Over the past few months, the United States government has relied upon its economic sanctions and anti-money laundering authorities to increase pressure on North Korea and its sponsor China. Treasury’s Office of Foreign Assets Control (OFAC), Financial Crimes Enforcement Network (FinCEN), and the State Department have all recently contributed to this effort. Examples from earlier this month include the redesignation of North Korea as a State Sponsor of Terrorism following Secretary Tillerson’s determination that North Korea “has repeatedly provided support for acts of international terrorism,” FinCEN’s Final Rule imposing prohibitions against China’s Bank of Dandong for its alleged sanctions evasion on behalf of North Korea, and OFAC’s designations and identifications of blocked property pursuant to Executive Order 13810.
Irrespective of the press releases announcing these sanctions, the most significant actions by the U.S. government have likely occurred behind the scenes in partnership with financial institutions and foreign partners. This information sharing with non-U.S. regulators and confidential targeted financial intelligence gathering against North Korean cover companies will likely steadily increase for the foreseeable future.
Partnerships with Foreign Financial Regulatory Authorities
In June and July of 2017, the Latvian financial regulator, the Financial and Capital Market Commission (FCMC) announced monetary penalties against five banks totaling about 3.5 million euro for anti-money laundering deficiencies. The penalties arose from the banks allegedly circumventing sanctions prohibitions on North Korea.
It is noteworthy anytime a non-U.S. regulatory agency imposes civil monetary penalties for money laundering violations unrelated to tax evasion. However, these penalties are especially important because of the public statements by the FCMC, which reflect how international cooperation leads to enforcement by non-U.S. regulators. In these statements, the FCMC Chairman explicitly acknowledged his agency’s partnership with the U.S. government.
Although most non-U.S. financial regulators are not likely to broadcast their partnerships with FinCEN, this enhanced international cooperation will likely produce a significant increase in enforcement by non-U.S. regulators. FinCEN likely fosters increased cooperation by referencing the possibility of 311 designations. If FinCEN perceives less than full cooperation, or regulatory enforcement that is not proportionate to the apparent risk to the U.S. financial system, the agency will likely threaten designation of banks at issue as primary money laundering concerns pursuant to its 311 authority.
Reports of Transactions with Foreign Financial Agencies
In addition to developing closer relationships with non-U.S. financial regulatory agencies, FinCEN will likely continue to expand its use of its Foreign Financial Agencies authority implemented under 31 C.F.R. § 1010.360. Confidential regulations issued under that authority enable FinCEN to identify “Foreign Financial Agencies,” which requires U.S. financial institutions to file additional reports about their transactions with the identified entities. The scope of the authority is quite broad, as it extends to a “person acting outside the United States for a person … as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold.” 31 C.F.R. § 1010.100(v).
This authority is substantially broader than 314(a), which requires certain financial institutions to search their records and identify any responsive information with respect to a particular investigative subject. Those requests may only be submitted on individuals and entities engaged in, or reasonably suspected of engaging in terrorist acts or money laundering activities. Furthermore, in cases involving money laundering, law enforcement must certify that all traditional means of investigation have been exhausted.
Those limitations do not apply to the Foreign Financial Agencies authority. In fact, the Foreign Financial Agencies authority may not be used to obtain information on customers known to be under investigation for possible violation of Federal law. It is for that reason that FinCEN will likely rely upon the § 1010.360 authority to expose the cover companies that provide North Korea access to the international financial system.
We will continue to monitor efforts to combat alleged money laundering and sanctions violations and publish updates as significant developments arise.