On September 21, 2017, President Trump, in response to North Korea's nuclear activities, issued an Executive Order "Imposing Additional Sanctions with Respect to North Korea" (EO). The EO provides for expansive designation authority against non-US persons and entities and, accordingly, has the potential to significantly expand existing US sanctions risk to a range of foreign financial institutions, shippers, insurers and other persons and entities that participate in or facilitate transactions involving North Korea.
The Countering America's Adversaries Through Sanctions Act (CAATSA),1 which became law on August 2, 2017 [See Dentons' alert " US enacts significant sanctions legislation against Iran, Russia and North Korea: Key takeaways"], gave the president authority to impose new sanctions on non-US persons for North Korea-related activities and targeted transactions involving the precious metals, mining, energy, textile, transportation, fishing, financial services, and agriculture sectors. The new measures announced on September 21, 2017 via the EO widen the scope of available sanctions and aim to curtail North Korea's access to the international financial system and international trade.
The EO provides additional bases for targeting non-US persons, including foreign financial institutions that engage in transactions involving North Korea, even where those transactions occur wholly outside the US and do not involve US persons;2 US-origin goods, services or technology; or the US financial system. Non-US persons engaging in the targeted transactions may be subject to blocking sanctions, other financial controls or limitations, and travel restrictions.
The EO also identifies numerous additional bases on which to designate North Korean persons as Specially Designated Nationals (SDNs) — including the mere fact of being a North Korean national or entity. The EO specifically targets multiple major sectors of the North Korean economy, as well as North Korean port owners and operators.
Summary of the new US sanctions measures
The EO (1) establishes new criteria under which the Office of Foreign Assets Control (OFAC) may list a person or entity as an SDN; (2) prohibits vessels and aircrafts that have called or landed at a port or location in North Korea in the previous 180 days, and vessels that have engaged in a ship-to-ship transfer with such a vessel in the previous 180 days, from entering the US; (3) blocks funds transiting certain accounts determined by OFAC to be linked to North Korea that come within the US or possession of a US person; and (4) provides OFAC authority to impose sanctions on a foreign financial institution that knowingly conducts or facilitates (i) any significant transaction on behalf of certain blocked persons or (ii) any significant transaction in connection with trade with North Korea. Further action from OFAC will be required to implement the changes authorized by the EO, including making specific designations of people or entities under the new criteria. However, both US and non-US persons should take steps now to assess and address the additional sanctions risk posed by the new EO.
Sanctions designations
The EO authorizes the US to block the assets of and impose a ban on entry into the US against any person determined to meet the following criteria specified in Section 1(a) of the EO:
- Operating in the construction, energy, financial services, fishing, information technology, manufacturing, medical, mining, textiles, or transportation industries in North Korea;3
- Persons or entities that own, control, or operate any port in North Korea, including any seaport, airport, or land port of entry;4
- Persons or entities that have engaged in at least one significant importation from or exportation to North Korea of any goods, services or technology;5
- North Korean persons, including a North Korea person that has engaged in commercial activity that generates revenue for the Government of North Korea or the Workers' Party of Korea;6
- Persons or entities that have materially assisted, sponsored, or provided financial material or technological support for goods or services to, or in support of, any person whose property and interests in property are blocked pursuant to EO of September 21, 2017;7 or
- Entities owned or controlled by, or that have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the EO of September 21, 2017.8
Two of these new bases for designation have major implications for non-US, non-North Korean persons. Section 1(a)(iii) of the EO authorizes sanctions against any person found to have engaged in at least one significant importation from or exportation to North Korea of any goods, services or technology. Section 1(a)(v) of the EO allows for the blocking of non-US persons determined to have materially assisted, sponsored, or provided financial material or technological support for, or goods or services to or in support of, any person designated as an SDN pursuant to the EO.
The EO does not define either "significant" or "materially" for purposes of these new sanctions. Guidance in other sanctions programs provide little clarity as to whether a specific transaction would be deemed "significant" or considered to "materially assist" an SDN.9 What is clear, however, is that non-US persons conducting business involving North Korea, or providing services to persons or entities engaged in trade with North Korea, face a significantly increased risk of sanctions exposure, including asset blocking.
In addition, while no designations pursuant to the EO have been made as of the date of this alert, OFAC is also likely, in the near future, to designate additional SDNs under the criteria listed in Sections 1(a)(i), (ii), (iv) and (vi). These impending changes highlight the importance of continued diligence in screening counterparties to protect against conducting business with an SDN, which could expose both US and non-US persons to sanctions or enforcement risk.
Financial sanctions
The EO also establishes a new framework for US sanctions on foreign financial institutions engaged in certain transactions involving North Korea, regardless of whether those transactions are lawful under the local laws applicable to the foreign financial institution. Under the EO, foreign financial institutions that knowingly conduct or facilitate any "significant transaction" on behalf of persons blocked in connection with North Korea-related activities, or knowingly conduct or facilitate any significant transaction in connection with trade with North Korea, may be:
- Prohibited from opening or subject to strict conditions on the maintenance of correspondent accounts or payable-through accounts in the US; or
- Subject to blocking sanctions, whereby all property and interests in property in the US of such financial institution is blocked.10
As noted above, there is uncertainty about what would constitute a "significant" transaction. Foreign financial institutions facilitating or conducting business involving North Korea, or with clients in countries that have significant ties to North Korea (such as China or Russia) will need to reassess their risk in light of these enhanced sanctions.
The EO also requires the blocking of funds that originate from, are destined for, or transit a foreign bank account that the US determines (1) is owned or controlled by a North Korean person, or (2) has been used to transfer funds in which a North Korean person has an interest.
Aviation and shipping sanctions
The EO effectively prohibits any aircraft or vessel11 that has landed or called at any port or location in North Korea from landing or calling in the US within 180 days after departure from North Korea. This prohibition extends to vessels that have engaged in a ship-to-ship transfer with a vessel that has called at a port in North Korea.12
Conclusion
The new sanctions authorities outlined last week come at a time of increased rhetoric and escalating diplomatic tensions between the US and North Korea. They also occur in the context of efforts by the Trump administration to place pressure on nations that maintain significant trade and financial ties to North Korea to reduce those ties to more effectively limit North Korea's nuclear program and belligerent conduct. Given the widespread congressional support for increased sanctions against Russia in CAATSA, and the president's stated desire to press China to take greater action, the prospect of designation for Russian or Chinese persons or entities should not be ignored.
The recent changes to the North Korea sanctions program make it increasingly similar in nature to US sanctions against Iran as the latter existed prior to the Joint Comprehensive Plan of Action (JCPOA). The new North Korea sanctions, like the pre-JCPOA Iran sanctions before it, target non-US persons for engaging in certain conduct with the sanctioned country, even absent a US nexus.
Several of the provisions in the EO of September 21, 2017 do not have immediate effect and require OFAC to designate targets. Others, however, immediately increase the sanctions risk facing even non-US persons engaging in activity with no nexus to the US. As a result, any person, including non-US persons, who may have business activity that involves North Korea should promptly conduct a risk assessment, monitor changes to the North Korea sanctions program (including new designations), and implement any appropriate compliance improvements.
Footnotes
1 Pub. L. No. 115-44, 131 Stat. 886 (August 2, 2017).
2 The EO of September 21, 2017 and the related North Korea Sanctions Regulations (31 C.F.R. Part 510) define US Person as "any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States."
3 Exec. Order, Section 1(a)(i) (September 21, 2017)
4 Exec. Order, Section 1(a)(ii) (September 21, 2017)
5 Exec. Order, Section 1(a)(iii) (September 21, 2017)
6 Exec. Order, Section 1(a)(iv) (September 21, 2017)
7 Exec. Order, Section 1(a)(v) (September 21, 2017)
8 Exec. Order, Section 1(a)(vi) (September 21, 2017)
9 See, e.g., 31 C.F.R. § 561.404, Significant transaction or transactions; significant financial services; significant financial transaction.
10 OFAC also issued a revised general license authorizing certain debits from blocked accounts under limited circumstances.
11 This provision of the EO specifically applies to any aircraft or vessel in which a foreign person has an interest, but those owned by US persons are already generally prohibited from landing or calling in North Korea.
12 OFAC also issued a general license allowing aircraft or vessels subject to the ban to land or call at US ports under limited circumstances.
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