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.
The Senate passed the North Korea Sanctions and Policy Enhancement Act of 2016 (“the Act”) on February 10, by a vote of 96-0. The House passed the Senate bill on February 12 by a vote of 408-2. President Obama signed the legislation into law 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 further expands the scope of U.S. primary sanctions targeting North Korea’s nuclear and ballistic missile proliferation activities, abuses of human rights, participation in cyberattacks, and money laundering activities. Perhaps more significantly, it would implement extraterritorial “secondary sanctions” that could impact a variety of importers and exporters, and potentially other companies such as freight forwarders, vessel owners, and insurers who do business in countries that engage in trade with North Korea, such as China.
The Act also would facilitate the designation of North Korea as a jurisdiction of primary money laundering concern (triggering due diligence steps for financial institutions), 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.
By putting third-country companies at risk of secondary sanctions, seizures of vessels or aircraft, or enhanced scrutiny by U.S. Customs and Border Protection (“CBP”) of U.S.-bound cargo, the Act employs the same or similar strategies used against Iran to discourage non-U.S. companies from having any involvement with North Korea. In astatement following the President’s signing, House Foreign Affairs Committee Chairman Ed Royce (R-CA) made clear the strategic aims of the Act, and Congress’ expectation of swift action by the White House: “Targeted sanctions aimed at banks and companies that do business with Kim Jong Un will cut off the cash he needs to sustain his illicit weapons programs, his army, and the continued repression of the North Korean people. I look forward to the full and aggressive implementation of this new law.”
Existing Sanctions Against North Korea
Broadly speaking, the U.S. has an extensive embargo on imports from and exports to North Korea when the activity has a U.S. nexus. This embargo is administered by the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the Department of Commerce’s Bureau of Industry and Security (“BIS”). Goods, services, and technology from North Korea may not be imported into the United States, directly or indirectly, without a license from OFAC or an applicable exemption. Although OFAC regulations do not prohibit exports to North Korea per se, exports of goods, software and technology (collectively “items”) to North Korea, directly or indirectly, are generally subject to a broad embargo administered by BIS, and a license is required for the export or re-export to North Korea of virtually all U.S.-origin items or foreign-origin items incorporating more than a de minimis amount of U.S.-origin controlled content, other than food or medicine. Persons involved in the export or re-export of luxury goods to North Korea may be subject to designation as Specially Designated Nationals (“SDNs”) and asset blocking.
Additional 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. persons. Due to possible seizure of vessels or aircraft and extraterritorial reach of the new restrictions, companies in the shipping, logistics, manufacturing, industrial, insurance, and financial sectors, in particular, 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. In addition, the prohibitions under the Act extend beyond designated parties to entities owned, controlled by, or acting on behalf of, directly or indirectly, any person designated as an SDN pursuant to the Act. As a result, the Act goes beyond the existing “50% rule” that OFAC applies with respect to parties owned by SDNs, and imposes restrictions on dealings with entities controlled by SDNs (even if the SDN’s equity stake is below the 50% threshold) as well as entities that are acting on behalf of an SDN (even if there is no clear ownership or control by an SDN). This additional “acting on behalf of” trigger for restrictions has the potential to create significant new due diligence obligations for companies to ensure that their dealings do not involve prohibited parties in North Korea, as compliance in this case cannot be focused only on screening the SDN list and obtaining beneficial ownership information.
A. Mandatory Designations
While existing authorities 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. Effectively, the Act does not leave the President with discretion on whether to designate certain parties; instead, the Act requires designation of parties targeted by mandatory sanctions, which include those who:
- Knowingly, directly or indirectly, import, export, or reexport to, into, or from North Korea, certain goods, technology or services for use in weapons of mass destruction (“WMD”) or delivery systems for WMD, and materially contribute to the use, development, production, possession, or acquisition by any person of a nuclear, radiological, chemical, or biological weapon or any device or system designed in whole or in part to deliver such weapons;
- Knowingly, directly or indirectly, provide training, advice, or other services or assistance, or engage in significant financial transactions, relating to the manufacture, maintenance, or use of any such weapon, device or system to be imported, exported, or reexported to, into, or from North Korea;
- Knowingly, directly or indirectly, import, export, or reexport luxury goods to or into North Korea;
- Knowingly engage in, are responsible for, or facilitate serious human rights abuses by the Government of North Korea;
- Knowingly, directly or indirectly, engage in money laundering, the counterfeiting of goods or currency, bulk cash smuggling, or narcotics trafficking that supports the Government of North Korea or any senior official or person acting for or on behalf of that Government;
- Knowingly engage in significant activities undermining cybersecurity through the use of computer networks or systems against foreign persons, government, or other entities on behalf of the Government of North Korea;
- Knowingly, directly or indirectly, sell, supply, or transfer to or from the Government of North Korea or any person acting for or on behalf of that government, 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 WMD and delivery systems for WMD, 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 of North Korea;
- Knowingly, directly or indirectly, import, export, or reexport to, into, or from North Korea any arms or related materiel; or
- Knowingly attempt to engage in any of the conduct described above.
The “raw or semi-finished metals” referenced in #7 above, while not further defined in the Act, mirror language used in the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA,” Pub. L. 112-239). OFAC guidance has offered an expansive definition of these terms in that context, which includes:
steels; aluminum metal and its alloys; base metals of single or complex borides of titanium; beryllium metal and its alloys; boron metal and its alloys; cobalt metal and its alloys; copper infiltrated tungsten metal; copper-beryllium metal; germanium metal and its alloys; graphites; hastelloy; inconel; magnesium metal and its alloys; molybdenum metal and its alloys; neptunium-237 metal and its alloys; nickel metal and its alloys; nickel aluminide metals; niobium metal and its alloys; niobium-titanium filaments; plutonium metal and its alloys; porous nickel metal; silver infiltrated tungsten metal; tantalum metal and its alloys; tellurium metal and its alloys; titanium aluminide metals; titanium metal and its alloys; tungsten metal, tungsten carbide metal, and their alloys; uranium titanium alloy metals; and zirconium metal and its alloys and compounds.
“Coal,” also referenced in #7 above, is defined in IFCA Section 1242(a)(3) as metallurgical coal, coking coal, or fuel coke.
OFAC may interpret these terms similarly in the North Korea context, putting a number of companies that engage in trade involving these commodities with North Korea at risk of designation. In addition, the Act requires the President to prepare reports on North Korea’s activities undermining cybersecurity and its human rights violations, which shall identify persons engaging in such activities. Following issuance of these reports, the President shall designate persons that: knowingly engage 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; knowingly engage in, are responsible for, or facilitate censorship by the Government of North Korea; or knowingly engage in, are responsible for, or facilitate serious human rights abuses by the Government of North Korea.
B. Discretionary Designations
In addition to the numerous mandatory designations described above, the Act also bolsters the President’s authority to target corruption and human rights abuses in North Korea, going beyond the proliferation activities emphasized in prior legislation. Specifically, the Act authorizes the President to impose discretionary sanctions against persons who: knowingly engage in, contribute to, assist, sponsor or provide financial, material or technological support for, or goods and services in support of, any person designated pursuant to certain United Nations Security Council Resolutions pertaining to North Korea; or who knowingly contribute to the bribery of a North Korean government official, the misappropriation, theft, or embezzlement of public funds by, or for the benefit of, an official of the Government of North Korea, or the use of any such proceeds.
Measures Targeting Importers and Shippers
Within six months of the date the Act enters into law, and on an annual basis afterwards, the President shall submit a report that identifies foreign ports and airports (i.e., those outside of North Korea) 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 any of the activities described above. The Secretary of Homeland Security may require enhanced inspections of any 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 in a third country. Good subject to enhanced inspection may encounter substantial delays during 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.
Anti-Money Laundering: The Act also requires the Secretary of the Treasury to make a determination within 180 days of whether reasonable grounds exist for concluding that North Korea is a jurisdiction of primary money laundering concern. If designated as a jurisdiction of primary money laundering concern, financial institutions would be required to take enhanced due diligence steps regarding any North Korean financial institution.
Government Contracts: Prospective contractors with the U.S. government will be required, pursuant to the Federal Acquisition Regulation (“FAR”) to certify that they do not engage in any of the prohibited activities involving North Korea described above.
Waivers: The Act allows the President to waive its restrictions only on limited national security and humanitarian grounds.
Although North Korea has only limited contacts with the outside world and remains subject to extensive U.S. primary sanctions, the addition of secondary sanctions could potentially impact a far greater number of companies, particularly in China, North Korea’s main trading partner. Companies should assess their potential sanctions exposure and dealings with companies that also do business with North Korea. Given the Act’s broad bipartisan support, OFAC will face tremendous pressure to strictly enforce its prohibitions.
Special thanks to Ari Fridman and Adam Berry for their contribution to this update.