Bottom-Trawling and Sanctions, Part II



Last week, Marc Noland covered first-rate reporting by George Turner on Orascom. The story opened interesting questions about whether the whole venture was vulnerable to US sanctions legislation. This week we report on another story showing that involvement in North Korea is by no means limited to China and that even with a near-final version of the secondary sanctions legislation passed by the Senate, Treasury still has a lot of work to do to clarify who might be liable (The National Committee on North Korea has excellent coverage of the legislation).

At the New York Time’s Dealbook page, Penn Bullock reports on a remarkable entrepreneur named James Passin, a hedge fund manager at Firebird Management. In addition to funds focused on the former Soviet Union and Eastern Europe, the company’s website advertises access to “exotic” sectors of interest to institutional investors and high net-worth individuals. (A few previous posts on Passin and his business interests in the DPRK and Mongolia can be found here, here, and here.)

Bullock’s reporting covers a number of Passin’s adventures at the far edges of country risk, but one story will suffice to give the flavor. In 2002, Passin attempted to buy Uzbekistan’s national oil company, Uzbekneftegaz, lock, stock and barrel. In addition to plays on distressed debt in Nauru and banking in Iraq, Passin developed an interest in North Korea’s possible oil reserves, about which he is extremely bullish; for a recent overview of such hopes, Anthony Fensom provides an overview at the National Interest.

The leap into the DPRK appears to have taken place via Firebird’s near 50% stake in the Mongolian oil and coal trading company, HBOil. According to BMI research, HbOil bought the Malaysian company Ninox Hydrocarbons, which holds a 20% stake in KOEC International. The dominant shareholder in KOEC International? None other than North Korea's national oil company the Korea Oil Exploration Corporation (KOEC). As BMI concludes, this would effectively give HBOil a stake in both upstream (some onshore blocs in North Korea) and downstream (refining and gas station) assets in North Korea. In another nice piece of journalism at the Guardian, Leo Byrne walks through some of HbOil’s early efforts to entice investors, including creation of a “data room” that would share preliminary geological data.

Bullock’s piece explicitly addresses the sanctions issue, citing lawyers saying that the investment is not vulnerable to sanctions and those that say it might be. Whether Firebird or any of its funds are registered outside the United States may not matter; the point of the Orascom story was that Naguib Sawiris is a US citizen and thus potentially accountable.

Marcus Noland and I are not lawyers, but a plain reading of Executive Order 13551 (summarized and linked in OFAC’s sanctions overview (.pdf) “blocks the property and interests in property of persons listed in the Annex to E.O. 13551.” But the E.O. also permits blocking of “individuals and entities determined by the Secretary of the Treasury, in consultation with the Secretary of State” (emphasis added) that engage in a variety of activities, including those that “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any of the [proscribed] activities.”

But that was only the beginning of US efforts. The more sweeping E.O. 13687 provides the administration with the authority to place similar restraints on persons determined to be “an agency, instrumentality or controlled entity of the Government of North Korea or the Korean Workers Party.”

Here is where the sanctions complexities—and uncertainties—come in. Firebird is a hedge fund, not an oil company; although it holds a large share in HbOil it does not appear to exercise managerial control. Put differently, the acquisition of HbOil was not a foreign direct investment and certainly not a foreign direct investment in North Korea.

But if HbOil is seen as contributing materially and knowingly to any of the proscribed activities in past E.O.’s and the new sanctions legislation, then it could be slapped with secondary sanctions, thus affecting Firebird’s interests indirectly. The KOEC is not now designated, which might be why some think that the HbOil investment is safe. But as Treasury gears up its financial forensics, all entities that do significant business with North Korea will come under closer scrutiny. There is still much about the new legislation that will require clarification, including the question of whether brokerages, pension funds, insurance companies or hedge funds can invest in entities with significant stakes in North Korea.

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