Don’t turn off those North Korea sanctions filters just yet. Despite the glad-handing between Donald Trump and Kim Jong-un in Singapore earlier this month, the legal landscape surrounding North Korea sanctions remains unchanged since March 2018. AML (anti-money laundering) risks will remain a focus of attention in Hong Kong and elsewhere.
On 22 June 2018, the Hong Kong government released a long-awaited amendment to the United Nations Sanctions (Democratic People’s Republic of Korea) Regulation. The amendment is meant to plug a tanker-sized gap in Hong Kong’s sanctions laws by giving effect to five Security Council resolutions adopted since March 2016. It comes six months after the issuance of UN Security Council Resolution 2397, on 22 December 2017, and about three-and-a-half years since the regulation’s last update, in December 2014.
Meanwhile, on the same day in the US, Donald Trump signed a presidential notice extending the national emergency declared under Executive Order 13466 , in 2008, and subsequent executive orders, with respect to North Korea. The notice means that US sanctions against North Korea will continue for at least one more year, unless terminated by the president.
According to the notice: “The existence and risk of proliferation of weapons-usable fissile material on the Korean Peninsula and the actions and policies of the Government of North Korea continue to pose an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.”
Global Pressure Campaign
Before CIA (Central Intelligence Agency) Director Mike Pompeo’s Kissinger-esque secret visit to North Korea over Easter weekend this year, the US and its allies were moving full steam ahead with a campaign of “maximum pressure” to compel Pyongyang to abandon its nuclear weapons development program and other malign activities. The US financial embargo went into overdrive with the adoption of Executive Order 13810, in September 2017, which threatened secondary sanctions against non-US persons and financial institutions involved in “significant” transactions with North Korea.
With the support of the UN, the Trump administration laid the groundwork for new restrictions on trading in coal, iron, seafood, textiles, luxury goods, crude oil and other goods, and a ban on North Korean nationals working abroad. UN member states placed renewed focus on combating ship-to-ship transfers, front companies, and other forms of North Korean sanctions evasion, as highlighted in revealing Panel of Experts reports. And who can forget the “largest ever” package of North Korea sanctions announced by the US Treasury Department in February 2018.
In Hong Kong and elsewhere, financial institutions raced to upgrade their AML and sanctions controls to detect North Korean activity. In January 2018, Sigal Mandelker, the US Treasury’s Under Secretary for Terrorism and Financial Intelligence, visited Hong Kong and chided the financial hub for playing host to North Korean front companies and its outdated North Korea regulatory framework. Following Mandelker’s visit, a stream of information requests from US government agencies and the HKMA (Hong Kong Monetary Authority) stretched compliance resources to the limit. The Hong Kong government highlighted its efforts to tighten its North Korea regulations as part of its national AML/CTF risk assessment, published in April 2018, ahead of a high-stakes mutual evaluation by the FATF (Financial Action Task Force) scheduled for later this year.
Raising the stakes, on 13 February 2018, the US FinCEN (Financial Crimes Enforcement Network) proposed adding Latvia’s ABLV Bank to the dreaded Section 311 List, in part for its failure to conduct adequate customer due diligence in connection with North Korea-related transactions. Within days of FinCEN’s announcement, ABLV Bank announced it would close down operations.
It came as a surprise, then, when Donald Trump announced his plans for a US-North Korea peace summit to be held in Singapore on 12 June 2018. Judging by the press reports, the summit was a diplomatic success (notwithstanding Trump’s decision to cancel and then reschedule the summit two weeks earlier), and tensions between North Korea and the international community have noticeably fallen.
Not Off the Hook
What does this all mean for financial institutions?
Despite the positive headlines, the Trump administration has made no public assurances so far regarding North Korea sanctions relief, and no action has been taken in the UN Security Council to ease restrictions under Resolution 2397. If anything, last week’s US and Hong Kong actions demonstrate that the regulatory momentum toward stronger North Korea sanctions still exists.
US enforcement agencies are sure to continue targeting illicit transactions conducted through the US financial system on behalf of North Korea. Investigations and enforcement actions that began during the sanctions ramp-up from 2016 to 2018 will invariably continue. As demonstrated by recent settlements by the US OFAC (Office of Foreign Assets Control) involving violations of the Sudanese Sanctions Regulations, a change in the diplomatic landscape will not forgive past breaches.
There is also the risk that the Trump administration’s efforts to woo the Kim regime will fail, or that future US administrations will take a harsher tone toward Pyongyang. As shown with the Joint Comprehensive Plan of Action, US sanctions policy can turn on a dime.
Hong Kong, for its part, must still undergo a potentially tricky FATF mutual evaluation later this year following months of negative publicity caused in part by the US Treasury Department, UN Panel of Experts, and the media’s portrayal of the city as a hub for North Korean transactions. To the extent banks’ customer due diligence and AML monitoring programs have failed to detect North Korea-related activity, there may be an incentive for Hong Kong regulators to crack down, regardless of whether banks have violated Hong Kong sanctions per se.
Nick Turner is a Registered Foreign Lawyer at Clifford Chance Hong Kong where he specialises in economic sanctions and anti-money laundering. He publishes a weekly summary of sanctions news and commentary available on LinkedIn. The views expressed here are his own and do not represent legal advice.