Archive for the ‘North Korea Sanctions’ Category


Jun

3

Nork Money Laundering Designation Targets Chinese Banks


Posted by at 10:24 am on June 3, 2016
Category: FinCENNorth Korea SanctionsOFAC

Kim

On May 25, the U.S. Treasury Department issued a finding designating North Korea as a  jurisdiction of “primary money laundering concern.”  On the same date, Treasury, through FinCEN, issued a notice of proposed rulemaking (“NPRM”) setting forth the measures that it proposes be implemented as a result of the finding.  Although the finding was immediately effective, the proposed rules will not become effective until some time after the 60-day comment period expires.

The designation comes shortly after evidence that North Korea hacked the SWIFT system to steal money from foreign banks and after an increase in activity by North Korea relating to nuclear and missile proliferation. The finding, however, is based instead on the  requirements set forth in section 311 of the Patriot Act as predicates for such a finding — namely that entities in North Korea were engaged in proliferation of WMD, that North Korea has no controls on money laundering, that North Korea does not have a mutual legal assistance treaty with the United States, and that there is a high level of corruption in the North Korean government.

Once such a  finding is made, section 311 permits Treasury to impose one of five special measures, and in this instance Treasury, as detailed in the NPRM, selected the so-called Special Measure Five to impose. Under that special measure, Treasury “may prohibit, or impose conditions upon, the opening or maintaining in the United States of a correspondent account or payable-through account” by foreign banks that involve the designated jurisdiction. The proposed rules implementing Special Measure Five would prohibit U.S. financial institutions from opening or maintaining a correspondent account for a foreign bank if the foreign bank was engaged in transactions on behalf of North Korea. They also impose certain due diligence obligations on U.S. banks to ferret out North Korean activities by foreign correspondent accounts.

These rules, when adopted, will go beyond current restrictions imposed by the Office of Foreign Assets Control (“OFAC”). Under current OFAC rules, banking transactions with blocked entities in North Korea as well as those that would involve the unlicensed import of North Korean goods into the United States are prohibited. But under the new FinCEN rules, foreign banks could be cut off from the U.S. financial system for engaging in transactions with any entity in North Korea, whether blocked or not.

Chinese banks are clearly the target here. China is North Korea’s biggest customer, and many of those transactions are believed to be denominated in the U.S. Dollars that North Korea needs to buy goods from around the world. These transactions will clearly become much riskier for Chinese banks when the rules go into effect. Although it is certain that Chinese banks have in the past concealed from U.S. banks the extent to which their correspondent accounts are used in connection with purchases from, or sales to, North Korea, it seems unlikely they will continue to run the risk that these activities will be uncovered now that the stakes (namely continued participation in the U.S. financial system) are higher and now that U.S. banks will be more closely scrutinizing the correspondent accounts of Chinese banks.

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Copyright © 2016 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Mar

29

There’s Nork Gold in Them Thar Gadgets!


Posted by at 11:01 pm on March 29, 2016
Category: North Korea SanctionsOFAC

North Korean Commemorative Coin via KCNA at https://flic.kr/p/e8xtQk [Fair Use]

A Reuters story is hyperventilating over the new sanctions on North Korea and their impact on the discovery in 2014 reported by the Wall Street Journal that there might be North Korean gold in the U.S. supply chain. In reviewing conflict minerals issues, some companies discovered that electronic components purchased by them might have contained gold refined by the Central Bank of the Democratic People’s Republic of Korea. So do the new sanctions make this problem worse?

To begin with, imports from North Korea have required licenses since Executive Order 13570 in 2011 and are not affected or changed by the new sanctions. But if I purchase an electronic component from China that uses North Korean gold, have I imported that North Korean gold into the United States when I import the electronic component? The WSJ article linked above quotes an “attorney at Nixon Peabody LLP, who specializes in sanctions,” as saying this: “It’s a problem, even if the raw materials are coming very indirectly through suppliers.”

This is far from clear. Neither the Executive Order nor the implementing North Korea Sanctions Regulations define what constitutes an import from North Korea. There is no reverse de minimis rule that covers imports of items with any particular level of North Korean content, say, one atom, one molecule, 10 percent or 25 percent. In the absence of any specific rule, it seems reasonable that if the North Korean gold has been substantially transformed into another product outside the United States, import of the transformed item is not the import of any good from North Korea within the meaning of E.O. 13570.

Perhaps the most relevant provision in the new sanctions imposed by Executive Order 13722 is section 2(a)(i) which permits OFAC to block any person that OFAC determines

to have sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea or any person acting for or on behalf of the Government of North Korea or the Workers’ Party of Korea, metal, graphite, coal, or software, where any revenue or goods received may benefit the Government of North Korea or the Workers’ Party of Korea, including North Korea’s nuclear or ballistic missile programs.

Although that seems to pose some peril, in my example, for the Chinese company buying Nork gold for its electronic components, it is far from clear that it covers, or would be used to block, a U.S. company that buys the electronic component incorporating the Nork gold. This seems even clearer given that section 1702(a)(1)(B) of the International Emergency Economic Powers Act, under which Executive Order 13722, only provides blocking authority for “property in which any foreign country or a national thereof has any interest” and would not permit the blocking of U.S. company (and all its property) simply because it imported some items incorporating some North Korean content.

Of course, given that the foreign manufacturer using North Korean gold risks blocking, U.S. importers would be well advised to remove Nork gold from their supply chain, both because of the risk to their supply chain and the commercial optics of dealing with a foreign manufacturer that winds up being blocked under the new sanctions.

Photo Credit: KCNA

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Copyright © 2016 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Mar

17

Fat Man Sanctioned over Little Boy


Posted by at 11:16 pm on March 17, 2016
Category: BISNorth Korea SanctionsOFAC

Fat Man and Little Boy via KCNA [Fair Use]Yesterday, the White House released an Executive Order ramping up U.S. sanctions on North Korea as a result of a recent ballistic missile test by the Norks and, it can be reasonably assumed, as a result of the Fat Man‘s recent claim to have his own Little Boy (or is it vice versa?). The new sanctions impose a complete ban on all exports of goods and services to North Korea, and as usual, with any executive order that gets drafted over at OFAC, the order, whether due to sloppy drafting or purposeful ambiguity, raises more questions than it answers.

Here’s the relevant provision that needs to be parsed:

Sec. 3. (a) The following are prohibited:

(i) the exportation or reexportation, direct or indirect, from the United States, or by a United States person, wherever located, of any goods,
services, or technology to North Korea;

(b) The prohibitions in subsection (a) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order or pursuant to the export control authorities implemented by the Department of Commerce, and notwithstanding any contract entered into or any license or permit granted prior to the effective date of this order.

Prior to this order licenses have been required by the Bureau of Industry and Security for all items subject to the EAR other than food or medicine. BIS would license, on a case-by-case basis, EAR99 items (other than luxury goods) to North Korea. Items on the Commerce Control List subject to NP or MT controls are subject to a presumption of denial.

The new provision, due to the “notwithstanding” clause of subsection (b), appears to invalidate all existing specific licenses for exports to North Korea. Whether this Order changes the existing policy of BIS for future licenses is unclear and depends on what is meant by “export control authorities implemented by the Department of Commerce,” which is anybody’s guess. What is clear is that items not subject to the EAR, which previously could be exported to North Korea, cannot now be exported to the North Korea by U.S. persons unless such items are transshipped through the United States and a license is obtained from BIS or an OFAC license is obtained if the items are not shipped back to the United States first.

At the same time as the Executive Order, OFAC issued nine new general licenses, such as General License No. 7 which authorizes mail and telecommunications services to North Korea. Other general licenses permit most of the usual exceptions to bans on exports of services such as emergency medical services, legal services, intellectual property services, and personal financial remittances. Oddly, the normal exception for services related to Internet-based communications is not included. So, you can send snail mail to the Norks but sending email is not allowed.

One nagging question is whether the travel and information exceptions in the Berman Amendment remain in place. Neither OFAC’s existing North Korea regulations nor the order contain a travel exemption, such as the one contained in section 560.210(d) of the Iranian Transactions and Sanctions Regulations. Nor does the order or those regulations contain an exemption for informational materials such as is found in section 542.211(b) of the Syria Sanctions Regulations.

Both the travel and informational material exceptions in the Berman Amendment may not be applicable because the Berman Amendment only applies to actions taken under the International Emergency Economic Powers Act (“IEEPA”). This latest executive order relies not only on IEEPA but also on the North Korea Sanctions and Policy Enhancement Act of 2016 (Public Law 114-122). Whether or not section 3 of the new order is authorized by the North Korea Sanctions and Policy Enhancement Act is not clear.  If section 3 is authorized under that statute, services related to travel to North Korea and the provision of informational services to North Korea would not be permitted unless OFAC specifically authorizes such services in its regulations or provides for specific licenses which, so far, it has not done.

Photo Credit: KCNA

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Copyright © 2016 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Feb

18

White House Will Sign New Nork Sanctions


Posted by at 8:54 pm on February 18, 2016
Category: North Korea SanctionsOFAC

Kim Il Sung Square in Pyongyang by Uri Tours [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/pQmzeV [cropped]White House spokesman Josh Earnest said yesterday that the President will sign H.R. 757, the “North Korea Sanctions and Policy Enhancement Act of 2016,” which imposes new sanctions on North Korea in the wake of a recent nuclear test and missile launch. The bipartisan bill passed the Senate unanimously (96-0) on February 10.

The initial text of the bill, in section 104(e), imposed a strict ban on all dealings in any property located in North Korea, originating from North Korea, or owned by the Government of North Korea. Because the bill did not define “property,” this provision could potentially have been read to impose a near-total embargo on the Norks. This was scaled back, no doubt due to the U.S. concerns that China, which the U.S. is currently seeking to bring on board for new U.N. sanctions, would object to the potential regional destabilizing effects of any measures that would have a significant impact on the North Korean economy.  The last thing China wants is a bunch of North Korean refugees pouring across its common border.

The only remaining export ban is a provision which appears to reimpose those export restrictions that are normally imposed on State Sponsors of Terrorism without actually putting North Korea back on that list. Section 203(a) provides:

A validated license shall be required for the export to North Korea of any goods or technology otherwise covered under section 6(j) of the Export Administration Act of 1979 (50 U.S.C. 4605(j)).

It is not immediately clear that this will change any of the extensive restrictions imposed by section 742.19 of the EAR beyond expanding the general policy of license denial beyond those items controlled for NP and MT reasons to all items controlled by the CCL.

The secondary sanctions of the bill are likely to have a broader impact. Section 104(a) defines activities that, if engaged in by any person, including a foreign person, require mandatory blocking of that person. This is a departure from the usual practice of granting the President the discretion to block persons who have engaged in prohibited conduct. The categories of prohibited conduct include import or export of goods from or to North Korea that are controlled on the Commerce Control List for CB, NP or MT reasons. Import of luxury goods into North Korea is also a ground for mandatory designation. So, if we ever find out who put that MacBook Pro into Kim Jong Un’s pudgy little hands, they’re going to be in big trouble.

The new sanctions bill also introduces an interesting wrinkle into the blocking rules for those designated under the new law. Under current OFAC guidance, entities owned 50 percent or more by a blocked person are also blocked. Under section 104(d), the automatic blocking extends to any entity “owned or controlled by, or to have acted or purported to have acted for or on behalf of, directly or indirectly” any party blocked under this act. That, of course, is a screening nightmare. Normally it is hard enough to determine ownership. Determining whether a party is controlled by, or, worse, acting on behalf of, a blocked party will be next to impossible.

Note:  posting has been, and will be, light this week because of work and travel considerations. Normal posting will resume next week.

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Copyright © 2016 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Oct

7

New Sanctions Against the Norks Introduced in Congress


Posted by at 11:21 pm on October 7, 2015
Category: North Korea Sanctions

Kim Jong Un Official Photo - Fair Use

Yesterday Senator Cory Gardner introduced S.2144, entitled the “North Korea Sanctions Enforcement Act.” (The official text of the proposed bill is not yet available at congress.gov but a discussion draft can be found here.)

Not surprisingly, the new bill seems mostly to be a feel-good exercise or a little Congressional chest-beating after not being able to sink the Iran deal.  Whether or not this bill has a chance of passage is difficult to predict.

The bill would do the following:

  • designate North Korea as a jurisdiction of primary money laundering concern;
  • instruct the President to come up with a plan to make U.N. members enforce U.N. sanctions against Korea;
  • require export licenses under section 6(j) of the (expired) Export Administration ACt for goods that contribute to North Korea’s military or terrorism capabilities;
  • enact an arms embargo against North Korea;
  • withhold foreign assistance from countries that supply lethal military equipment to North Korea;
  • prohibit federal procurement from persons engaging in certain activities with North Korea, such as exporting luxury goods;
  • increase customs inspections of goods transported through foreign ports that do not engage in adequate inspection activities to prevent exports of certain goods to North Korea; and
  • require the State Department to issue enhanced travel warnings regarding travel to North Korea.

Some of these provisions certainly seem unnecessary. Licenses are already required for all exports to North Korea other than food and medicine designated EAR99, and North Korea is already designated under section 6(j) as a country supporting international terrorism. Further, there is already an arms embargo in place against North Korea. I suppose these provisions might limit the ability of the White House to lift these sanctions but, frankly, it seems unlikely that this White House, or any White House in the foreseeable future is likely to start selling arms to the Norks or drop licensing requirements for other exports to them.

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Copyright © 2015 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)