In Latest Salvo, the Trump Administration Pressures Non-U.S. Companies and Persons to Cut Financial and Business Ties with North Korea

September 26, 2017

On September 20, 2017, the Trump Administration issued a new Executive Order No. 13810, imposing additional sanctions on the Democratic People’s Republic of Korea (“DPRK” or “North Korea”), with dramatic implications for foreign persons involved in North Korean trade.[1]  Most notably, the new measures borrow from the Obama Administration’s sanctions playbook by imposing sanctions on specific sectors and threatening to cut off access to the U.S. banking system for any person involved in North Korean trade.  The Order has significant implications for foreign financial institutions, and in the words of Department of the Treasury Secretary Steven Mnuchin, effectively puts foreign banks “on notice that, going forward, they can choose to do business with the United States, or with North Korea, but not both.”

The sanctions could have a profound impact on China, North Korea’s primary trading partner.  Immediately prior to releasing the Order, President Trump reported that the Chinese Central Bank had ordered the nation’s banks to “immediately stop doing business with North Korea”—although China’s foreign ministry spokesman denied that the country had agreed to go that far.  Other press reports indicated that China’s central bank told banks to strictly implement the existing United Nations sanctions against North Korea.

North Korea has posed one of the most persistent U.S. foreign policy dilemmas since the end of the Cold War, and while the United States has maintained some form of sanctions against the Pyongyang regime for the better part of the last century, this most recent Executive Order is a dramatic departure from the measures imposed under prior administrations.[2]  As we reported last month, the U.S. Congress recently passed additional North Korea sanctions in response to North Korea’s first successful test of an intercontinental ballistic missile on July 4, 2017.  This new Order goes farther, replicating key features of the Office of Foreign Assets Control (“OFAC”) sanctions programs involving Cuba, Iran, and Russia.  Notably, the new North Korean sanctions include a vessel blockade, secondary, and sectoral sanctions.

Critically, the Trump Administration’s Executive Order grants OFAC authority to suspend U.S. correspondent account access to any foreign bank that knowingly conducts or facilitates significant transactions tied to trade with North Korea.  The Order authorizes OFAC to impose sanctions on foreign financial institutions that knowingly conduct or facilitate any significant transaction (i) on behalf of any person whose property and interests in property have been blocked under the DPRK sanctions, or (ii) in connection with trade with North Korea.  Such sanctions could include prohibitions on opening or maintaining correspondent accounts or payable-through accounts in the United States—measures that Congress and the Obama Administration imposed on Iran to bring Iran’s leadership to the negotiating table in advance of the nuclear deal, the Joint Comprehensive Plan of Action (“JCPOA”).  In the Iran context, the threat of losing access to the U.S. market severely restricted the willingness of foreign financial institutions to do business with the country, dealing a massive blow to the Iranian economy although OFAC rarely enforced the measures.  In July 2012, OFAC sanctioned two financial institutions—Bank of Kunlun in China and Elaf Islamic Bank in Iraq—for their dealings with Iranian banks, effectively cutting those institutions off from the U.S. market.

This is not the first attempt to restrict North Korea’s access to the global banking community.  In 2016, OFAC imposed a comprehensive ban on the export of goods, technology, and services to North Korea, including financial services.  Also in 2016, the Treasury Department classified North Korea as a “jurisdiction of primary money laundering concern” under Section 311 of the USA Patriot Act, 31 U.S.C. § 5318A, effectively prohibiting the use of correspondent accounts on behalf of North Korean financial institutions and requiring that U.S. financial institutions implement additional due diligence with regard to entities linked to North Korea.  However, the threat of the potential application of correspondent and payable-through banking restrictions on non-North Korean financial institutions could have a more significant impact on North Korea than these other measures.

The Trump Administration’s Executive Order also lays the groundwork for the imposition of sectoral sanctions by granting OFAC the authority to designate those involved in a long list of North Korean economic sectors: construction, energy, financial services, fishing, information technology, manufacturing, medical, mining, textiles, or transportation industries, as well as those who own, control, or operate any port in North Korea, and North Korean persons, including those engaged in commercial activity that generates revenue for the Government of North Korea or the Workers’ Party of Korea.  A more limited set of sectoral sanctions were imposed on Russia in 2014, and restricted U.S. persons from engaging in certain types of activities with persons in certain sectors of the Russian economy.  By contrast, a designation under this most recent Executive Order results in the blocking of all property and interests in property.

Significantly, the Executive Order also gives OFAC the authority to sanction any entity—including those outside of the U.S. and North Korea—that are found to have engaged in at least one significant  importation from or exportation to North Korea of any goods, services, or technology, or to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this Order.  This puts significant pressure on foreign financial institutions to determine whether their customers are involved in North Korean trade, lest they become designated and trigger sanctions that could result in losing access to U.S. financial markets.  OFAC has not made any new designations under this Executive Order, although it has revised the Frequently Asked Questions regarding the North Korea sanctions to refer to the new Order.

The Order also prohibits any aircraft or vessel from entering the United States for 180 days after visiting North Korea.  Foreign vessels that engage in a ship-to-ship transfer with vessels that had visited North Korea within the previous 180 days are similarly prohibited from calling at a port in the United States.  OFAC also issued a new General License 10 to allow such vessels to enter the United States in emergency situations.

While some have remarked that these new measures indicate a move from “economic pressure” to “economic warfare,” the reality is that there is already limited trade and dealings with North Korea.  The few countries that maintain commercial links — including several in Africa — may now risk sanctions if they do not alter their behavior.  However, the true test of these sanctions lies ahead:  with the exception of the aircraft and vessel restrictions, no part of the Executive Order is self-executing — as such, much as with application of the Iran sanctions during the Obama Administration, the true power of the Trump Administration’s Order will depend upon OFAC’s ability to use the threat of sanctions to cajole and convince North Korea’s few remaining trade and finance partners to meaningfully increase North Korea’s isolation and economic stress.  With a reduced diplomatic corps, federal hiring freeze, and significant demands on existing resources,  including the rollback of steps taken by the Obama Administration to normalize relations with Cuba and potential withdrawal from the JCPOA, it is possible that the Administration may ultimately lack the sustained energy and resources required to implement the kinds of sanctions announced in the Executive Order.

[1]  Exec. Order No. 13810, 82 Fed. Reg. 44705 (September 20, 2017).

[2]   OFAC’s current North Korea sanctions program began in 2008, when then President George W. Bush declared a national emergency to deal with the threat posed by North Korea’s proliferation of weapons of mass destruction (“WMD”).  From 2008 to 2016, the United States gradually expanded the scope of the North Korean sanctions, including blocking the property of certain persons (individuals and entities) and prohibiting certain types of transactions.  Since 2016, various pieces of U.S. legislation have expanded and strengthened U.S. sanctions.

The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Stephanie Connor and Christopher Timura.

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