New North Korean Sanctions: Ratcheting Up The Pressure On Kim Jong-Un - Export Controls & Trade & Investment Sanctions

The world has recently ratcheted up sanctions on North Korea in response to the regime's aggressive behavior. Sanctions against North Korea are now broader in scope than ever before and could impact companies that previously were unaffected by them. Below, we summarize these new rules, with a focus on compliance and potential impact.

On January 6, 2016, North Korea conducted a purported test of a hydrogen bomb, its fourth nuclear test over the past decade. Not long after, on February 7, 2016, North Korea carried out a test of a long-range ballistic missile technology. On March 2, 2016, the United Nations issued its response: a unanimous Security Council resolution, UN Security Council Resolution 2270 ("Resolution"), which enacts additional sanctions on North Korea.

United Nations Member States, including the United States, European Union (EU) countries, and China, quickly began enacting new resolutions to implement the UN Resolution, and, in some cases, imposing their own additional sanctions. While various sanctions have been in place against North Korea for some time, the sanctions imposed by Resolution 2270 are more extensive. In particular, if enforced, the sanctions seem likely to impact Chinese-Korean trade, which could result in significant pressure on the North Korean regime.

Enforcement, however, is largely left up to the UN Member States that implement the Resolution. Implementation efforts to date of several member states, including the U.S., EU countries, and China, are analyzed below.

UN Security Council Resolution 2270

In response to North Korea's test of a nuclear weapon and ballistic missile technology in January and February 2016, on March 2, 2016, the UN Security Council unanimously agreed upon Resolution 2270. North Korea's nuclear weapons tests were in violation of various UN resolutions to which North Korea, as a UN Member State, was a party. Moreover, the Security Council condemned the tests as a "challenge" to the Treaty on Non-Proliferation of Nuclear Weapons, as well as to peace and stability in the region.

The sanctions imposed against North Korea by Resolution 2270 are extensive, but many contain vague language or significant caveats, so much will depend on how Member States – and especially China – implement the sanctions.

The most significant provisions include the following:

Crackdown on illicit foreign trade channels. The Security Council attempted to close some of the foreign channels that North Korea uses to facilitate illicit trade. The UN will attempt to track and identify for sanction North Korean shell corporations. Furthermore, Member States are required to expel any foreign person – including North Korean diplomats – that the state finds are assisting North Korea in the evasion of sanctions.
Shipping and transport limitations. The Resolution requires member states to inspect cargo that originated in North Korea for items shipped in violation of sanctions. Additionally, Member States are required to forbid their citizens from leasing or chartering ships or aircraft to North Korea, or providing any services (insurance, crew, etc.) to North Korean vessels. Furthermore, ships and aircraft that a Member State has "reasonable ground[] to believe" contain goods that should not be sold or transported under the sanctions regime, or that are owned by certain sanctioned entities, are not to be allowed in Member State ports or airports.
Limitation of mineral exports from North Korea. The Resolution prohibits North Korea from selling or transferring gold (which it often uses as payment in transactions to evade sanctions); rare earth metals; and certain other rare ores. Furthermore, North Korea is similarly banned from selling coal and iron. However, the ban on coal and iron is subject to certain exceptions. The most significant is that sales of coal and iron can occur when they are "exclusively for livelihood purposes" and cannot generate revenue for North Korea to engage in prohibited activities.
Restrictions on financial institutions. The Resolution further isolates North Korea and makes it more difficult for foreign companies to do business there by placing significant restrictions on both North Korean and Member State financial institutions. Member States must prohibit new North Korean banks in their territories and close existing North Korean banks in their territories by May 31, 2016. Furthermore, Member States must forbid their banks from opening new branches within North Korea; already existing branches located in North Korea may stay, unless the Member State has "credible information that provides reasonable grounds to believe" the bank's activities could be contributing to prohibited North Korean activities.
Enhanced arms control measures. Among other things, the Resolution contains a "catch all" provision that forbids transfer to or from North Korea of any item (except food and medicine) that "could directly contribute" to the military's "operational capabilities." It also directs Member States to freeze assets within their jurisdiction that are associated in any way with prohibited North Korean activities (such as the nuclear or ballistic missile testing).

The Resolution is binding on Member States, but the exact method of implementation is left up to each Member State. Some Member States, such as the U.S., are doing even more than required under the Resolution. Others, such as China, may take a take different approach.

Implementation by the U.S., and Additional U.S. Sanctions

The United States already had in place a stringent North Korean sanctions regime and implemented new sanctions that built upon the old regime and were even stronger than the measures required under the Resolution. New sanctions came in the form of a statute, Executive Order from the President, and action by the Office of Foreign Asset Controls (OFAC).

To begin with, on February 18, 2016, before the United Nations agreed upon Resolution 2270, the United States enacted a law directing the President of the United States to toughen sanctions on North Korea, The North Korea Sanctions and Policy Enhancement Act of 2016 (the "N. Korea Act"). Among other things, the N. Korea Act specifies both mandatory and discretionary categories of entities that the President should sanction. Generally speaking, the measures of the N. Korea Act are stricter than what was required in the UN Resolution. For example, there was no discussion of human rights abuses in the Resolution; however the N. Korea Act requires the President to sanction any entities who were knowingly and significantly involved in them.

The President implemented both the N. Korea Act and the UN Resolution via Executive Order 13722, issued March 15, 2016 (the "Order"). The Order set out changes to the United States' sanctions on Korea and encompasses sanctions more restrictive than those found in the Resolution. For example:

Frozen North Korean assets. The Order blocks all property or interests of the North Korean government or the Workers' Party of Korea that are in the U.S. or come into the U.S., or that are within possession or control of any U.S. person. The Resolution only required countries to block such assets if they were associated with prohibited North Korean activities.
Other frozen assets. The Order also freezes the assets of other entities. The Order freezes the assets of any entities that operate in the transportation, mining, energy, and financial services industries in North Korea; entities that have engaged in human rights abuses; and any entity that has engaged in activities "undermining cyber security" at the behest of the North Koreans. This goes beyond what was required in the Resolution, which focused instead on restricting the financial industry and any items that could contribute to North Korea's military capability.
Exports/Investments generally prohibited. Exports from the U.S. to North Korea are already subject to extensive prohibitions under the Export Administration Regulations. Under the Order, all exportation from the U.S. or by a U.S. person of any good, service, or technology to North Korea is prohibited. Also prohibited is any new investment in North Korea by a U.S. person. Generally speaking, without a license, a U.S. person cannot do business with any North Korean entity. This again goes beyond what was required by the Resolution.

Additionally, the Order prohibits "approval, financing, facilitation, or guarantee" by any U.S. person of an action by a foreign person that would be prohibited under U.S. law. In other words, a U.S. entity cannot help anyone else to do what it could not do itself. Although what exactly constitutes "facilitation" is not defined, OFAC generally interprets this prohibition broadly. Thus, for example, even if a U.S. person merely refers a prohibited North Korea transaction to a non-U.S. person, OFAC would likely view that referral as prohibited facilitation.

Finally, as is common in sanctions program, OFAC also issued certain general licenses that permit the export of some narrow categories of items without a specific license from OFAC. The general licenses cover issues such as export of food and medicine, humanitarian aid, and non-commercial, personal remittances. It is important to note that these general licenses are very specific. Thus, before undertaking any transaction in reliance on a general license, it is important to confirm that the activity is fully covered by the scope of the general license.

Implementation by the European Union

The EU maintains restrictive measures against North Korea since the implementation of UN Security Council Resolution 1718 (2006) by the Council of the European Union's common position 2006/795/CFSP of 20 November 2006 and Council Regulation (EC) No 329/2007 of 27 March 2007.

Following the adoption of UN Resolution 2270, the EU has implemented restrictive measures in line with the broadened scope of the UN sanctions regime. In particular, in order to prevent asset flight, the EU Commission immediately aligned the list of persons and entities subject to the freeze of assets with the respective addition of 16 natural person and 12 entities by UN Resolution 2270 (Commission Implementing Regulation (EU) 2016/315 of 4 March 2016).

The transposition of the more complex new sectoral sanctions included in UN Resolution 2270 followed on March 31, 2016, by the adoption of Council Decision (CFSP) 2016/476. This Council decision, in its recitals, precisely lists the amendments introduced by UN Resolution 2270 and implements the respective restrictive measures including the prohibition of sale or supply of aviation fuel and the prohibition to establish new joint ventures with North Korean banks and the jurisdiction of EU Member States. On March 31, 2016, the EU also listed the Korea National Insurance Corporation (KNIC), because KNIC is generating substantial foreign-exchange revenue which could contribute to North Korea's nuclear-related, ballistic-missile-related, or other military programs.

In addition to the implementation of UN Resolution 2270, according to EU officials, the EU has started to prepare some additional, autonomous sanctions against North Korea. The adoption of additional, autonomous sanctions by the EU is particularly promoted by France, one of the countries that, other than the EU itself, does not maintain any diplomatic relations with North Korea.

These additional restrictive measures most likely will include sanctions against persons and entities linked to North Korea's nuclear program, which would subject those persons and entities to travel bans and asset freezes. In addition, such sanctions would prohibit EU entities, EU citizens and any other persons acting from within the EU territory from making available, directly or indirectly, funds or economic resources to or for the benefit of those persons. The notion of making economic resources "indirectly available" is rather broad and can, as the case may be, include the transfer of goods to a non-listed entity that is controlled by a listed natural or legal person. It is therefore of particular importance to conduct detailed diligence including the majority shareholders of a potential North Korean business partner.

Implementation by China

In the wake of the adoption of UN Resolution 2270, it was widely understood and reported that the effectiveness of the new sanctions would largely hinge on the strength of cooperation and enforcement from China, North Korea's largest trading partner. Early this month, China took concrete steps to demonstrate its support for the latest round of sanctions against North Korea.

In a joint announcement ("Joint Announcement") issued on April 5, 2016 (and subsequently published in English translation on April 7, 2016), China's Ministry of Commerce (MOFCOM) and General Administration of Customs announced an embargo enacting some core elements of the sanctions announced in UN Resolution 2270 (MOFCOM Announcement No. 11 of 2016). The specific components of the Joint Announcement are:

Limitation on coal and iron imports. The Joint Announcement prohibits the import into China of coal, iron, and iron ore from North Korea. This prohibition enacts the provisions of paragraph 29 of the Resolution and is expressly subject to the same two exemptions set forth in the Resolution. Specifically, the prohibition does not apply to:
- (1) transactions determined to be solely for livelihood purposes; and
- (2) imports of coal determined to originate outside of North Korea and transported through North Korea solely for export from the Port of Rason, as long as the transaction at issue in each case does not involve North Korea's nuclear or ballistic missile programs or otherwise generate revenue for prohibited activities.
Prohibition on import of gold, titanium ore, vanadium ore, and rare earth minerals. The Joint Announcement forbids any import into China of gold, titanium ore, vanadium ore, and rare earth minerals from North Korea. This prohibition enacts the provisions of paragraph 30 of the Resolution and is not subject to any exceptions.
Prohibition on export of aviation fuel. The Joint Announcement forbids the export to North Korea of aviation gasoline, naphtha aircraft fuel, kerosene aircraft fuel, and kerosene rocket fuel. This prohibition enacts paragraph 31 of the Resolution and expressly is subject to the same two exemptions set forth in the Resolution. Specifically, the prohibition does not apply to (1) transactions specifically approved by the Sanctions Committee of the UN Security Council for verified basic humanitarian needs, although "special arrangements must be made to effectively monitor the delivery and use of such fuel," and (2) aircraft fuel that is sold to civilian passenger airplanes outside North Korea or is supplied solely for use in trips from and to North Korea.

Each of these categories of prohibitions could be important aspects to the overall sanctions regime against North Korea. For example, the ban on import of gold and other minerals targets an activity that has been identified as one of the more lucrative revenue sources for the North Korean government, and the prohibition of the export of aviation fuel targets key commodities necessary for the North Korea missile program.

A key question about the potential effectiveness of the ban on the import of coal and iron concerns the scope and likely application of the exceptions. The Joint Announcement, consistent with the terms of the Resolution, implemented controls designed to police the exceptions. For example, in order to establish that an import of coal or iron ore is only for purposes of livelihood, the importer must submit to Chinese customs a specified form undertaking to that effect, and Chinese customs authorities are empowered to reject the import on the basis of "solid information" that the import does not fall within the exemption.

With respect to the exception for coal being transshipped through the Port of Rason, the importer must file an application (and other relevant information) with the Chinese provincial commerce authority, which then will be transmitted from MOFCOM to the Ministry of Foreign Affairs, and then to the Sanctions Committee of the UN Securities Council, before the import transaction can proceed. The importer is also required to submit to Chinese customs a certificate of origin and a specified form undertaking that the import qualifies for the exception, and Chinese Customs authorities are empowered to reject the import if they confirm by "solid information" that the exception does not properly apply.

The Joint Announcement is not the first time that Chinese authorities have promulgated formal statements enacting UN sanctions against North Korea. For example, in response to UN sanctions against North Korea in 2013, various Chinese administrative agencies, including MOFCOM, MIIT, the General Administration of Customs, and the China Atomic Energy Authority issued a joint announcement prohibiting the export to North Korea of specified goods and technologies related to weapons of mass destruction. The Ministry of Transport also has issued announcements implementing asset freeze and travel restrictions on certain North Korean officials as well as asset freezes of North Korean firms, including Ocean Maritime Management Company Limited (OMM), as required by prior UN sanctions. A key source of authority often invoked by sanctions implementing directives is the Chinese Foreign Trade Law, which authorizes the Chinese government to restrict or ban the import or export of goods and technologies, including goods and technologies restricted by authority of international agreements to which China is a party. Depending on the nature of the sanction, violations can result in administrative customs actions or significant penalties under the Foreign Trade Law, including the confiscation of illegal gains and a penalty of up to five times the amount of illegal gains, as well as potential criminal liability.

As with any sanctions framework, the ultimate impact and effectiveness of the measures implemented in the Joint Announcement will depend largely on how the sanctions are enforced—an especially important consideration given the vague standards and considerable discretion inherent in the practical application of the Joint Announcement's prohibitions. A spokesman for the General Administration of Customs has stated that Chinese customs intends to strictly enforce the newly announced North Korea embargo measures, and state-controlled media has lauded the Joint Announcement as showing that Beijing is "strictly honoring the resolution of the UN Security council." And anecdotal reports suggest that Chinese customs officials have recently increased customs inspections of cargo moving through the China-North Korea border, although other reports suggest that relevant Chinese customs offices lack the necessary staff to inspect all cargo to ensure that no items are transferred in violation of UN sanctions, as called for by paragraph 18 of the Resolution.

Only time will tell whether the embargo measures implemented by the Joint Announcement will be effectively enforced. Nevertheless, China's work with the UN Security Council in passing the Resolution and ratcheting up sanctions on North Korea is a concrete and visible step that demonstrates China's increased willingness to cooperate with the international community to respond to North Korea's continued nuclear provocations.

Impact and Takeaways

The new North Korean sanctions are more extensive than ever before and seem more likely to be enforced more strictly than past sanctions regimes. This could result in restrictions on businesses that had not before been impacted, particularly in the finance and commodities industries. Furthermore, North Korea is already threatening additional nuclear tests, which could result in further sanctions.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.