On 21 September 2017, the US dramatically expanded the scope of US sanctions that apply to those who do business with North Korea. These new sanctions target not only foreign companies that trade with North Korea, but also the foreign financial institutions (FFIs) that finance such trade. Companies that trade with North Korea, or that have an interest in trading with North Korea, face significant new challenges in light of Executive Order 13810 (EO 13810). This article explains the far-reaching nature of these changes and highlights some of the key areas that risk managers will need to be aware of.
Existing US-North Korea sanctions
The new sanctions are the latest in a series of measures taken by the US against North Korea. In the past decade, US presidential administrations have continually added North Korean individuals, entities and aircraft to the list of specially designated nationals (SDNs), which currently number some 200. US persons (including US citizens, and companies and banks established under US law) are prohibited from dealing with SDNs and must block their assets, including transfers of funds in which SDNs have an interest.
Through presidential executive orders, US persons and non-US persons have been prohibited (a) since 2011 from importing North Korean goods, services and technology into the US; and (b) since 2016 from exporting US goods, services or technology to North Korea. Importantly, when a US dollar wire payment is cleared by a bank in New York, that bank is providing a service, and if the payment relates to trade with North Korea the provision of such services likely violates US sanctions.
In late July 2017, the US Congress passed the Korean Interdiction and Modernization of Sanctions Act (KIMSA), which, in part through modifications of a 2016 act, calls for sanctions against non-US persons that acquire from North Korea significant amounts of gold, titanium, copper, silver, nickel, zinc, coal, iron, fishing rights, and agricultural products, among others. KIMSA also provides for sanctions against non-US persons that provide to North Korea significant amounts of rocket, aviation or jet fuel, crude oil, condensates, refined petroleum or other types of petroleum or petroleum products, and LNG and other natural gas resources.
Among its many other provisions, KIMSA requires US banks to stop servicing FFIs’ correspondent accounts that are used to provide significant financial services to persons designated for sanctions, and generally bans importation into the US of goods, wares, articles and merchandise mined, produced or manufactured by the labour of North Korean nationals, unless US Customs and Border Protection finds by clear and convincing evidence that such goods, wares, articles and merchandise were not produced with convict labour, forced labour, or indentured labour.
The new sanctions
New sanctions were imposed by President Donald Trump under EO 13810. The most significant of these sanctions apply to those who trade with North Korea, provide related transportation services, or finance trade with North Korea.
Trade with North Korea
EO 13810 provides authority for the US Treasury Department, which administers most US sanctions through its Office of Foreign Assets Controls (OFAC), to designate as SDNs any non-US person determined:
- “to operate in the construction, energy, financial services, fishing, information technology, manufacturing, medical, mining, textiles or transportation industries in North Korea”; or
- “to have engaged in at least one significant importation from, or exportation to, North Korea of any goods, services, or technology”.
Accordingly, OFAC is not only authorised under EO 13810 to designate as SDNs an expansive new array of participants in the North Korean economy, but also non-US persons that engage in a single “significant” trade transaction with North Korea. What constitutes a significant trade transaction is, as is generally the case with US sanctions, up to OFAC’s discretion.
Transport services and North Korea
The new sanctions restrict travel to the US for aircraft and vessels that transit to North Korea. Specifically, EO 13810 provides that:
- “no aircraft in which a foreign person has an interest that has landed at a place in North Korea may land at a place in the United States within 180 days after departure from North Korea”; and
- “no vessel in which a foreign person has an interest that has called at a port in North Korea within the previous 180 days, and no vessel in which a foreign person has an interest that has engaged in a ship-to-ship transfer with such a vessel within the previous 180 days, may call at a port in the United States”.
FFIs and North Korea
The new sanctions authorise OFAC to designate as SDNs, prohibit the opening of correspondent or payable-through accounts in the US of, or impose strict conditions on the maintenance of correspondent or payable-through accounts in the US of, FFIs determined to have knowingly:
- conducted or facilitated any “significant transaction” concerning an SDN designated under executive orders concerning North Korea; or
- “knowingly conducted or facilitated any significant transaction in connection with trade with North Korea”.
According to a fact sheet released by the White House:
“Foreign financial institutions must choose between doing business with the United States or facilitating trade with North Korea or its designated supporters.”
Any company with business interests linked to North Korea should carefully consider the impact of these latest sanctions. Such traders particularly need to consider the prospect of a potential US SDN designation for trading with North Korea, whether their partners that ship goods to or from North Korea by air or sea will continue to do so, and whether FFIs will continue to be willing to process payment transactions that involve North Korea.
This article was published on Commercial Risk on 6th October 2017: http://www.commercialriskonline.com/dramatic-expansion-us-sanctions-north-korea/