The U.S. Department of the Treasury recently announced a finding that North Korea is a jurisdiction of “primary money laundering concern” pursuant to its Section 311 authority, codified at 31 U.S.C. 5318A. Treasury’s Financial Crimes Enforcement Network (FinCEN) also released a notice of proposed rulemaking, which would impose the strongest available “special measure” to address the money laundering risks from North Korea. This action may be misinterpreted as inconsequential because of the separate Office of Foreign Assets Control (OFAC) prohibitions against North Korea. However, it likely signals the beginning of increased domestic and international scrutiny of China’s role in providing North Korea access to the international financial system. The notice of finding sets forth the U.S. government’s position that North Korea accesses the international financial system through its network of China-based cover companies.
United Nations Security Council Resolution 2270
In March 2016, the United Nations Security Council adopted resolution 2270 imposing additional economic sanctions on North Korea. This Resolution contains several significant restrictions on financial services tucked away in paragraphs 33-35. Paragraph 33 specifically obligates Member States to “terminate … correspondent banking relationships with DPRK [North Korea] within ninety days from the adoption of this resolution.”
The United States likely submitted this language with the expectation that China would raise an objection and the broad banking restrictions would be removed. Apparently, China did not object and the financial prohibitions are now binding on all Member States. Unlike the previous relatively narrow international financial restrictions, the prohibitions in paragraph 33 apply to all correspondent banking relationships. While the United States generally prohibited all financial services prior to UNSCR 2270, the 311 finding and proposed rule should support the ongoing efforts to financially isolate North Korea. It serves as a clear example of leadership in commitment to United Nations obligations.
The Fifth Special Measure
Upon finalization of the rule, covered financial institutions will be prohibited from providing North Korean banks direct or indirect access to U.S. correspondent accounts. FinCEN would aim to prevent indirect access by imposing special due diligence requirements. (See 31 C.F.R. §1010.659 (3)) Part of this process would require financial institutions to notify certain respondents that its correspondent accounts cannot be used to indirectly provide North Korean banks access to the U.S. financial system.
Despite FinCEN’s requests not to “de-risk” potentially higher-risk customers absent good cause, it is likely that U.S. banks will close accounts for certain Chinese banks with suspected North Korean ties. This is more likely to happen if OFAC uses its designation authorities to identify additional China-based North Korean front companies.