On February 18, 2016, President Obama signed into law the North Korea Sanctions and Policy Enhancement Act of 2016 (NKSPEA, Pub. L. 114-122), and on March 2, 2016, the United Nations Security Council (UNSC) unanimously passed Resolution 2270, which Secretary of State John Kerry characterized as “the toughest set of sanctions imposed by the Security Council in more than two decades.”
Blocking of Government of North Korea and Workers’ Party of Korea
The NKSPEA requires the President to prohibit “US persons” – defined in the statute as US citizens, US lawful permanent residents, and entities organized under US law (including their non-US branches) – from having any dealings with, and to block the property and interests in property of, the Government of North Korea and the Workers’ Party of Korea (the Party). As there are few – if any – activities related to North Korea in which one can avoid dealing with the Government or the Party, this effectively cuts US persons off from practically all dealings with North Korea, except:
- Within the narrow exceptions provided in the law (described below) and in other preexisting statutes
- Where a US person is authorized by a license (general or specific) issued by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC)
- If a US person can find a reliable way of operating without any dealings with the Government or the Party, and at the same time comply with other US restrictions (such as the very tight export control regime)
The NKSPEA provides that the designation of the Government of North Korea and the Party must apply to any person “who is determined to be owned or controlled by, or to have acted or purported to have acted for or on behalf of” those entities. Therefore, additional entities and individuals are subject to designation and blocking based on this provision. Furthermore, under OFAC’s “50%” rule, any entity owned 50% or more by these entities automatically will be blocked, even if it is not itself designated. The President will likely issue an executive order to implement these blocking requirements in the NKSPEA, which have no direct regulatory effect until implemented by the President.
Sanctions Targeting Non-US Persons
Another noteworthy feature of the NKSPEA is section 104(a), which requires the blocking of persons determined to have engaged knowingly in specified types of conduct. Companies in China and other countries that conduct a material level of trade with North Korea could find themselves at risk. Most of the activities covered in section 104(a) are already prohibited under existing UN Security Council resolutions (UNSCRs), as implemented in national laws, or were already sanctionable under US law. These new sanctions apply to persons that knowingly:
- Import, export, or reexport to or from North Korea, directly, or indirectly, goods, services, or technology that are of a type that would be controlled under the US Export Administration Regulations (EAR) for reasons including Nuclear Nonproliferation (NP), Proliferation of Chemical and Biological Weapons (CB) and Missile Technology (MT), and that would materially contribute to the development, production, acquisition, possession or use by any person – not just North Korea – of weapons of mass destruction (WMDs) or their delivery systems.
- UNSCR 1718 (2006) already requires UN member states to prevent trade with North Korea in items that could contribute to its WMD or missile programs. The threat of sanctions by the US Government adds another layer of risk for anyone involved in such trade.
- The statutory language refers to “goods, services, or technology controlled for export by the United States because of the use of such goods, services, or technology for weapons of mass destruction or delivery systems for such weapons.” It remains to be seen precisely how the Administration will implement this provision – it may, for example, also include transactions involving persons or entities sanctioned for proliferation activities.
- Provide training, advice or other services or assistance, or engage in significant financial transactions, relating to the manufacture, maintenance or use of WMDs or delivery systems to be imported, exported, or reexported to or from North Korea.
- UNSCR 1718 requires member states to prevent transfers to or from North Korea of training, advice, services, or assistance related to the provision, manufacture, maintenance, or use of items related to WMDs or ballistic missiles. Specifically naming financial transactions could increase the risk profile for foreign financial institutions that deal in transactions related to North Korea.
- Engage in or facilitate censorship by the Government of North Korea.
- Any dealings with the Korean Central News Agency (KCNA) or other media or media regulators in North Korea would present significant risk under this provision.
- Engage in or facilitate serious human rights abuses by the Government of North Korea.
- This is a broad provision that would likely include arms trading with North Korea, which again is already covered by UNSCR 1718. But this provision could also impose sanctions for other activity such as dealings related to North Korean workers overseas, which the UN Special Rapporteur has described as forced labor designed to circumvent UN sanctions (finding the vast majority of such North Korean national laborers are in China and Russia). This may warrant due diligence by companies to avoid supporting such labor practices through their supply chains.
- Supply to or from the Government of North Korea, or any person acting for or on behalf of that government, of 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 WMDs and their delivery systems, 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.
- This provision is similar to restrictions imposed under the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA, Pub. L. 112-139), and guidance issued under IFCA may be useful in understanding the types of materials that are covered. This measure calls for an additional level of due diligence when non-US companies are trading to or from North Korea in any of the types of items listed, to ensure the items are not used by one of the covered entities or for one of the covered uses. Practically speaking, that will be challenging for exports to North Korea.
Other activities listed in section 104(a) are already sanctionable under existing executive orders targeting North Korea, including trade in arms and luxury goods, money laundering, counterfeiting, bulk cash smuggling, and narcotics trafficking. However, a congressional mandate could increase the pressure on the Administration to take more aggressive action in those already sanctionable areas. The NKSPEA also complicates the President’s ability to remove or modify those sanctions provisions, which were previously established under the President’s own authority.
Sections 104(a) and 209(b) also require the President to designate persons involved in “significant activities undermining cybersecurity” conducted on behalf of the Government of North Korea and directed against “foreign persons”. Such activity directed against the United States already is covered by Executive Order 13694 (April 1, 2015), on which we have previously advised, and which targets a wide array of “cyber-enabled” activities. To the extent the NKSPEA covers cyber-related activities directed at non-US persons on behalf of the Government of North Korea, that is a new restriction. Also, the NKSPEA cyber-related provisions appear to codify effectively Executive Order 13694, thereby reducing Executive Branch discretion in this area.
In addition to blocking, the statute authorizes the following sanctions against persons designated for engaging in the activity listed above:
- Sanctioned persons are subject to restrictions on receiving procurement contracts from the US Government.
- Sanctioned persons – or officials of sanctioned entities – may be denied entry into the United States.
- Vessels and aircraft used to facilitate activity described under section 104(a) are subject to seizure.
- Property that is derived from proceeds “traceable” to activity described in section 104(a) is subject to forfeiture.
Section 104(b) authorizes the President, at his discretion, to sanction persons who knowingly support UNSCR-designated persons, or contribute to, or use proceeds from, bribery and corruption in North Korea. As with persons sanctioned under section 104(a), such persons can be subject to blocking, procurement bans, vessel and aircraft seizures, and travel bans, as well as financial restrictions such as prohibiting foreign exchange transactions subject to US jurisdiction and the application of “special measures” applicable to entities of primary money laundering concern under 31 U.S.C. § 5318A. This provision could increase the risks for foreign financial institutions that conduct business with North Korea.
The NKSPEA provides that designations under sections 104(a) or (b) apply to any person “who is determined to be owned or controlled by, or to have acted or purported to have acted for or on behalf of” those entities. Therefore, as with the section requiring the blocking of the government and party, additional entities and individuals are subject to designation and blocking based on this provision. Furthermore, under OFAC’s “50%” rule, any entity owned 50%or more by these entities automatically will be blocked, even if it is not itself designated.
It is also noteworthy that section 104(e) authorizes the revocation of previously granted licenses – such as OFAC or BIS licenses – when the authorized transaction lacks sufficient “financial controls” to prevent activities sanctionable under sections 104(a) or (b).
Enhanced Inspections of Cargo
Section 205 authorizes the Secretary of Homeland Security to require enhanced inspections of any goods that have been transported through a port or airport identified in a report that the President will be required to submit to Congress. That report will identify ports and airports at which inspections of shipments 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 the activities described in section 104(a). Depending on which ports are named in that report, these enhanced inspections could increase tensions with US trading partners, and increase the risk of seizures (including the vessel or aircraft itself) by US Customs and Border Protection (CBP). Notably, once a port or airport is named, CBP may be required to conduct enhanced inspections of all shipments that passed through it, which could impact a broad swath of commerce. Insurers, shippers, freight forwarders, and others will need to pay close attention to these measures.
Financial Sector Restrictions
The NKSPEA also significantly increases the pressure on the Administration to impose tougher financial sector restrictions on North Korea, while stopping short of absolutely requiring this step. Section 201 “urges the President, in the strongest terms” to designate North Korea immediately as a jurisdiction of primary money laundering concern. It also requires the Secretary of the Treasury to determine within 180 days “whether reasonable grounds exist for concluding” that North Korea should be so designated and, if so, requires the Secretary to put in place stringent anti-money laundering measures. This requirement may effectively force the Administration to designate North Korea as a jurisdiction of primary money laundering concern, which would trigger significant restrictions on financial activity for both US and non-US financial institutions.
Section 203 requires a validated license for exports to North Korea covered by section 6(j) of the Export Administration Act of 1979, which imposes stringent export controls on state sponsors of terrorism. North Korea was removed from the list of state sponsors of terrorism in 2008, but this provision appears to be an effort to impose similar restrictions without actually re-listing North Korea as a state sponsor alongside the currently listed Iran, Sudan and Syria. However, the Commerce Department’s Bureau of Industry and Security (BIS) already maintains tight restrictions on North Korea under the EAR, so it does not appear that this provision in the statute will have any practical effect. The EAR already provide that “as authorized by section 6 of the Export Administration Act of 1979 . . . a license is required to export or reexport any item subject to the EAR [to North Korea] . . . except food and medicines classified as EAR99 . . .”. 15 C.F.R. § 746.4(a). The EAR also already require congressional notification before BIS can issue a license for certain items intended for the “military, police, intelligence or other sensitive end-users” in North Korea, as though it were currently listed as a state sponsor of terrorism. 15 C.F.R. § 750.4(b)(6).
The only effect of this provision therefore appears to be preventing BIS from changing its current policy toward North Korea, and removing the State Department’s discretion to determine that it is not a state sponsor of terrorism.
The statute does allow the President to waive for up to one year the application of most of the sanctions in the NKSPEA if necessary for “humanitarian assistance” or to carry out the humanitarian purposes set forth in the North Korean Human Rights Act of 2004 (22 U.S.C. § 7802). The term ‘‘humanitarian assistance’’ is defined narrowly in the NKSPEA to mean assistance to meet humanitarian needs, including needs for food, medicine, medical supplies, clothing, and shelter. It does not appear to authorize other activities such as education, religious activities, or disaster relief. The North Korean Human Rights Act contains broad statements of purpose that could potentially encompass these other types of humanitarian activities, although it remains to be seen whether the Administration will implement a commensurately broad exception. Any such exception would probably take the form of a general license in OFAC’s regulations. In addition, OFAC may state a willingness to grant specific licenses on a case-by-case basis for a broader set of humanitarian activities.
In recent years, Congress has increasingly turned to sanctions as a foreign policy tool, and sanctions legislation tends to pass easily with broad bipartisan support. In the case of North Korea, members on both sides of the aisle argued that the legislature needed to step in because they were dissatisfied with the results of the Obama Administration’s policies to contain the reclusive country’s nuclear ambitions. The Obama Administration did not have sufficient support in Congress to block the NKSPEA’s advancement, so it lobbied its House and Senate co-sponsors to include waivers that would give the Executive Branch flexibility in implementing the law, especially because the Administration needed support from China to advance UNSCR 2270. To date, both Democratic and Republican congressmen have praised the NKSPEA’s passage, with House Foreign Affairs Committee Chairman Ed Royce (R-CA) praising US Ambassador to the United Nations Samantha Power and the Obama Administration’s efforts. However, as Senate Foreign Relations Committee Chairman Bob Corker (R-TN) noted, “The legislative branch wanted to make sure that what it’s passing into law is going to force action” – while Congress has not indicated any forthcoming plans to introduce more bills targeting North Korea, that could change if congressional sanctions hawks believe that the Obama Administration is not adequately implementing the NKSPEA.
UNSCR 2270 imposes unprecedented obligations on UN member states to restrict trade with North Korea, in the following ways:
- Requires the inspection of all cargo within or transiting through the member state’s territory if originating from or directed to North Korea, including shipments brokered or facilitated by North Korea.
- Requires states to prohibit new branches, subsidiaries and representative offices of North Korean banks; prohibit national banks from opening new branches, subsidiaries, representative offices or accounts in North Korea; prohibit the establishment of joint ventures or other investments in North Korean banks (unless approved by a UN Committee); take steps to close certain existing North Korean branches, subsidiaries, representative offices, joint ventures, accounts and correspondent relationships within their territory within 90 days; and ban public or private financial support (including export credits, guarantees or insurance) from reaching North Korea if in support of sanctioned activity.
- Requires states to prohibit the sale or supply of aviation fuel, except to civilian passenger aircraft outside North Korea for flights to and from North Korea.
- Requires states to prohibit procurement of coal, iron, and iron ore from North Korea, except on a case-by-case basis if not used to generate revenue for North Korea’s nuclear or ballistic missile programs, along with a prohibition on trade in gold, titanium ore, vanadium ore, and rare earth minerals in all circumstances.
- Restricts leasing and chartering vessels and aircraft and registering vessels in North Korea.
- Expands the scope of the existing arms embargo to include all defense-related items.
- Expands the existing luxury goods embargo to include additional types of items.
It is noteworthy that many of the sanctions provisions in the NKSPEA appear to be designed to bolster the enforcement of UNSCR 2270, by layering US sanctions on top of a UN mandate for member states to prohibit certain conduct in their own national laws.
The NKSPEA is notable in that it blocks, for the first time since 2008, the Government of North Korea and the Workers’ Party of Korea, effectively cutting off US persons from practically all dealings with North Korea, subject to narrow exceptions. Additionally, the NKSPEA introduces a broad range of sanctions targeting non-US persons’ activity with North Korea, which could have a particular impact on China, North Korea’s main trading partner.