On February 23, 2018, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctioned 56 vessels and shipping and trading companies for their support of the North Korean regime and evasion of sanctions. Also, OFAC, along with the U.S. Department of State and the U.S. Coast Guard, issued an advisory on North Korea's use of deceptive shipping practices to evade sanctions. The sanctioned parties include one individual, 27 shipping and trading companies, and 28 vessels from North Korea, China, and seven other countries. U.S. persons are forbidden from transacting business with specially designated nationals (SDN), and U.S. entities such as banks that are in possession of assets belonging to SDNs must freeze them. In addition, non-U.S. companies that engage in certain significant transactions with desginated persons may themselves become subject to secondary sanctions.
These designations are being touted as the largest round of North Korea-related sanctions yet, and target its use of the shipping industry to evade sanctions. In particular, these companies and vessels are believed to have conducted coal and fuel transactions and transfers in violation of U.S. and UN sanctions. The designations continue a trend of actions consistent with the Countering America’s Adversaries Through Sanctions Act (CAATSA), on which we previously reported, which broadly authorizes sanctions on North Korea’s shipping sector.
This round of sanctions will have little effect on U.S. companies, which are already subject to a comprehensive embargo against North Korea. However, these designations provide a basis for potential secondary sanctions against third-country entities, including foreign financial institutions, that conduct or facilitate certain transactions with sanctioned persons. In fact, Treasury Secretary Mnuchin said in a press release accompanying the sanctions that “[t]he President has made it clear to companies worldwide that if they choose to help fund North Korea’s nuclear ambitions, they will not do business with the United States.”
The advisory is intended to notify parties involved in the shipping sector of the sanctions risk posed by North Korea’s deceptive practices. For example, it describes tactics such as obfuscating the identity of vessels, goods, and the origin or destination of the cargo. In addition, North Korea has been using shipto-ship transfers to transport coal and fuel without entering ports, in violation of UN sanctions. The advisory suggests risk mitigation measures for monitoring and avoiding unknowing involvement in these schemes in order to ensure compliance with U.S. and UN sanctions.
While OFAC continues to expand its North Korea sanctions, the utility of unilateral U.S. sanctions is limited. Pressure on North Korea will have to come from its main trading partners, China and Russia. Accordingly, OFAC has designated third-country SDNs and extended the use and threat of secondary sanctions against third-country parties (as it did most notably under the Iran sanctions program) in order to pressure these third-country parties to terminate transactions with North Korea. Companies worldwide that are involved in or support the shipping sector should review this advisory and consider whether any additional compliance measures may be warranted.