United States: New North Korean Sanctions: Ratcheting Up The Pressure On Kim Jong-Un

The world has recently ratcheted up sanctions on North Korea in response to the regime's aggressive behavior.  Sanctions against North Korea are now broader in scope than ever before and could impact companies that previously were unaffected by them.  Below, we summarize these new rules, with a focus on compliance and potential impact.

On January 6, 2016, North Korea conducted a purported test of a hydrogen bomb, its fourth nuclear test over the past decade.  Not long after, on February 7, 2016, North Korea carried out a test of a long-range ballistic missile technology.  On March 2, 2016, the United Nations issued its response: a unanimous Security Council resolution, UN Security Council Resolution 2270 ("Resolution"), which enacts additional sanctions on North Korea.

United Nations Member States, including the United States, European Union (EU) countries, and China, quickly began enacting new resolutions to implement the UN Resolution, and, in some cases, imposing their own additional sanctions.  While various sanctions have been in place against North Korea for some time, the sanctions imposed by Resolution 2270 are more extensive.  In particular, if enforced, the sanctions seem likely to impact Chinese-Korean trade, which could result in significant pressure on the North Korean regime.

Enforcement, however, is largely left up to the UN Member States that implement the Resolution.  Implementation efforts to date of several member states, including the U.S., EU countries, and China, are analyzed below.

UN Security Council Resolution 2270

In response to North Korea's test of a nuclear weapon and ballistic missile technology in January and February 2016, on March 2, 2016, the UN Security Council unanimously agreed upon Resolution 2270.  North Korea's nuclear weapons tests were in violation of various UN resolutions to which North Korea, as a UN Member State, was a party.  Moreover, the Security Council condemned the tests as a "challenge" to the Treaty on Non-Proliferation of Nuclear Weapons, as well as to peace and stability in the region.

The sanctions imposed against North Korea by Resolution 2270 are extensive, but many contain vague language or significant caveats, so much will depend on how Member States – and especially China – implement the sanctions.

The most significant provisions include the following:

  • Crackdown on illicit foreign trade channels. The Security Council attempted to close some of the foreign channels that North Korea uses to facilitate illicit trade.  The UN will attempt to track and identify for sanction North Korean shell corporations.  Furthermore, Member States are required to expel any foreign person – including North Korean diplomats – that the state finds are assisting North Korea in the evasion of sanctions.
  • Shipping and transport limitations. The Resolution requires member states to inspect cargo that originated in North Korea for items shipped in violation of sanctions.  Additionally, Member States are required to forbid their citizens from leasing or chartering ships or aircraft to North Korea, or providing any services (insurance, crew, etc.) to North Korean vessels. Furthermore, ships and aircraft that a Member State has "reasonable ground[] to believe" contain goods that should not be sold or transported under the sanctions regime, or that are owned by certain sanctioned entities, are not to be allowed in Member State ports or airports.
  • Limitation of mineral exports from North Korea. The Resolution prohibits North Korea from selling or transferring gold (which it often uses as payment in transactions to evade sanctions); rare earth metals; and certain other rare ores. Furthermore, North Korea is similarly banned from selling coal and iron.  However, the ban on coal and iron is subject to certain exceptions.  The most significant is that sales of coal and iron can occur when they are "exclusively for livelihood purposes" and cannot generate revenue for North Korea to engage in prohibited activities.
  • Restrictions on financial institutions. The Resolution further isolates North Korea and makes it more difficult for foreign companies to do business there by placing significant restrictions on both North Korean and Member State financial institutions.  Member States must prohibit new North Korean banks in their territories and close existing North Korean banks in their territories by May 31, 2016.  Furthermore, Member States must forbid their banks from opening new branches within North Korea; already existing branches located in North Korea may stay, unless the Member State has "credible information that provides reasonable grounds to believe" the bank's activities could be contributing to prohibited North Korean activities.
  • Enhanced arms control measures. Among other things, the Resolution contains a "catch all" provision that forbids transfer to or from North Korea of any item (except food and medicine) that "could directly contribute" to the military's "operational capabilities."  It also directs Member States to freeze assets within their jurisdiction that are associated in any way with prohibited North Korean activities (such as the nuclear or ballistic missile testing).  

The Resolution is binding on Member States, but the exact method of implementation is left up to each Member State.  Some Member States, such as the U.S., are doing even more than required under the Resolution.  Others, such as China, may take a take different approach.

Implementation by the U.S., and Additional U.S. Sanctions

The United States already had in place a stringent North Korean sanctions regime and implemented new sanctions that built upon the old regime and were even stronger than the measures required under the Resolution.  New sanctions came in the form of a statute, Executive Order from the President, and action by the Office of Foreign Asset Controls (OFAC).

To begin with, on February 18, 2016, before the United Nations agreed upon Resolution 2270, the United States enacted a law directing the President of the United States to toughen sanctions on North Korea,  The North Korea Sanctions and Policy Enhancement Act of 2016 (the "N. Korea Act").  Among other things, the N. Korea Act specifies both mandatory and discretionary categories of entities that the President should sanction.  Generally speaking, the measures of the N. Korea Act are stricter than what was required in the UN Resolution.  For example, there was no discussion of human rights abuses in the Resolution; however the N. Korea Act requires the President to sanction any entities who were knowingly and significantly involved in them.

The President implemented both the N. Korea Act and the UN Resolution via Executive Order 13722, issued March 15, 2016 (the "Order").  The Order set out changes to the United States' sanctions on Korea and encompasses sanctions more restrictive than those found in the Resolution.  For example:

  • Frozen North Korean assets. The Order blocks all property or interests of the North Korean government or the Workers' Party of Korea that are in the U.S. or come into the U.S., or that are within possession or control of any U.S. person. The Resolution only required countries to block such assets if they were associated with prohibited North Korean activities.
  • Other frozen assets. The Order also freezes the assets of other entities. The Order freezes the assets of any entities that operate in the transportation, mining, energy, and financial services industries in North Korea; entities that have engaged in human rights abuses; and any entity that has engaged in activities "undermining cyber security" at the behest of the North Koreans.  This goes beyond what was required in the Resolution, which focused instead on restricting the financial industry and any items that could contribute to North Korea's military capability.
  • Exports/Investments generally prohibited. Exports from the U.S. to North Korea are already subject to extensive prohibitions under the Export Administration Regulations.  Under the Order, all exportation from the U.S. or by a U.S. person of any good, service, or technology to North Korea is prohibited.  Also prohibited is any new investment in North Korea by a U.S. person.  Generally speaking, without a license, a U.S. person cannot do business with any North Korean entity.  This again goes beyond what was required by the Resolution.

Additionally, the Order prohibits "approval, financing, facilitation, or guarantee" by any U.S. person of an action by a foreign person that would be prohibited under U.S. law.  In other words, a U.S. entity cannot help anyone else to do what it could not do itself.  Although what exactly constitutes "facilitation" is not defined, OFAC generally interprets this prohibition broadly.  Thus, for example, even if a U.S. person merely refers a prohibited North Korea transaction to a non-U.S. person, OFAC would likely view that referral as prohibited facilitation.

Finally, as is common in sanctions program, OFAC also issued certain general licenses that permit the export of some narrow categories of items without a specific license from OFAC.  The general licenses cover issues such as export of food and medicine, humanitarian aid, and non-commercial, personal remittances.  It is important to note that these general licenses are very specific.  Thus, before undertaking any transaction in reliance on a general license, it is important to confirm that the activity is fully covered by the scope of the general license.

Implementation by the European Union

The EU maintains restrictive measures against North Korea since the implementation of UN Security Council Resolution 1718 (2006) by the Council of the European Union's common position 2006/795/CFSP of 20 November 2006 and Council Regulation (EC) No 329/2007 of 27 March 2007.

Following the adoption of UN Resolution 2270, the EU has implemented restrictive measures in line with the broadened scope of the UN sanctions regime. In particular, in order to prevent asset flight, the EU Commission immediately aligned the list of persons and entities subject to the freeze of assets with the respective addition of 16 natural person and 12 entities by UN Resolution 2270 (Commission Implementing Regulation (EU) 2016/315 of 4 March 2016).

The transposition of the more complex new sectoral sanctions included in UN Resolution 2270 followed on March 31, 2016, by the adoption of Council Decision (CFSP) 2016/476. This Council decision, in its recitals, precisely lists the amendments introduced by UN Resolution 2270 and implements the respective restrictive measures including the prohibition of sale or supply of aviation fuel and the prohibition to establish new joint ventures with North Korean banks and the jurisdiction of EU Member States. On March 31, 2016, the EU also listed the Korea National Insurance Corporation (KNIC), because KNIC is generating substantial foreign-exchange revenue which could contribute to North Korea's nuclear-related, ballistic-missile-related, or other military programs.

In addition to the implementation of UN Resolution 2270, according to EU officials, the EU has started to prepare some additional, autonomous sanctions against North Korea. The adoption of additional, autonomous sanctions by the EU is particularly promoted by France, one of the countries that, other than the EU itself, does not maintain any diplomatic relations with North Korea.

These additional restrictive measures most likely will include sanctions against persons and entities linked to North Korea's nuclear program, which would subject those persons and entities to travel bans and asset freezes.   In addition, such sanctions would prohibit EU entities, EU citizens and any other persons acting from within the EU territory from making available, directly or indirectly, funds or economic resources to or for the benefit of those persons. The notion of making economic resources "indirectly available" is rather broad and can, as the case may be, include the transfer of goods to a non-listed entity that is controlled by a listed natural or legal person. It is therefore of particular importance to conduct detailed diligence including the majority shareholders of a potential North Korean business partner.

Implementation by China

In the wake of the adoption of UN Resolution 2270, it was widely understood and reported that the effectiveness of the new sanctions would largely hinge on the strength of cooperation and enforcement from China, North Korea's largest trading partner. Early this month, China took concrete steps to demonstrate its support for the latest round of sanctions against North Korea.

In a joint announcement ("Joint Announcement") issued on April 5, 2016 (and subsequently published in English translation on April 7, 2016), China's Ministry of Commerce (MOFCOM) and General Administration of Customs announced an embargo enacting some core elements of the sanctions announced in UN Resolution 2270 (MOFCOM Announcement No. 11 of 2016). The specific components of the Joint Announcement are:

  • Limitation on coal and iron imports. The Joint Announcement prohibits the import into China of coal, iron, and iron ore from North Korea. This prohibition enacts the provisions of paragraph 29 of the Resolution and is expressly subject to the same two exemptions set forth in the Resolution. Specifically, the prohibition does not apply to:
    • (1) transactions determined to be solely for livelihood purposes; and
    • (2) imports of coal determined to originate outside of North Korea and transported through North Korea solely for export from the Port of Rason, as long as the transaction at issue in each case does not involve North Korea's nuclear or ballistic missile programs or otherwise generate revenue for prohibited activities.
  • Prohibition on import of gold, titanium ore, vanadium ore, and rare earth minerals. The Joint Announcement forbids any import into China of gold, titanium ore, vanadium ore, and rare earth minerals from North Korea. This prohibition enacts the provisions of paragraph 30 of the Resolution and is not subject to any exceptions.
  • Prohibition on export of aviation fuel. The Joint Announcement forbids the export to North Korea of aviation gasoline, naphtha aircraft fuel, kerosene aircraft fuel, and kerosene rocket fuel. This prohibition enacts paragraph 31 of the Resolution and expressly is subject to the same two exemptions set forth in the Resolution. Specifically, the prohibition does not apply to (1) transactions specifically approved by the Sanctions Committee of the UN Security Council for verified basic humanitarian needs, although "special arrangements must be made to effectively monitor the delivery and use of such fuel," and (2) aircraft fuel that is sold to civilian passenger airplanes outside North Korea or is supplied solely for use in trips from and to North Korea.

Each of these categories of prohibitions could be important aspects to the overall sanctions regime against North Korea. For example, the ban on import of gold and other minerals targets an activity that has been identified as one of the more lucrative revenue sources for the North Korean government, and the prohibition of the export of aviation fuel targets key commodities necessary for the North Korea missile program.

A key question about the potential effectiveness of the ban on the import of coal and iron concerns the scope and likely application of the exceptions. The Joint Announcement, consistent with the terms of the Resolution, implemented controls designed to police the exceptions. For example, in order to establish that an import of coal or iron ore is only for purposes of livelihood, the importer must submit to Chinese customs a specified form undertaking to that effect, and Chinese customs authorities are empowered to reject the import on the basis of "solid information" that the import does not fall within the exemption.

With respect to the exception for coal being transshipped through the Port of Rason, the importer must file an application (and other relevant information) with the Chinese provincial commerce authority, which then will be transmitted from MOFCOM  to the Ministry of Foreign Affairs, and then to the Sanctions Committee of the UN Securities Council, before the import transaction can proceed. The importer is also required to submit to Chinese customs a certificate of origin and a specified form undertaking that the import qualifies for the exception, and Chinese Customs authorities are empowered to reject the import if they confirm by "solid information" that the exception does not properly apply.

The Joint Announcement is not the first time that Chinese authorities have promulgated formal statements enacting UN sanctions against North Korea. For example, in response to UN sanctions against North Korea in 2013, various Chinese administrative agencies, including MOFCOM, MIIT, the General Administration of Customs, and the China Atomic Energy Authority issued a joint announcement prohibiting the export to North Korea of specified goods and technologies related to weapons of mass destruction. The Ministry of Transport also has issued announcements implementing asset freeze and travel restrictions on certain North Korean officials as well as asset freezes of North Korean firms, including Ocean Maritime Management Company Limited (OMM), as required by prior UN sanctions. A key source of authority often invoked by sanctions implementing directives is the Chinese Foreign Trade Law, which authorizes the Chinese government to restrict or ban the import or export of goods and technologies, including goods and technologies restricted by authority of international agreements to which China is a party. Depending on the nature of the sanction, violations can result in administrative customs actions or significant penalties under the Foreign Trade Law, including the confiscation of illegal gains and a penalty of up to five times the amount of illegal gains, as well as potential criminal liability.

As with any sanctions framework, the ultimate impact and effectiveness of the measures implemented in the Joint Announcement will depend largely on how the sanctions are enforced—an especially important consideration given the vague standards and considerable discretion inherent in the practical application of the Joint Announcement's prohibitions. A spokesman for the General Administration of Customs has stated that Chinese customs intends to strictly enforce the newly announced North Korea embargo measures, and state-controlled media has lauded the Joint Announcement as showing that Beijing is "strictly honoring the resolution of the UN Security council." And anecdotal reports suggest that Chinese customs officials have recently increased customs inspections of cargo moving through the China-North Korea border, although other reports suggest that relevant Chinese customs offices lack the necessary staff to inspect all cargo to ensure that no items are transferred in violation of UN sanctions, as called for by paragraph 18 of the Resolution.

Only time will tell whether the embargo measures implemented by the Joint Announcement will be effectively enforced. Nevertheless, China's work with the UN Security Council in passing the Resolution and ratcheting up sanctions on North Korea is a concrete and visible step that demonstrates China's increased willingness to cooperate with the international community to respond to North Korea's continued nuclear provocations.

Impact and Takeaways

The new North Korean sanctions are more extensive than ever before and seem more likely to be enforced more strictly than past sanctions regimes.  This could result in restrictions on businesses that had not before been impacted, particularly in the finance and commodities industries.  Furthermore, North Korea is already threatening additional nuclear tests, which could result in further sanctions.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Timothy Blakely
Michael C. Mateer
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.