On September 21, 2017 President Trump issued Executive Order No. 13810 (the new Executive Order), which introduces new US sanctions in response to North Korea’s “provocative, destabilizing, and repressive actions and policies.” The new sanctions programs authorize a variety of penalties against individuals, entities and foreign financial institutions for a wide range of activities related to North Korea. In connection with the new Executive Order, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued a new general license, updated an existing general license and published guidance related to the North Korea sanctions.
During his announcement of the new US sanctions, President Trump also claimed that Chinese President Xi Jinping had ordered Chinese banks to halt activities with North Korea. China’s Ministry of Foreign Affairs has since disputed the accuracy of President Trump’s statement.
Below we summarize five key points related to the new developments in North Korea sanctions.
1. The Trump Administration Has Sweeping New Authority to Block Persons Related to North Korea.
The new Executive Order significantly expands the categories of conduct related to North Korea that can result in being designated as a blocked person by the US Treasury Department. The new Executive Order directs the blocking of all property or interests in property of any individual or entity determined by the Treasury Secretary to fall into certain categories, including:
- Industries: Persons who “operate in” certain North Korean industries, including construction, energy, financial services, fishing, information technology, manufacturing, medical, mining, textiles and transportation;
- Ports: Persons who own, control or operate a seaport, airport or land port of entry in North Korea;
- Imports into or Exports from North Korea: Persons who “have engaged in at least one significant” importation into or exportation from North Korea of goods, services or technology; or
- Nationals of North Korea: North Korean citizens, permanent resident aliens or entities organized under the laws of North Korea; excluding US citizens, permanent resident aliens, lawful aliens or holders of valid US visas.
It is worth noting that the Countering America’s Adversaries Through Sanctions Act (CAATSA) of August 2, 2017 introduced new US sanctions on North Korea, but regulations have not yet been issued and the Trump Administration has not yet designated anyone as a blocked person under CAATSA. Whereas the President signed CAATSA into law despite his stated reservations, the new Executive Order has been issued at the initiative of the Trump Administration and supports the Administration’s policy goals, increasing the likelihood that more persons may be blocked in relation to North Korea pursuant to the new Executive Order as opposed to CAATSA.
2. US Secondary Sanctions (Including Prohibitions on US Correspondent Accounts) May Be Imposed on Foreign Financial Institutions for “Significant” North Korean Transactions.
The new Executive Order authorizes the imposition of secondary sanctions on foreign financial institutions that knowingly conduct “significant” transactions related to North Korea. Notably, the United States can impose these new sanctions regardless of whether or not the foreign bank has any connection to the United States. The new executive order authorizes the US Treasury Secretary to determine whether a foreign financial institution (defined broadly) has (i) knowingly conducted or facilitated any significant transaction on behalf of a person blocked under North Korea sanctions, or (ii) knowingly conducted or facilitated any significant transaction “in connection with” trade with North Korea. The new Executive order defines “knowingly” as including actual knowledge or reason to know of the conduct, circumstance or result. The secondary sanctions are not retroactive, however, so a foreign financial institution must have engaged in the conduct on or after September 21, 2017 to potentially be caught by these new sanctions.
Upon making such a determination, the Treasury Secretary has discretion to impose one of the following two penalties: (i) severely restricting or prohibiting the financial institution’s ability to open or maintain correspondent or payable-through accounts in the United States, or (ii) blocking the financial institution’s property and interests in property (which would have the effect of adding the financial institution to the US list of blocked persons).
3. Aircraft and Vessels Engaging with North Korea Face New US Restrictions.
The new Executive Order prohibits entry into the United States of certain aircraft and vessels that have engaged with North Korea within the prior 180 days. This prohibition is designed to disrupt trade with North Korea by blocking access to the United States by vessels that have traded with North Korea. First, the new Executive Order mandates that no aircraft in which a foreign person has an interest may land in the United States within 180 days of departing from a location in North Korea. Second, no vessel in which a foreign person has an interest may call at a US port (i) within 180 days of calling at a port in North Korea, or (ii) engaging in a ship-to-ship transfer with a vessel that has called at a port in North Korea within the previous 180 days. The new aircraft and vessel restrictions apply regardless of any contract, license or permit entered into or obtained prior to September 21, 2017.
In connection with the new Executive Order, OFAC issued new General License No. 10, which authorizes narrow exceptions to the aircraft and vessel restrictions for cases of distress or emergency.
4. The Trump Administration May Now Block Foreign Bank Accounts and Associated Funds Related to North Korea.
In addition to individuals and entities, the new Executive Order authorizes the Treasury Secretary to designate certain foreign bank accounts – and funds associated with those accounts – as blocked. The Treasury Secretary may block foreign bank accounts determined to (i) be owned or controlled by a North Korean citizen, North Korean permanent resident alien, or entity organized under the laws of North Korea (again excluding individuals who are also US citizens, permanent resident aliens, lawful aliens or holders of valid US visas); or (ii) have been used to transfer funds by such persons. The new sanctions authorize the blocking of accounts even if the individual or entity that owns the account is not blocked.
By blocking a foreign bank account, the new sanctions effectively block all funds that originate from, are destined for or pass through the account. US persons are further prohibited from approving, financing, facilitating or guaranteeing a transaction involving such blocked funds or accounts, even if the funds or accounts never enter the United States or come within the possession of a US person.
5. Chinese Banks May Be Prohibited from Engaging in or Facilitating Transactions Related to North Korea.
According to press reports, China’s central bank, the People’s Bank of China, issued a new rule on Monday, September 18, 2017 to Chinese banks, requiring them to (i) fully implement United Nations sanctions against North Korea, (ii) stop providing financial services to new North Korean customers, and (iii) wind down loans with existing North Korean customers. The existence of the new banking rule was not reported until several days later, on Thursday, September 21, 2017, when President Trump himself claimed in a press conference that Chinese President Xi Jinping had ordered Chinese banks to halt activities with North Korea. On Friday, September 22, 2017, however, the Chinese Ministry of Foreign Affairs disputed the accuracy of President Trump’s statement and affirmed that China implements the UN Security Council sanctions on North Korea but opposes unilateral sanctions that go beyond the UN prohibitions.
In any case, it remains to be seen how China and its banks will respond in practice to the new US sanctions on North Korea. The effectiveness of a new banking rule may ultimately determine how great an impact, if any, the new US sanctions on North Korea will have on business in China and dealings with Chinese banks.
As unpredictable global events lead to increasing and rapidly changing sanctions against North Korea, companies and individuals should consider the potential impact of these changes on ongoing and new business activities. The broad extraterritorial reach of these new sanctions also requires a careful reexamination of activities and relationships that might now present greater sanctions risks as a result of these recent developments.