In light of missile and nuclear weapons tests by the Democratic People’s Republic of Korea (“DPRK”) earlier this year, which the EU has described as posing “a grave threat to international peace and security”, the EU Council has decided to impose additional restrictive measures against DPRK. This follows the EU’s expansion of its DPRK sanctions in May 2016, in response to UN Security Council Resolution 2270 (2016) in March 2016.
The EU measures, as summarised in this briefing, include:
- a prohibition on investment into the EU by DPRK persons;
- restrictions on funds transfers to/from DPRK and the ability of EU financial institutions to carry out transactions with DPRK; and
- additional trade sanctions, including a ban on the import of listed petroleum products from DPRK.
We also provide a summary of recent US developments in relation to DPRK, in particular its recent designation as a jurisdiction of primary money laundering concern and the special measures proposed in relation to this finding.
1 – EU sanctions
The EU introduced new DPRK-related legislation on 27 May 2016: Council Decision (CFSP) 2016/849 (the “Decision”), which repeals Decision 2013/183, and Council Regulation (EU) 2016/841 (the “Regulation”), which amends Regulation 329/2007. Both the Decision and the Regulation were published on 28 May 2016 and took effect on 29 May 2016.
In its press release announcing the new measures, the European Council indicated that the new measures are intended to complement and reinforce the UN sanctions imposed on DPRK. The EU has also published an updated fact-sheet on its relations with DPRK.
The Decision and Regulation impose a series of additional restrictions which apply to nationals of EU member states and EU-incorporated companies, and in relation to any acts done within the physical territory of the EU. An overview of the restrictions appears below.
The Regulation introduces a blanket “in-bound” investment ban, prohibiting EU persons from accepting or approving investment in any commercial activity made by the DPRK government, the Workers Party of Korea, DPRK nationals, DPRK-incorporated entities or persons acting under their control, on their behalf or at their direction (“DPRK Persons”).
EU persons are also prohibited from:
- establishing joint ventures with, or extending an ownership interest in, any DPRK Persons engaged in DPRK’s nuclear, ballistic missile or WMD-related programmes or activities (the “Restricted Activities”), or in the mining, refining and chemical industry sectors;
- granting financing or financial assistance to DPRK-incorporated entities or persons acting under their control, on their behalf or at their direction (i.e. a sub-set of the DPRK Persons subject to the in-bound investment ban described above), or for the documented purpose of financing such legal entities; and
- providing investment services directly related to the above activities.
Funds transfer restrictions
The new sanctions include restrictions on the transfer of funds to or from DPRK. These operate in a similar way to the restrictions previously in force in relation to transfers to and from Iran (which were lifted under the Joint Comprehensive Plan of Action). The starting point in the Regulation is that all transfers of funds to/from DPRK are prohibited unless they relate to certain specific purposes including humanitarian transactions, transactions covered by exemptions in the Regulation and transactions in connection with permitted trade contracts (the full list of exemptions appears in article 5c(3) of the Regulation). Transactions for these permitted purposes require prior authorisation from the relevant member state where they are over €15,000.
HM Treasury has issued guidance on compliance with these new restrictions.
Restrictions on entering into, or participating in, transactions with the DPRK financial institutions
In addition to the funds transfer restrictions set out above, EU financial institutions are prohibited from entering into, or continuing to participate in, any transactions with banks domiciled in the DPRK (including the Central Bank of the DPRK), as well as branches or subsidiaries of such banks, as listed in Annex VI of the Regulation. Transactions for one of the permitted purposes listed in article 5c(3) are permitted, but require prior authorisation where the amounts in question exceed €15,000.
The Regulation also provides that EU financial institutions shall take the following steps when carrying out transactions with DPRK institutions:
- apply customer due diligence measures;
- ensure compliance with EU anti-money laundering and counter terrorist financing procedures;
- refuse to process transactions without complete payer and payee information;
- maintain records of the transactions;
- promptly inform their competent financial intelligence unit where there are reasonable grounds to suspect that funds could contribute to Restricted Activities;
- promptly report any suspicious transactions/attempted transactions; and
- refrain from carrying out any transactions which they reasonably suspect could be related to financing for Restricted Activities until they have made the necessary notifications and complied with any instructions from the relevant authorities.
Restrictions on financial support for trade with the DPRK
EU Member States are now prohibited from providing public financial support for all trade (subject to some exceptions) with DPRK to their nationals or entities involved in such trade. This includes the granting of export credits, guarantees or insurance. However, this prohibition will not affect commitments established prior to the entry into force of the new restrictions unless such support contributes to Restricted Activities, or any other activities prohibited under specified UN Security Council Resolutions.
In addition to the above ban on public financial support for trade with DPRK, private financial support for trade with DPRK is also prohibited where such support could contribute to the DPRK’s Restricted Activities.
The above restrictions are subject to exemptions in relation to trade relating to food, agricultural, medical or other humanitarian purposes.
Ban on importation of petroleum products
EU persons are prohibited from importing, purchasing or transferring petroleum products (as listed in Annex IF of the Regulation) from DPRK.
Ban on importation of luxury goods
The import, purchase or transfer of listed luxury goods from the DPRK has been prohibited. This is in addition to the pre-existing restriction on the direct or indirect supply, sale or transfer of such luxury goods to the DPRK.
Further export ban in relation to dual use goods
The Decision provides that, in addition to the existing restrictions applicable to the provision to DPRK of certain dual-use and military goods, restrictions should be applied to the sale, supply, transfer or export to DPRK of “any further items, materials and equipment relating to dual-use goods and technology; the Union shall take the necessary measures in order to determine the relevant items to be covered by this point.” The Regulation does not introduce a new list of dual-use items to which trade restrictions will apply and so it may be that the EU will, in due course, publish a further amending regulation introducing a new list of dual-use items which may not be supplied to DPRK.
The new measures also include restrictions on access to EU airports or sea ports for aircraft operated by DPRK carriers or originating from the DPRK and vessels owned, operated or crewed by the DPRK.
2 – US developments
On 18 February 2016, the North Korea Sanctions and Policy Enhancement Act was enacted in the US. This legislation requires, among other things, that the US administration determine within 180 days whether reasonable grounds exist for concluding that DPRK is a jurisdiction of primary money laundering concern, and if so, to propose one or more special measures. On 1 June 2016, the US Department of the Treasury announced a finding that DPRK is a jurisdiction of “primary money laundering concern” because (1) it uses state-controlled financial institutions and front companies to conduct international financial transactions that support the proliferation and development of WMD and ballistic missiles; (2) it is subject to little or no bank supervision with respect to anti-money laundering or combating the financing of terrorism controls; (3) it has no diplomatic relationship, and thus no mutual legal assistance treaty, with the United States and does not cooperate with U.S. law enforcement and regulatory officials in obtaining information about transactions originating in or routed through or to DPRK; and (4) it relies on the illicit and corrupt activity of high-level officials to support its government.
In connection with the finding, the Financial Crimes Enforcement Network (“FinCEN”) also released a notice of proposed rulemaking recommending a special measure to prohibit covered US financial institutions from opening or maintaining correspondent accounts with DPRK financial institutions, and prohibit the use of US correspondent accounts to process transactions for DPRK financial institutions. As US financial institutions are already prohibited from dealing with DPRK financial institutions directly or indirectly, the most significant impact of the proposed FinCEN rule will be in respect of due diligence requirements to prevent indirect access to the US financial system by DPRK financial institutions. The proposed rule is open for public comments for 60 days before being finalised.
3 – Commentary
Both the EU and US developments in relation to DPRK demonstrate a clear willingness further to restrict the country’s access to international financial systems. The fact that further enhancements to the EU’s DPRK sanctions have been introduced only weeks after the most recent expansion of the regime can be seen as a clear expression of the EU’s concern about DPRK’s current proliferation activities. For any remaining EU persons still doing business with DPRK, the new funds transfer restrictions will need close attention; the lack of clarity, and limited awareness of the broad scope of the equivalent measures in the Iran regime, led to a material risk of inadvertent breaches in respect of otherwise lawful business with Iran.