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Focus on Regulation

FinCEN Designates North Korea as a Jurisdiction of Primary Money Laundering Concern, Triggering Additional Due Diligence Requirements for Financial Institutions

Pursuant to the North Korea Sanctions and Policy Enhancement Act of 2016’s requirement that the Secretary of the Treasury determine whether North Korea is a jurisdiction of primary money laundering concern, on May 27, 2016, the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) found that the Democratic People’s Republic of Korea (“DPRK” or “North Korea”) is a jurisdiction of primary money laundering concern under Section 311 of the USA PATRIOT Act. This designation is due to FinCEN finding that North Korea:

  • uses state-controlled financial institutions and front companies to support proliferation of WMD and development of ballistic missiles;
  • has minimal controls to combat money laundering or the financing of terrorism;
  • does not have a mutual legal assistance treaty with the United States; and
  • relies on corrupt activity to support its government.

United States and United Nations determinations that Korea Mining Development Trading Corporation, Tanchon Commercial Bank, Korea Kwangson Banking Corporation, and Daedong Credit Bank conduct financial transactions in support of North Korea’s proliferation of WMD or ballistic missiles also factored into this finding.

As a result, on June 3, 2016, FinCEN published a notice of proposed rulemaking imposing special measure five under Section 311, which prohibits covered financial institutions from opening or maintaining a correspondent account in the United States for, or on behalf of, North Korean banking institutions and from processing  transactions involving North Korean financial institutions through a United States correspondent account. Covered institutions will also be required to apply special due diligence to their foreign correspondent accounts to prevent processing of transactions on behalf of North Korean financial institutions, including though indirect correspondent accounts. Violation of these requirements could result in the imposition of civil monetary or criminal penalties.

Financial institutions can satisfy these special due diligence requirements by:

  • notifying, and documenting the notification of, foreign correspondent account holders that the institution has reason to believe provide services to North Korean financial institutions;
  • taking steps to identify any use of foreign correspondent accounts by North Korean financial institutions, to the extent that such use can be determined from records maintained in the normal course of business;
  • using a risk-based approach when determining what, if any, other due diligence measures must be adopted to guard against the use of its foreign correspondent accounts to process transactions involving North Korean financial institutions; and,
  • when aware of potential North Korean access, taking all appropriate steps to further investigate and prevent that access, including the notification of its correspondent account holder and, where necessary, termination of the correspondent account.

The one-time notification requirement can be satisfied with the following notification:

Notice: Pursuant to U.S. regulations issued under Section 311 of the USA PATRIOT Act, see 31 CFR 1010.659, we are prohibited from establishing, maintaining, administering, or managing a correspondent account for, or on behalf of, a North Korean financial institution. The regulations also require us to notify you that you may not provide a North Korean financial institution, including any of its branches, offices, or subsidiaries, with access to the correspondent account you hold at our financial institution. If we become aware that the correspondent account you hold at our financial institution has processed any transactions involving a North Korean financial institution, including any of its branches, offices, or subsidiaries, we will be required to take appropriate steps to prevent such access, including terminating your account.

This finding and the subsequent imposition of special measure five follow United Nations Security Council Resolution 2270, imposing multilateral sanctions against North Korea, and the Financial Action Task Force’s continued statements urging all jurisdictions to advise their financial institutions to protect their correspondent accounts from being used by North Korean financial institutions to evade countermeasures and risk mitigation practices.

These new restrictions are expected to directly impact smaller Chinese banks, primarily those based in the cities of Dandong and Hunchun, which stand to lose several billion U.S. dollars, according to this New York Times report. The United States imposed similar, but more limited, measures in 2005, when it designated Banco Delta Asia (“BDA”) as an entity of primary money laundering concern, which triggered a bank run at BDA. Although China publicly supports the recent U.N. sanctions, the Foreign Ministry has voiced opposition to the new U.S. restrictions.

Financial institutions that have relationships with Chinese banks should review their due diligence policies to determine whether their current practices are in line with these new measures.

The comments period for this proposed rule will close on August 2, 2016.

Special thanks to Lisa Ann Johnson, a summer associate in our Washington, D.C. office, for her contribution to this post.