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Coal Hard Facts: North Korea Sanctions Remain in Place and Remain a Risk

KEPCO is at the heart of an inquiry into the alleged repeated import of North Korean coal into the Republic of Korea. Reportedly, 8 other Korean companies and 2 other banks may also be involved and may also be under investigation.

The story may have come as a shock to some, who saw President Trump’s visit with the North Korean leader Kim Jung Un as a sign of a coming détente. However, that meeting resulted in very little substantive change by the DPRK or the United States, and UN and U.S. sanctions remain in place.

Why Coal?

In early 2016, UN sanctions on North Korea, most of which have been accepted and implemented by ROK, began targeting the import of North Korean Coal as one of the major exports of the DPRK. In August 2017, UN Sanctions prohibited Member States from importing North Korean coal, iron, lead, and seafood. The Republic of Korea implemented the UN resolution in its domestic law.

However, a real risk of violations arises not only out of UN and ROK sanctions regulations, but also from U.S. regulations that have an effect on Korean companies.

What is the risk?

U.S. and UN sanctions create risks beyond the import of coal. For the U.S. sanctions, the key to extraterritorial enforcement is use of the U.S. banking system – generally by clearing a transaction in dollars. Many of the commodities traded from North Korea.

U.S. sanctions affect Korean companies outside the United States by effectively prohibiting the use of the U.S. financial system in connection with any transaction with the Government of North Korea, the Workers’ Party of Korea, or Specially Designated Nationals (SDNs) of North Korea. Therefore, any transaction involving North Korea must be reviewed to ensure that the transaction does not unlawfully involve U.S. financial institutions or otherwise involve the U.S. financial system.

Further, U.S. and UN sanctions prohibit the movement of “bulk cash” to avoid sanctions triggered by U.S. dollar use in a transaction. Additionally, according to a U.S. Treasury Department Publication, the U.S. government is keenly observing deceptive shipping practices and has designated numerous shipping entities as blocked.

Where a Korean company, including Korean banks, transacts with a designated party in North Korea, that company may be subject to U.S. sanctions that would effectively cut it off from trade with the United States, many U.S. allies around the world, and from use of the U.S. Dollar. If the Korean entity involves a U.S. person in the transaction, the Korean company, including individuals at the company, may be subject to fines and penalties, up to $1,000,000 and 20 years in prison.

What can my business do?

If your business has transacted with North Korea, now is the time to take a hard look at what has happened. U.S. enforcement agencies are actively investigating transactions and cooperating Korean companies may name others who have traded with the DPRK. A company’s best defense is to have an outside counsel or expert conduct an investigation, identify the issues, and take mitigating and corrective actions as soon as possible.

No U.S. regulation requires that Korean companies disclose the issued they find. Further, the investigation by outside counsel will generally be covered by the attorney-client privilege, giving the Korean company the power to decide whether and how it controls its internal issues. By contrast, attempts to hide or destroy evidence of violations may be considered an aggravating factor by U.S. enforcers and create an even greater penalty than the original violation.

A company that has addressed its sanctions compliance issues is a much less tempting target for regulators than one that is involved in a cover up.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume VIII, Number 221


About this Author

Reid Whitten, partner, Sheppard Mullin Law Firm

Reid Whitten works with clients around the world to plan, prepare, and succeed in global business transactions.

In the areas of U.S. and international sanctions, export and defense export controls, and anti-corruption regulations, he supports clients in detecting and deterring potential compliance issues as well as conducting and defending investigations and enforcements. Mr. Whitten also advises on anti-dumping, anti-money laundering, and anti-boycott regulations.

Mr. Whitten is a thought leader on cross-border business regulations. He teaches a seminar on The Law of...

Seth Kim, Sheppard Mullin Law Firm, Seoul and New York, Finance, Bankruptcy and Litigation Law Attorney

Seth (Byoung Soo) Kim is a partner in the Finance and Bankruptcy Practice Group in the firm’s Seoul and New York offices. He is also the Representative, Foreign Legal Consultant (U.S.A.) for the Seoul office.

Areas of Practice

Mr. Kim, a native Korean speaker, is a business lawyer who serves as an advisor to Korean and other Asian companies, as well as U.S. companies doing business in Korea, on a broad array of legal issues. Drawing on the expertise of Sheppard Mullin lawyers across multiple practices and geographies, Mr. Kim has experience representing clients in the following areas:

  • Dispute Resolution - Litigation in U.S. Courts in patent litigation, employment litigation and other complex matters

  • International Arbitration International dispute resolution (including international arbitration and litigation) and counseling involving contruction defects, extra work claims, changed conditions claims, delay, acceleration and disruption claims, defective work claims, surety bond claims, and professional liability of architects and engineers.

  • White Collar Defense and Corporate Investigations White collar defense and internal investigations in connection with domestic and cross-border investigations and inquiries by U.S. Attorney’s Offices, the SEC, FINRA, the NY Attorney General’s Office and other governmental entities and self-regulatory organizations

  • Banking Law - Federal, New York and California bank regulatory matters; bank acquisitions

  • Bankruptcy Law - Corporate reorganization and restructuring; domestic and cross-border insolvencies; creditors' rights; distressed acquisitions

  • Commercial law - Asset based financings; syndicated credit facilities; real estate financings; working capital loans; mezzanine and subordinated credit financings; letters of credit and other credit enhancement facilities; cross-border lending transactions; commercial paper offerings; asset securitization; swaps, options and OTC derivatives; financings involving collateralized debt, bond and loan obligations, total return swaps and other structured derivative programs

  • Corporate and Securities Law - SEC filings; exchange listing rules; public offerings; private equity financings; proxy solicitations; broker-dealer matters; investment advisor matters; corporate governance; mergers and acquisitions; joint ventures and strategic alliances

  • Entertainment Law - Development, production, acquisition and distribution of motion pictures, television programming, music videos, video games and other content; production financing; recording, soundtrack, and music publishing deals; videogame development and publishing arrangements; sports and other live events; fashion, apparel and beauty matters

  • Intellectual Property - Licensing and other intellectual property matters