginning in 2010 with The Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) and expanding in 2012 with the Iran Threat and Syria Human Rights Act (ITRSHA), as well as other statutes and numerous Executive Orders.

An examination of the newly enacted laws and executive orders shows how the US has opened the door to secondary sanctions on non-US person trade with North Korea:

E.O. 13687 (January 2, 2016)

  • Authorizes OFAC to designate and block the assets of agencies, instrumentalities and controlled entities of the Government of North Korea and the Worker’s Party of Korea, and officials of the Government of North Korea and the Worker’s Party of Korea that come into the possession or control of US persons.
  • Also authorizes OFAC to block the assets of persons OFAC determines “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the Government of North Korea or any person whose property and interests in property are blocked” pursuant to the order.

The “North Korea Sanctions and Policy Enhancement Act of 2016” (signed into law on February 19, 2016)

  • Extends the previously implemented ban on exports to North Korea to include all goods and technology exports as laid out in Section 6(j) of the Export Administration Act of 1979 (50 U.S.C. 4605).
  • Expands asset blocking rules to include entities owned or controlled, or acting on behalf of by a designated person, rather than entities owned 50% or more by one or more SDNs (as was previously the rule). For a list of currently blocked persons or entities, please see OFAC’s SDN List.
  • In Section 104(a), increases mandated (not discretionary) North Korea-related primary and secondary sanctions (those that apply to non-US persons outside the US) to require OFAC to designate any person who breaches certain prohibitions, including knowingly:
    • (1) Importing or exporting banned items relating to nuclear proliferation, chemical and biological weapons, and missile technology;
    • (2) Providing training, advice, or other assistance, or engaging in significant financial transactions, concerning items relating to nuclear proliferation, chemical and biological weapons, and missile technology;
    • (3) Importing, exporting, or re-exporting luxury goods;
    • (4) Facilitating censorship by the Government of North Korea;
    • (5) Facilitating serious human rights abuses by the Government of North Korea;
    • (6) Engaging in money laundering, counterfeiting of goods or currency, bulk cash smuggling, or narcotics trafficking that supports the Government of North Korea;
    • (7) Engaging in significant activities undermining cybersecurity through the use of computer networks or systems against foreign persons, governments, or other entities on behalf of the Government of North Korea
    • (8) Selling, supplying, or transferring to or from the Government of North Korea (or any person acting on its behalf) a significant amount of precious metal, graphite, raw or semi-finished metals or aluminum, steel, coal, or software, for use by or in industrial processes directly related to weapons of mass destruction and their delivery systems, other proliferation activities, the Korean Workers’ Party, armed forces, internal security, or intelligence activities, or the operation and maintenance of political prison camps or forced labor camps, including outside North Korea; 
    • (9) Importing, exporting, or reexporting arms or related materiel; or
    • (10) Knowingly attempting to engage in any of the conduct described in paragraphs (1) to (9).
  • In Section 104(b), authorizes the following discretionary sanctions to allow OFAC to designate any person who breaches certain prohibitions, including knowingly:
    • (1)(A) Engaging in, contributing to, assisting, or providing support to, any SDN;
    • (1)(B) Contributing to (i) the bribery of an official of the Government of North Korea or someone working on their behalf; (ii) the misappropriation, theft, or embezzlement of public funds by, or for the benefit, of, an official of the Government of North Korea or someone working on their behalf; and (iii) using the proceeds of any activity described in (i) or (ii).

E.O. 13722 (March 15, 2016)

  • Implements the North Korea Sanctions and Policy Enhancement Act of 2016.
  • In Section 2(a), expands on the North Korea Sanctions and Policy Enhancement Act of 2016 to authorize OFAC to designate and block the property of persons determined by OFAC as follows:
    • (i) To operate in any industry in the North Korea economy as may be determined by the Secretary of Treasury, in consultation with the Secretary of State, to be subject to this subsection, such as transportation, mining, energy, or financial services;
    • (ii) To have sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea or any person acting for or on behalf of the Government of North Korea or the Workers’ Party of Korea, metal, graphite, coal, or software, where any revenue or goods received may benefit the Government of North Korea or the Workers’ Party of Korea, including North Korea’s nuclear or ballistic missile programs;
    • (iii) to have engaged in, facilitated, or been responsible for an abuse or violation of human rights by the Government of North Korea or the Workers’ Party of Korea or any person acting for or on behalf of either such entity;
    • (iv) to have engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea;
    • (v) to have engaged in significant activities undermining cybersecurity through the use of computer networks or systems against targets outside North Korea on behalf of the Government of North Korea or the Workers’ Party of Korea;
    • (vi) to have engaged in, facilitated, or been responsible for censorship by the Government of North Korea or the Workers’ Party of Korea;
    • (vii)  to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this order;
    • (viii)  to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order; or
    • (ix) to have attempted to engage in any of the activities described in subsections (a)(i)–(viii) of this section.
  • Prohibits all exports and reexports of goods, services and technology from the United States or by US persons, new investment in North Korea by US persons, and approval or facilitation by US persons of foreign person actions with respect to North Korea that would be prohibited for a US person.

July 6, 2016 SDN Designations

  • Expands the SDN List to include several North Korean top officials, including North Korean leader Kim Jong Un, ten other individuals, and five entities. The designations were issued pursuant to E.O. 13722 and E.O. 13687, and were made in conjunction with the State Department’s release of its “Report on Serious Human Rights Abuses or Censorship in North Korea.” The SDN List now includes all of the individuals and entities named in the State Department’s report.

Secondary Sanctions Are Coming: The combined effect of the two recent Executive Orders, plus the North Korea Sanctions and Policy Enhancement Act of 2016, is to allow the US Department of Treasury, in coordination with US Department of State, to impose sectoral SDN or other sanctions on non-U.S. companies operating in the North Korean transportation, mining, energy, or financial services. OFAC is also able to designate as SDNs non-US persons who have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to, or in support of, the Government of North Korea and SDNs. Less surprisingly, persons who have provided support to North Korea’s nuclear or ballistic missile program, who have facilitated or engaged in human rights abuses or violations, who have exported workers from North Korea, who have engaged in undermining cybersecurity on behalf of the North Korea Government, or who have engaged in or facilitated censorship in North Korea, can also be designated.

In short, North Korea in many ways is stepping into Iran’s shoes as a potential source of secondary sanctions for non-US companies providing material support to the North Korean regime or, in the future, operating in certain North Korean sectors. Non-US companies doing business in market areas where North Korea produces, for example, should consider extra due diligence that the products they are trading are not of North Korean origin. Similarly, companies selling to resellers or other intermediaries should take care to know the ultimate customer. This task is made substantially more difficult by the blocking of entities owned or controlled, or acting on behalf of by a designated person, rather than merely entities owned 50% or more by one or more SDNs.