UN Security Council Resolution (UNSCR) 2321, adopted on November 30, 2016, pushes the limits of how far international economic sanctions can go in isolating the North Korean regime without causing a collapse of the country’s economy as a whole. It also sets out a handful of additional legal restrictions that will be relevant for US and international stakeholders that may still have direct or indirect connections with North Korea, and closes some of the gaps left by UNSCR 2270 from March 2016, on which we previously advised. On December 2, 2016, the US Treasury Department’s Office of Foreign Assets Control (OFAC) announced related sanctions designations of additional individuals, entities and aircraft in North Korea.
This marks the culmination of the Obama Administration’s years-long diplomatic push to bring the entire international community on board with an unprecedented effort to squeeze the North Korean government commercially and cut off its access to foreign currency and trade, while trying to strike a delicate balance by not causing a humanitarian catastrophe that would threaten regional stability. It leaves the incoming Trump Administration with few additional sanctions options, as most of those cards have now been played, but facing the likelihood of an escalation of tensions and instability. North Korea affairs will be a topic to watch closely over the coming months for any business in Northeast Asia.
With the exception of the additional OFAC designations, most of the restrictions set out in UNSCR 2321 will not change US sanctions on North Korea, which already broadly prohibit exports and reexports of goods, services, and technology to North Korea, along with facilitation, financing, and the like, and any transactions or dealings with the North Korean government. But it should lead to changes in other countries’ trade regulations, along with more vigilance and enforcement by the UN and national regulators.
Coal and non-ferrous metal exports
UNSCR 2321 continues the general requirement from UNSCR 2270 that states prohibit the procurement of coal, iron, and iron ore from North Korea. For iron and iron ore, it continues to exempt transactions that are “exclusively for livelihood purposes,” along with coal from a third country that merely transits the Port of Rajin (Rason). But it establishes a unique program for the coal trade that acts as a more limited exception to the ban, rather than the general “livelihood” exception from UNSCR 2270. It sets a cap on total global coal exports by North Korea, with a requirement for member states to report monthly coal trade volumes with North Korea, which the UN will use to announce publicly and “on a real-time basis” the progress towards reaching the cap and when coal imports from North Korea must cease. This program is designed to cut what North Korea earns from coal exports by approximately $700 million per year from its 2015 total, or more than 60% of its coal export revenue. This should have a significant impact on the North Korean economy, as coal constitutes about one third of its export revenue.
This new type of UN-run export management program was motivated in part by reports that China has actually increased coal imports from North Korea this year, even after UNSCR 2270 had set strict limits on that trade, with Chinese officials defending that activity as consistent with UNSCR 2270’s open-ended “livelihood” exception. Now, rather than a subjective and potentially limitless exception, there is a hard, objective cap. How its impact ripples through the North Korean economy and changes the regime’s already erratic behavior remains to be seen. It is noteworthy, though, that US officials have publicly warned their Chinese counterparts that the United States will “have no choice” but to impose sanctions on any Chinese entities that fail to comply with the new restrictions.
In addition, the UN now requires its member states to prohibit, with no exceptions, imports of copper, nickel, silver, and zinc from North Korea, which were not included in UNSCR 2270. This strict ban on non-ferrous metals imports is expected to eliminate another $100 million per year in hard currency revenue for the regime. It will also likely create supply chain verification challenges for companies once implemented into national legislation, as it applies to “indirect” sourcing from North Korea as well.
Other export controls
This resolution requires states to prohibit “public and private financial support” for trade with North Korea, including export credits, guarantees, and insurance. Previously, that ban was limited to circumstances in which such trade would contribute to North Korea’s WMD or missile activity. It also bans imports and exports of the items listed in Annex III (related to WMDs and missiles), along with the items that will be listed in a new list of dual-use items for conventional arms, like radar and night vision, which the UN’s DPRK Sanctions Committee is required to publish by mid-December, expanding upon the arms embargo that has already been in place for years.
In addition, it adds to the list of luxury goods subject to an export ban to North Korea, rugs and tapestries valued over $500 and porcelain or bone china tableware valued over $100. It also requires states to prohibit exports of new helicopters and vessels to North Korea –presumably including commercial helicopters and vessels, as there is already a separate arms embargo in place, although the resolution does not specify.
In an impressive display of international determination to cut off North Korea’s global banking activity, this resolution requires states to expel individuals determined to be working on behalf of North Korean financial institutions, with only limited exceptions. It also requires states to take steps to close existing bank offices, subsidiaries or accounts in North Korea within 90 days, except those used for humanitarian or diplomatic purposes. UNSCR 2270 had already strictly limited North Korea’s international banking capabilities, but this resolution takes it several steps further.
UNSCR 2321 takes further action in the transportation sector to prevent North Korea from trading abroad, which will present compliance considerations for companies in related sectors such as insurance, chartering, cargo transportation, port and airport management, and the like. It requires states to prohibit the provision of insurance or re-insurance services to vessels “owned, controlled, or operated, including through illicit means,” by North Korea, with limited exceptions. That expands on the previous ban on insuring North Korean-flagged vessels, and appears to set out some kind of due diligence expectation, though how states will implement that remains to be seen.
It also closes the livelihood exception for leasing and chartering vessels and aircraft to North Korea, providing crew services to North Korea and activities related to registering vessels in North Korea, and requires states to de-register North Korean vessels and prohibit the procurement of vessel and aircraft crewing services from North Korea. This unprecedented resolution even empowers the UN’s DPRK Sanctions Committee to require states to de-flag, seize, prohibit port entry, and even direct to a specific port, vessels identified as being involved in North Korea’s nuclear or ballistic missile activity.
It also clarifies that the prohibition on providing aviation fuel to North Korea requires states to ensure that no more fuel is provided to North Korean aircraft than is necessary for the flight from that state, and requires inspection of personal luggage and checked baggage of individuals entering or departing North Korea.
UNSCR 2321 requires states to suspend scientific and technical cooperation involving persons or groups officially sponsored by, or representing North Korea, except for medical exchanges and other case-by-case exceptions. It also adds to the list of prohibited disciplines for specialized teaching and training of North Korean nationals that could contribute to its proliferation activities, and clarifies that that list of disciplines is illustrative only.
This resolution includes an expanded list of individuals and entities subject to asset freezes and travel bans, including North Korea’s ambassadors and commercial envoys to Egypt, Sudan, Syria, and Myanmar. All of the entities are already included on OFAC’s list of Specially Designated Nationals and Blocked Persons (SDNs), as are most (but not all) of the individuals.
On December 2, 2016, OFAC issued additional SDN designations, not limited to those required under UNSCR 2321. OFAC designated 16 entities, 16 aircraft and 7 individuals under various authorities related to North Korea, including several commercial enterprises in the coal and energy industries, and numerous North Korean banks. Also among the designations is Air Koryo, North Korea’s national flag carrier, which had recently been undergoing a series of changes intended to enhance and modernize its facilities, after it had repeatedly been ranked as the world’s worst airline. Air Koryo was designated under Executive Order 13722 (March 16, 2016) for operating in North Korea’s transportation sector, along with 16 of its aircraft. Also under that order, OFAC designated entities involved in the exportation of workers from North Korea to Algeria, Angola, Botswana, Benin, Cambodia, Chad, the Democratic Republic of the Congo, Egypt, Equatorial Guinea, Ethiopia, Malaysia, Mozambique, Madagascar, Namibia, Senegal, Syria, Togo, and Zimbabwe, along with other unnamed countries in the Middle East and Asia. UNSCR 2321 “calls upon States to exercise vigilance over” the use of North Korean nationals as laborers abroad.
UNSCR 2321 also requires states to prohibit North Korea from using its real property abroad for commercial purposes. Oddly, it requires states to prohibit imports of statues from North Korea, which reportedly generate tens of millions of dollars in revenue for the government, such as the statue of Laurent Kabila in the Democratic Republic of the Congo and two statues for which Robert Mugabe of Zimbabwe reportedly paid $5 million.
Unlike recent North Korea resolutions, this one “emphasizes the importance” of states’ “taking the necessary measures to ensure” that no claims by North Korea or related parties will be valid if premised on actions required by the UN, which may lead to changes in national law and should simplify enforcement and compliance.
UNSCR 2321 also requires states to limit North Korean diplomatic posts and personnel to one bank account each, and “calls upon” them to reduce the number of staff at North Korean diplomatic posts. Interestingly, as the US Ambassador stated, this resolution points out for the first time that, under Article 5 of the UN Charter, “if DPRK continues on its current path, systematically and flagrantly violating its Charter obligations, it could see some or all of its rights and privileges here at the UN suspended.”
This resolution will not require significant changes in US law, which already prohibits nearly all activity in or involving North Korea. Nor will it have a major impact on international trade, from which North Korea is already quite isolated. It will, however, have an important impact in the few areas where North Korea does still have some presence abroad, such as transportation, insurance, banking, and the commodities trade. From a practical point of view, the very strict obligations on states to cut off banking relationships with North Korea, except in narrow areas such as humanitarian assistance and diplomatic activity, will make it difficult for foreign banks to maintain any presence in North Korea, which will have a ripple effect in complicating the continuation of lawful activity there.
As the international community takes one more step towards tightening the screws on North Korea, the big questions are whether the economy as a whole can withstand the pressure, and how the regime will react. The implications for security and stability in Northeast Asia could be significant, and it remains to be seen if these will be positive or negative.