Last week, President Obama issued an Executive Order outlining new sanctions. It is designed in part to incorporate the multilateral commitments outlined in UN Security Council Resolution 2270 but goes far beyond them as a result of the North Korea Sanctions and Policy Enhancement Act of 2016 (Public Law 114-122; our analysis here). Of particular note is the fact that sanctions follow E.O. 13687 of January 2015 which authorized sanctions not only for the country’s nuclear and missile activities but for human rights violations and specifically labor exports. Following is a brief overview of the plain meaning of the main sections of the EO, omitting those that define terms (Section 9), outline procedures and timing of implementation (Sections 11-13) and exempt activities of the US government and United Nations (Section 8). We close with a discussion of implementation, which remains a question but may require only a few test cases to have effect.
Section 1 blocks all property or interests in property of the Government of North Korea and the Korean Workers Party. This would seem gratuitous; why would either the DPRK or KWP have assets in the US? But the EO issues the prohibition not only with respect to the US as a physical jurisdiction but with respect to any US person as well. Our reading would thus suggest that US citizens are not free to use offshore locations in order to invest in or possibly even transact with any entity that is state- or party-owned, which is pretty much the entire economy. This site does not offer legal advice to the handful of intrepid entrepreneurs trying to do business with North Korea, including through exotic funds and other instruments (including Orascom as it turns out). But I would certainly be talking to my lawyers if you are.
Sections 2 and 6 effectively outline secondary sanctions by applying the same restrictions in Section 1 to entities engaged in a host of specific activities with North Korea. The list is expansive, and includes any industry that might be designated (“such as transportation, mining, energy, or financial services”), generating uncertainty about what might subsequently come under scrutiny. In addition, the EO specifically references companies engaged in trade in metal, graphite, coal or software in line with UNSC 2270 (with the weakly limiting condition of it contributing to party or state coffers); entities engaged in facilitating human rights abuses or censorship; entities engaged in labor exports (see Marc Noland’s analysis); firms undermining cybersecurity; and a permissive category of facilitators (entities that “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this order).
Section 3 institutes a complete ban or embargo on direct or indirect trade of goods, services, and technology; investment; and any financing or guarantees.
Section 4 bans entry into the United States of any person involved in any of the foregoing activities.
Section 5 is written in particular legalese with reference to statute governing presidential authorities (section 203(b)(2) of IEEPA (50 U.S.C. 1702(b)(2)), but a plain reading suggests it could have effect on humanitarian operations. It states that the president claims the authority to restrict donations (under the prior statute) of items “such as food, clothing, and medicine, intended to be used to relieve human suffering.”
Section 7 stipulates that any effort to circumvent these bans is prohibited, a section we suspect is inserted in order to get around the “whack-a-mole” problem of creating front companies.
Section 10, in an interesting twist, states that firms need not be given prior notice before the blocking actions are taken. This measure is important. If firms are notified that their activities are blocked, then they can simply transfer funds out of the US or shift their financing needs to other jurisdictions.
What effect will these new measures have? The answer depends on two things. The first is whether any third parties doing business with North Korea—whether corporate or particularly financial—have financial dealings with the US that might make them either vulnerable or skittish. An example of how the sanctions operate can be seen in a Russian example. In a terse story Chosun Ilbo picked up that Gazprom has severed all business with North Korea, which had included gas exploration and gas pipe construction. The reason? The country is an issuer of debt in European financial markets and wanted to make the point in a recent prospectus. What we don’t know is exactly how vulnerable Chinese banks and firms might be, and whether some have such limited exposure that they will run risks.
But second, the effects of the measure will also hinge on Treasury demonstrating it’s credibility by tracking a few exemplary firms to earth. Treasury could then either send a warning signal or go straight to blocking actions. Note that it does not take many; one of the central objectives of broadly-framed secondary sanctions is to create uncertainty that will have ripple effects. As advocates of secondary sanctions have long noted, they circumvent the ability of the Chinese government to protect North Korea because the actions having material effect come from the decentralized choices of Chinese entities.
I am more and more convinced that North Korea is about to face difficulties that it has simply not anticipated. The next phase of the game: how hard will the US push and will China push back by loosening the screws if they see real distress? China almost immediately pushed back on the sanctions,arguing they were opposed to unilateral sanctions in general and to measures that affected their “legitimate interests” in particular. Stay tuned.