Under Congressional Mandate, OFAC Asserts Jurisdiction Under North Korea Sanctions Regulations Over Non-US Entities Owned or Controlled by US Financial Institutions

In a Federal Register notice published on April 10, 2020, the US Department of the Treasury, Office of Foreign Assets Control (OFAC), amended its North Korea Sanctions Regulations (NKSR) to extend their application to non-US entities owned or controlled by US financial institutions. The change was mandated by Congress in Section 7121 of the National Defense Authorization Act for Fiscal Year 2020. This jurisdictional expansion involving US sanctions on North Korea is noteworthy. With the exception of the Cuba and Iran sanctions programs, US sanctions prohibitions typically do not apply directly to non-US entities owned or controlled by US persons. Historically, the extension of US sanctions prohibitions to foreign subsidiaries of US companies has been one of the most controversial “extraterritorial” aspects of US sanctions programs. (So-called “secondary sanctions” do generally apply to non-US entities, but they do not impose “prohibitions” under US law.) New Section 510.214 of the NKSR extends the broad prohibitions of the NKSR to “any person that is owned or controlled by a US financial institution and established or maintained outside the United States.” This appears to include non-financial companies that are owned or controlled by US financial institutions. In general, “control” can include minority ownership combined with other important rights, such as executive appointments or board representation. Moreover, a “US financial institution” includes branches or offices of non-US financial institutions that are located in the United States – conceivably an exercise of “control” by such a US branch or office over a non-US entity could trigger OFAC jurisdiction.

• The comprehensive prohibitions in the NKSR include prohibitions on exports, imports, and new investments, as well as “blocking” sanctions against the Government of North Korea and the Workers’ Party of Korea. Practically speaking, this latter prohibition effectively restricts all activity in or relating to the formal economy of North Korea, where the North Korean government is ubiquitous and unavoidable. The NKSR also prohibit dealings with the many non-North Korean parties that have been designated on OFAC’s Specially Designated Nationals (SDN) list under the NKSR. This includes numerous trading and shipping companies and vessels domiciled in various jurisdictions, among others.
• The term “US financial institution” includes “any US entity (including its foreign branches) that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or other extensions of credit, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent. It includes depository institutions, banks, savings banks, trust companies, securities brokers and dealers, commodity futures and options brokers and dealers, forward contract and foreign exchange merchants, securities and commodities exchanges, clearing corporations, investment companies, employee benefit plans, and US holding companies, US affiliates, or US subsidiaries of any of the foregoing. This term includes those branches, offices, and agencies of foreign financial institutions that are located in the United States, but not such institutions' foreign branches, offices, or agencies.”

The new prohibitions only apply when such prohibited activity is conducted “knowingly.” It some circumstances, a party may not know that it is dealing with North Korea or its instrumentalities or affiliates, which often operate internationally through shell entities and other deceptive structures that may not be readily apparent to their counterparties. That said, OFAC generally expects parties to conduct risk-based due diligence to ascertain whether a party involved in a transaction may be subject to US sanctions, and the term “knowingly” includes circumstances in which a party “should have known” of the relevant facts. Given the relative isolation of North Korea from the global economy, this change may not have significant immediate practical impact.  But US-based institutions (including US branches or offices of non-US institutions) that have not fully implemented US sanctions compliance policies and procedures with respect to their foreign owned or controlled entities should carefully review their compliance program to be sure it adequately accounts for this new rule. The parent institution is subject to fines and other penalties if any non-US entity that it owns or controls violates, attempts to violate, conspires to violate, or causes a violation of the NKSR.