The U.S. Department of the Treasury ("Treasury") Financial Crimes Enforcement Network ("FinCEN") issued a final rule to further block North Korean access to the U.S. financial system and warned institutions about strategies employed by North Korean state-owned enterprises to gain access to international financial systems.
In the final rule issued pursuant to Section 311 of the USA PATRIOT Act, FinCEN banned U.S. financial institutions from opening or operating correspondent accounts for the Bank of Dangdong Co., Ltd. In addition, the rule requires financial institutions to take measures to (i) avoid processing transactions for correspondent accounts if such transactions involve the Bank of Dangdong, and (ii) apply enhanced due diligence to foreign correspondent accounts to prevent them from being used to process transactions involving the Bank of Dangdong. FinCEN issued the prohibition due to concerns that the Chinese bank serves as a "gateway for North Korea to access the U.S. and international financial systems despite U.S. and UN sanctions."
In an accompanying Advisory, FinCEN highlighted recent actions taken by Treasury to sanction North Korea in response to its ongoing weapons development and violations of UN Security Council resolutions. Further, FinCEN outlined how North Korean state-owned enterprises seek to engage in trade-based payment schemes through use of foreign-based front or shell companies and covert representatives based abroad. The Advisory also included red flags for potential illicit financial activity, including: (i) certain activities in China's Liaoning province and the Hong Kong Special Administration Region, (ii) the use of shared corporate registrations, business addresses, owners, managers, employees or phone lines, (iii) irregular payment activities, (iv) substantial financial activity unrelated to stated areas of business, and (v) the lack of a website or other online presence. Finally, the Advisory reminded U.S. financial institutions of their regulatory obligations with regard to correspondent accounts that may be connected to North Korean enterprises.
Commentary / Christian Larson
FinCEN's 311 rulemaking identifies one bank as having acted as a conduit for illicit North Korean financial activity. Undoubtedly, North Korea will continue its efforts to maintain access to the international financial system. In light of FinCEN's rulemaking and Advisory, financial institutions should consider the risks of doing business in the Chinese border region with North Korea, and with any foreign bank that still does business involving North Korea.
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