1. Improving Inter-Korean and US-North Korea Relations
The recent inter-Korean summit in Panmunjeom in April 2018, and the United States (“US”)-North Korea summit in Singapore in June 2018, have brought about significant progress towards the resolution of the North Korean nuclear crisis and the normalization of the US-North Korea relationship. Today there is greater interest in business opportunities in North Korea than there has ever been.
However, the basic stance of the Trump administration remains that any relaxing or lifting of economic sanctions against North Korea must be conditional upon the complete denuclearization of North Korea. In fact, the US government continues to reinforce its economic sanctions against North Korea and prohibit any and all transactions between US persons and North Korea. US persons—including US financial institutions—are subject to primary sanctions if they are involved in direct or indirect transactions with North Korea. Further, as the US imposes secondary sanctions on certain types of North Korea related transactions, non-US corporations are also exposed to the risk of US sanctions if they engage in business activities involving North Korea. In addition to US sanctions, the government of the Republic of Korea (“South Korea”) also maintains its own restrictions on transactions with North Korea.
In light of the above, any party wishing to do business in or with North Korea will have to be mindful of economic sanctions that remain in place against North Korea despite the recent improvement in the political situation on the Korean peninsula.
2. Current US Sanctions Against North Korea
A. The range of activities subject to sanctions is extremely broad
In 2016, in response to North Korea’s nuclear testing and launch of long range missiles, the US government imposed sanctions with respect to North Korea by issuing Executive Order 13722 and enacting the North Korea Sanctions and Policy Enhancement Act of 2016. The sanctions include (i) freezing all property and interests in property of the Government of North Korea or the Workers’ Party of Korea, that are in the US; (ii) placing restrictions on certain North Korean industries such as transportation, mining, energy, and financial services; (iii) prohibiting the sale or purchase of metal, graphite, coal, or software where any revenue or profit benefits the Government of North Korea or the Workers’ Party of Korea; (iv) prohibiting abuses or violations of human rights, export of workers, significant activities undermining cybersecurity, censorship, and other activities similar in kind by the Government of North Korea or the Workers’ Party of Korea; and (v) prohibiting exports to and investments in North Korea.
Further to the sanctions above, in 2017, the US additionally issued Executive Order 13810, which freezes all property and interests in property that come within the US, or come into the possession or control of a US person, and which belong to a person determined by the US government: (i) to operate in the construction, energy, finance, fishing, information technology, manufacturing, medical, mining, textile, or transportation industries in North Korea; (ii) to own, control, or operate a seaport, airport, or land port in North Korea; (iii) to have engaged in at least one significant import or export transaction into/from North Korea involving any goods, services, or technology; (iv) to be a North Korean person, including a North Korean person that has engaged in commercial activity that generates revenue for the Government of North Korea or the Worker’s Party of Korea;, and (v) to have materially assisted any person whose property and interests in property are blocked pursuant to Executive Order 13810. The US has also reinforced its sanctions regarding flights, marine transportation, and financial activities involving North Korea.
Furthermore, in August 2017, in order to block any further sources of income for North Korea, the US enacted the Countering America’s Adversaries Through Sanctions Act targeting Russia, Iran, and North Korea, and implemented extensive sanctions against the following transactions: (i) purchasing precious metals from North Korea; (ii) supplying rockets, and aviation or jet fuel, to North Korea; (iii) providing support for the operation or maintenance of any vessel owned or controlled by North Korea; (iv) maintaining a correspondent account with any North Korean financial institution; (v) purchasing coal, iron, or iron ore from North Korea; (vi) providing oil or natural gas to North Korea; (vii) facilitating North Korean online commercial activities; (viii) purchasing food or agricultural products from North Korea; (ix) facilitating the export of workers from North Korea in a manner intended to generate significant revenue for the government or ruling party of North Korea; (x) conducting any significant transaction in North Korea’s transportation, mining, energy, or financial services industries; and (xi) facilitating the operation of any branch, subsidiary, or office of a North Korean financial institution.
B. Violating sanctions may severely limit one’s future commercial activities
In the event that any person violates any of the above sanctions, his/her property in the US may be frozen and any future transactions with that person and related parties may be prohibited. A non-US party may also be subject to civil and criminal penalties pursuant to the International Emergency Economic Powers Act (IEEPA) if he/she causes a US person—in particular a US financial institution—to violate the North Korea sanctions.
Moreover, depending on the relevant type of industry and activity, anyone in violation of the sanctions may be prohibited from accessing US financial markets, foreign exchange markets, and/or public procurement, and may be denied entry into and departure from the US. Imposition of such sanctions would severely limit the violating party’s ability to engage in any future commercial activities.
3. Improving Inter-Korean and US-North Korea Relations
The Inter-Korean Exchange and Cooperation Act (the “Inter-Korean Cooperation Act”) is the primary legislation that governs transactions between the Koreas. Further, the Foreign Trade Act and Foreign Exchange Transactions Act are applicable to transactions with and investments in North Korea.
Under the Inter-Korean Cooperation Act, the only way for a South Korean person to directly invest in or transact with North Korea is through a “cooperative project.” In order to commence a “cooperative project” in North Korea, prior approval by the Korean Minister of Unification is generally required. However, filing advance notice with the Minister may be sufficient in cases where a cooperation project (a) takes place in the Kaesong Industrial Zone or in other special districts designated by the Korean Minister of Unification; or (b) represents a total investment value of USD 500,000 or less.
Prior approval by the Minister is also required for exporting goods to and importing goods from North Korea. It is notable that non-South-Korean persons located in South Korea are also required to receive such approval, since the relevant provisions of the Inter-Korean Cooperation Act are applicable to them as well.
The Inter-Korean Cooperation Act also requires that any and all communication or contact by a South Korean person with a North Korean person be reported in advance to the Minister.
Additionally, as a response to the sinking of South Korea’s Cheonan warship by North Korea in March 2010, the South Korean government implemented its own sanctions against North Korea, which are still in force today. The sanctions, also known as the “May 24 Measure,” (i) banned visits by South Koreans to North Korea; (ii) halted all North-South trade;, (iii) prohibited business expansion by South Korean persons in North Korea, with the exception of investment in the Kaesong Industrial Zone; (iv) halted all aid projects except for certain aid to social minorities in North Korea; and (v) prohibited North Korean vessels from sailing in South Korea’s territorial waters and exclusive economic zone (EEZ). As a result of these restrictions, the already scarce business opportunities in North Korea for South Korean persons were limited even more considerably.
South Korea further added additional sets of sanctions in 2016 and 2017 in response to North Korean nuclear tests. These sanctions targeted various organizations and individuals, froze their assets, and aimed to tighten up and more effectively enforce various restrictions on trade involving North Korea. South Korea also shut down the Kaesong Industrial Zone in 2016, which remains shuttered although the current Moon government has signaled a desire to reopen it.
However, the recent improvement in the inter-Korean relationship, as well as the US-North Korea relationship, has aroused expectations of a relaxation or lifting of sanctions. If sanctions are indeed alleviated or repealed, we expect that there will be more opportunities for South Korean persons to expand their business in North Korea.
4. Sanctions Risk Requires Careful Assessment
If the US-North Korea relationship continues to improve, there is a possibility that a significant part of the US sanctions currently in place will be relaxed or lifted. Even in that case, however, we cannot rule out the possibility that the US may decide to re-impose sanctions depending on the progress of its denuclearization talks with North Korea, as it did in the case of Iran. As of today, engaging in any business with North Korea still faces considerable restrictions and sanctions both under US and South Korean laws and regulations.
Accordingly, companies already engaging in North Korea related business, as well, as those that plan to do so, are advised to take into consideration the sanctions risks associated with the specific projects at issue. With the help of a sanctions expert, one can carefully assess whether a certain type of business involving North Korea is permitted under the relevant laws and regulations. In certain cases, obtaining a license from the US government confirming that it will defer the enforcement of sanctions, or a prior approval from the Korean government for commencing or participating in a cooperation project in North Korea, may be needed.