Overview
As tensions continue to escalate between the United States and North Korea – and President Donald Trump and Kim Jong-Un trade increasingly harsh barbs – the United Nations, United States, and other countries continue to impose stringent sanctions against North Korea. This advisory reviews UN Security Council Resolution 2375, which was adopted on September 11, and Executive Order 13810, which was signed by President Trump on September 20. As a result of these and other recent activities by the UN Security Council and the US, such as a complete suspension of immigrant and nonimmigrant entry into the US by North Korean nationals, North Korea is now subject to more stringent sanctions than any other country. Taken together, these actions have wide-ranging impacts on global trade with North Korea.
UN Security Council Resolution 2375
In response to the North Korean nuclear test conducted on September 2, the UN Security Council unanimously adopted Resolution 2375 to further strengthen UN sanctions on North Korea. This is the second significant sanctions action taken by the Security Council against North Korea in the last two months, following on Resolution 2371 of August 5, and it builds upon a sanctions program that the Security Council originally established in 2006. After the passage of Resolution 2375, the US hailed the North Korea UN sanctions program as the “strongest sanctions ever imposed on North Korea” and a “very clear message to North Korea that the Security Council is united in condemning North Korea’s violations.”
Oil/Petroleum
Resolution 2375 establishes an annual cap of 2 million barrels on North Korea's refined petroleum imports, effective as of October 1, with a limit of 500,000 barrels during the first three month period. The resolution does not define the term “refined petroleum products.” This cap fell short of the US’ original demand, a complete oil embargo, but was accepted to accommodate Russia and China and garner their support. The resolution is intended to cut off over half of the refined petroleum products that have been going into North Korea.
Every 30 days, UN member states must notify the Security Council’s North Korea Sanctions Committee – which is composed of representatives from the 15 members of the UN Security Council – of the amount of refined petroleum sales to North Korea and provide information about all parties to the transactions. When 95 percent of the aggregate yearly amount has been reached, all member states will be instructed to immediately cease selling refined petroleum products to North Korea for the remainder of the year.
Additionally, Resolution 2375 freezes the amount of crude oil supplied to North Korea by prohibiting member states from selling crude oil in excess of the amount that the member state sold in the previous twelve months. Crude oil in excess of these amounts may be approved by a consensus of the North Korea Sanctions Committee in advance on a case-by-case basis, and only if used exclusively for livelihood purposes.
Textiles
Resolution 2375 also bans all North Korean textile exports (including fabrics and partially or fully completed apparel). The United States estimated that this industry earned North Korea nearly $800 million per year and characterized textiles as one of North Korea’s “last remaining major exports” not previously targeted by the Security Council. (North Korean exports of coal, iron, and seafood had been prohibited by previous resolutions.) With this prohibition, over 90% of North Korea’s publicly reported 2016 exports of $2.7 billion have been banned by the Security Council.
Overseas Laborers
Another main source of cash for the regime is overseas laborers. According to the US, an estimated 100,000 North Korean citizens are working around the world and generate roughly half a billion dollars each year for the regime. With the enactment of this resolution, all member states are prohibited from providing work authorizations for these North Korean nationals. Exceptions may be made on a case-by-case basis only if the work is related to delivery of humanitarian assistance, denuclearization, or if the work authorizations were finalized prior to the resolution.
Joint Ventures
Resolution 2375 also requires member states to end all joint ventures with North Korea, characterized by the US as an effort to “stop all future foreign investments and technology transfers to help North Korea’s nascent and weak commercial industries.” Notably, however, China and Russia were able to secure carve-outs for the existing China-North Korea hydroelectric power infrastructure projects and the Russia-North Korea Rajin-Khasan port and rail project.
Executive Order 13810
Shortly after the announcement of UNSCR 2375, on September 20, President Trump signed Executive Order (E.O.)13810 to impose additional sanctions on North Korea. Earlier, President Trump had threatened to impose secondary sanctions against any persons doing business with North Korea. E.O. 13810 takes a significant step in that direction, establishing perhaps the broadest set of secondary sanctions ever imposed by the US. While signing the order, President Trump touted it as providing “powerful new tools” that will enable the US to seek “a complete denuclearization of North Korea” -- perhaps signaling that the US government intends to enforce these new sanctions with some vigor. Notably, the order does not interfere with or restrict any previously-licensed activities, such as those covered by the existing general licenses issued by the Department of the Treasury’s Office of Foreign Assets Control (OFAC).
Blocking Provisions
The executive order includes a number of new blocking provisions. For example, Section 1(a)(iv) of the order broadly authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to designate and block the assets of any “North Korean person,” including (but not limited to) a North Korean person that has engaged in commercial activity that generates revenue for the Government of North Korea or the Workers' Party of Korea.
Section 1(a) also authorizes the designation and blocking of a variety of other individuals and entities who are doing business with or are otherwise connected to the North Korean economy, regardless of whether they are themselves North Korean. Specifically, E.O. 13810 authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to designate and block the property and interests in property of any person determined:
- to operate in the construction, energy, financial services, fishing, information technology, manufacturing, medical, mining, textiles, or transportation industries in North Korea;
- to own, control, or operate any port in North Korea, including any seaport, airport, or land port of entry;
- to have engaged in at least one significant importation from or exportation to North Korea of any goods, services, or technology;
- 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 E.O. 13810; or
- to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to E.O. 13810.
On September 26, OFAC designated eight North Korean banks and 26 individuals linked to North Korean financial networks under E.O. 13810 and other North Korea sanctions authorities. Several of the designated banks have branch offices in China. All 26 individuals are representatives of North Korean banks who are operating outside of North Korea, in China, Russia, Libya, and the United Arab Emirates. Treasury announced that the sanctions were imposed “to complement” UN Security Council Resolution 2375, and Treasury Security Mnuchin indicated that Treasury was “targeting North Korean banks and financial facilitators acting as representatives for North Korean banks across the globe.”
Under previously existing secondary sanctions authorities, Treasury had already imposed blocking sanctions against a number of individuals and entities for their ties to North Korea, including sixteen Russian and Chinese individuals and entities designated by Treasury on August 22.
Financial Institution Sanctions
E.O.13810 also authorizes the imposition of secondary sanctions restrictions on foreign financial institutions doing business with, or related to, North Korea. Specifically, under Section 4 of the order, the Secretary of the Treasury, in consultation with the Secretary of State, may impose either a restriction on US correspondent banking services or blocking sanctions on a foreign financial institution that is determined to have “knowingly conducted or facilitated any significant transaction” on behalf of a North Korea-related sanctioned individual or entity, or in connection with trade with North Korea. This provision follows the restrictions that Treasury’s Financial Crimes Enforcement Network (FinCEN) put in place against North Korea under Section 311 of the USA PATRIOT Act when it designated North Korea as a jurisdiction of money laundering concern in 2016, and FinCEN’s June 2017 proposed imposition of Section 311 correspondent account sanctions against a Chinese bank, Bank of Dandong, for facilitating North Korea’s access to US financial institutions. In enacting E.O. 13810, President Trump warned that “foreign banks will face a clear choice: do business with the United States or facilitate trade with the lawless regime in North Korea.”
On the heels of the executive order, the People’s Bank of China, the country’s central bank, was reported to have ordered banks to “strictly implement United Nations sanctions against North Korea.” The document reportedly issued by the People’s Bank said North Korea-related business was an “issue of national-level politics and national security” and directed banks to “refuse to handle any individual loans connected to North Korea.” President Trump described China’s action as an order to “immediately stop doing business with North Korea,” which he characterized as “very bold” and “somewhat unexpected.” China has not publicly released any order, and on September 22, a spokesman for China’s Foreign Ministry denied that China’s order went as far as described by President Trump.
Sanctions on Non-US Bank Accounts Tied to North Korea
Section 3 of the order appears to be quite broad on its face, but it will remain to be seen how it is implemented. This section requires US persons to block funds that are or come into their possession or control that originate from, are destined to, or pass through a foreign bank account that Treasury determines (a) to be owned or controlled by North Korean persons, or (b) used to transfer funds in which a North Korean individual or entity has an interest. OFAC’s new Frequently Asked Questions on North Korea clarify that “this provision does not create any immediate compliance obligations on US persons” until OFAC identifies covered bank accounts and provides appropriate notice and additional guidance. Pursuant to General License No. 3-A, US financial institutions will be authorized to debit any blocked accounts with “normal service charges,” such as interest and other ancillary maintenance costs.
This is a potentially sweeping provision. The blocking obligation is not on its face limited to funds that are owned, controlled, or used for a North Korean person. Rather, the blocking order apparently would apply to all funds – regardless of their origin, use, ownership, or intended beneficiary – from a foreign bank account that is designated by OFAC as having been used to transfer funds in which a North Korean person has an interest. For example, funds transferred from a Russian bank to the US or otherwise held in the US and having nothing to do with North Korea, could apparently be blocked if the relevant account was identified by OFAC as having been used to facilitate trade involving North Korea.
Airline and Vessel Landing
Section 2 of the order prohibits aircraft that have landed in North Korea from landing in the US within 180 days of having been in North Korea. Section 2 also prohibits any vessel that has called at a port in North Korea within 180 days (or that has engaged in a ship-to-ship transfer in the past 180 days with a vessel that would be subject to the restriction) from calling at a port in the US. General License No. 10 creates an exception for aircrafts or vessels in distress that seek refuge in the US.
Executive Order 13810 and the Countering America’s Adversaries Through Sanctions Act
In many ways, the new executive order provides a framework for implementing the economic sanctions imposed by Congress under the Countering America's Adversaries Through Sanctions (CAATS) Act, which was signed into law on August 2. The CAATS Act required blocking sanctions on persons determined by the Trump Administration to “knowingly” do any of the following:
- import from or export or re-export to North Korea any defense article or defense service;
- purchase or acquire from North Korea “significant” amounts of gold, titanium ore, vanadium ore, copper, silver, nickel, zinc, or rare earth minerals;
- sell or transfer to North Korea “significant” amounts of rocket, aviation, or jet fuel (except for use by a civilian passenger aircraft outside North Korea, exclusively for consumption during its flight to North Korea or its return flight);
- provide “significant” amounts of fuel or supplies, provide bunkering services, or facilitate a significant transaction to operate or maintain, a vessel or aircraft designated by the US or UN for North Korea-related activity or owned or controlled by such a designated person;
- insure or register, facilitate the registration of, or maintain insurance or a registration for, a vessel owned or controlled by the Government of North Korea (except as specifically approved by the UN Security Council);
- maintain a correspondent account with any North Korean financial institution (except as specifically approved by the UN Security Council); or
- employ North Korean laborers.
These congressionally-specified triggers for sanctions appear to fall within the ambit of the secondary sanctions restrictions to be implemented under E. O. 13810, which as noted above identifies several broad categories of activity that trigger sanctions against persons who engage in trade or other business activity involving North Korea.
The CAATS Act also requires the President to issue a number of sanctions-related reports to Congress in the coming months, including a report to determine whether reasonable grounds exist to designate additional North Korean individuals and entities, including the Central Bank of the Democratic People’s Republic of Korea; a report on the degree to which individuals and foreign governments provide specialized financial messaging services (e.g., SWIFT) to North Korean financial institutions; and a report on the degree to which other governments and foreign ports have knowingly failed to implement existing UN Security Council resolutions against North Korea. In addition, the president must evaluate whether North Korea meets the criteria for designation as a state sponsor of terrorism, a label that the US government removed from North Korea in 2008. These reporting requirements may result in further sanctions actions by the Executive Branch or Congress in the coming months.
Executive Order 13810 and Other Proposed US Legislation
E.O. 13810 takes actions that are consistent with a number of North Korea-related bills pending before the Congress. These bills include the Banking Restrictions Involving North Korea (BRINK) Act (S. 1591), which would target “foreign banks and firms that have provided illicit support to Kim Jong Un,” and the North Korean Enablers Accountability Act (S. 1562), which would ban any entities that do business with North Korea from using the US financial system. Upon the signing of the executive order, Senate Foreign Relations Subcommittee on East Asia Chairman Cory Gardner (R-CO), author of S.1562, lauded the administration for its actions. Echoing President Trump’s statements on the secondary sanctions, Senator Gardner wanted the sanctions to warn North Korea’s enablers that “they can do business with the United States, the most powerful economy in the world, or they can do business with an outlaw regime in North Korea.”
What's Next?
Before the passage of CAATS Act in August, Senator Bob Corker (R-TN) signaled that Congress was “committed to approving additional enhancements to the North Korea sanctions provisions in the near future.” President Trump for his part has expended a great deal of personal energy and attention in trying to deal with the North Korean threat, urging allies and trading partners collectively and singularly to take action to isolate the North Korean regime and economy from the global community. At the same time, the Administration, and specifically Secretary of State Tillerson, continues to espouse an openness to discussions. The UN Security Council could continue to play a role in galvanizing collective action, while also serving as a vehicle for encouraging dialogue to reduce tensions. With military engagement being the worst case scenario, it should be expected that enforcement of North Korea sanctions will increase in an effort to incentivize all parties to find a diplomatic solution.
We will continue to keep you informed about sanctions developments. If you have any questions, please contact Edward Krauland at +1 202 429 8083, Brian Egan at +1 202 429 8009, Stephen Heifetz at +1 202 429 6227, Jack Hayes at +1 202 429 6491, Ying Huang at +1 202 457 8333, Alexis Early at +1 202 429 6742, or Judy Wang at +1 202 429 6471 in our Washington office, Meredith Rathbone at +44 20 7367 8021 in our London office, or Susan Munro at +86 10 5834 1199 in our Beijing office. Further commentary is available on the Steptoe International Compliance Blog. You can also follow us on Twitter (@SteptoeIntlReg).
