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Volume XII, Number 340


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U.S. Treasury’s 311 Action Against North Korea Intensifies Pressure on China

The U.S. Department of the Treasury recently announced a finding that North Korea is a jurisdiction of “primary money laundering concern” pursuant to its Section 311 authority, codified at 31 U.S.C. 5318A. Treasury’s Financial Crimes Enforcement Network (FinCEN) also released a notice of proposed rulemaking, which would impose the strongest available “special measure” to address the money laundering risks from North Korea. This action may be misinterpreted as inconsequential because of the separate Office of Foreign Assets Control (OFAC) prohibitions against North Korea. However, it likely signals the beginning of increased domestic and international scrutiny of China’s role in providing North Korea access to the international financial system. The notice of finding sets forth the U.S. government’s position that North Korea accesses the international financial system through its network of China-based cover companies.  

United Nations Security Council Resolution 2270

In March 2016, the United Nations Security Council adopted resolution 2270 imposing additional economic sanctions on North Korea. This Resolution contains several significant restrictions on financial services tucked away in paragraphs 33-35. Paragraph 33 specifically obligates Member States to “terminate … correspondent banking relationships with DPRK [North Korea] within ninety days from the adoption of this resolution.”[1]

The United States likely submitted this language with the expectation that China would raise an objection and the broad banking restrictions would be removed. Apparently, China did not object and the financial prohibitions are now binding on all Member States. Unlike the previous relatively narrow international financial restrictions, the prohibitions in paragraph 33 apply to all correspondent banking relationships. While the United States generally prohibited all financial services prior to UNSCR 2270, the 311 finding and proposed rule should support the ongoing efforts to financially isolate North Korea. It serves as a clear example of leadership in commitment to United Nations obligations.

The Fifth Special Measure

Upon finalization of the rule, covered financial institutions will be prohibited from providing North Korean banks direct or indirect access to U.S. correspondent accounts. FinCEN would aim to prevent indirect access by imposing special due diligence requirements. (See 31 C.F.R. §1010.659 (3)) Part of this process would require financial institutions to notify certain respondents that its correspondent accounts cannot be used to indirectly provide North Korean banks access to the U.S. financial system.

Despite FinCEN’s requests not to “de-risk” potentially higher-risk customers absent good cause, it is likely that U.S. banks will close accounts for certain Chinese banks with suspected North Korean ties. This is more likely to happen if OFAC uses its designation authorities to identify additional China-based North Korean front companies.

[1] 33.  Decides that States shall prohibit in their territories the opening and operation of new branches, subsidiaries, and representative offices of DPRK banks, decides further that States shall prohibit financial institutions within their territories or subject to their jurisdiction from establishing new joint ventures and from taking an ownership interest in or establishing or maintaining correspondent relationships with DPRK banks, unless such transactions have been approved by the Committee in advance, and decides that States shall take the necessary measures to close such existing branches, subsidiaries and representative offices, and also to terminate such joint ventures, ownership interests and correspondent banking relationships with DPRK banks within ninety days from the adoption of this resolution; (United Nations Security Council Resolution 2270 (2016))

Copyright Holland & Hart LLP 1995-2022.National Law Review, Volume VI, Number 166

About this Author

Jeremy Paner, Economic, Trade Sanctions Attorney, HOlland Hart Law Firm
Of Counsel

Mr. Paner is Of Counsel at Holland & Hart's Washington, DC office. His practice focuses on economic and trade sanctions compliance issues, in addition to general white collar criminal and regulatory investigations. Mr. Paner leverages his sophisticated governmental experience to deliver valuable risk analysis and compliance and avoidance advice to private clients.

Prior to joining Holland & Hart, Mr. Paner was the New York State Department of Financial Services appointed independent economic sanctions monitor of a major international...