The Screw Turns I: New US Financial Sanctions



This week, we lead with two developments on the sanctions front; today, the Treasury ruling that places new constraints on North Korea’s access to the international financial system; and on Wednesday, a discussion of new European sanctions.

The new Treasury “finding” and “notice of proposed rule-making,” as they are technically called, stem from the 2001 Patriot Act and its measures against money-laundering and terrorist financing. Under the Act, Treasury has the power to conclude that a foreign “jurisdiction, institution, class of transactions, or type of account is of ‘primary money laundering concern.” For example, the infamous Banco Delta Asia case reached the conclusion that the BDA was an “institution” of primary money-laundering concern. Once this “finding” is reached, Treasury then has the power to issue rules that “require domestic financial institutions and financial agencies to take ‘special measures’ against the money laundering concern.” These, too, are tiered, ranging from tighter record-keeping up through the so-called “fifth special measure” under which banks are required to place conditions on—or sever outright—correspondent or “payable-through” accounts.

The Treasury measure went large on each of these dimensions. First, after presenting evidence of malfeasance, it not only designated particular North Korean institutions, a strategy which—despite the appeal of BDA—has proven of mixed efficacy given the capacity to create new shell entities and false name accounts. The Treasury finding reached the conclusion that North Korea as a whole is a jurisdiction of primary money-laundering concern. Second, the notice of rule-making also invoked the fifth special measure of calling on banks to sever all correspondent relations with North Korean entities altogether.

But this, of course, was not the central bite of the Treasury ruling since no North Korean banks have correspondent relations with American banking institutions. The bite comes in the measures that bear a resemblance to secondary sanctions. American institutions involved in clearing functions for foreign banks on behalf of third-party financial institutions are also required to undertake “due diligence” in this regard, in effect requiring them to sever such relations as well (thanks to Bill Newcomb for reference to two diagrams on the dominant methods of clearing of dollar transactions that illustrate clearly the power the US holds as a result of the centrality of its financial system.) Reproduced below is also the precise language that Treasury suggests should be sent out by American banks to their correspondents.  

Nor can North Korea evade these measures by going to secondary offshore dollar-clearing centers—for example, in Tokyo, Hong Kong or Manila—because those clearing centers are designated as such precisely because they are credible adherents to international money-laundering standards.

These measures are by no means foolproof. First, they do not entirely get around the need for financial intelligence. The notice offshores due diligence by requiring foreign banks to abide by increasingly sophisticated anti money-laundering protocols, including through use of dedicated software. Foreign banks may be more or less rigorous in their scrutiny, and we have seen that major European and American banks more or less openly flouted Iranian sanctions. Nonetheless, those cases ultimately did come to light and with great cost to the respective institutions; banks are lax at their own risk. There simply aren’t that many foreign banks likely to be willing to do low-volume dollar business with North Korea on their own account or without concern for American scrutiny.

Closure of these accounts pushes North Korea back into an incredibly labor-intensive business—also ultimately not exempt from scrutiny—of attempting to conduct financial transactions in cash or through borrowed-name accounts, thus lengthening the chain of financial transactions that would require scrutiny. Impossible? No. Costly and increasingly difficult? Absolutely.

Two final notes, the first on timing. We suspect that this measure has been in the works for some time and is not related to the bank heist cases we discussed last week. A series of sanctions measures have moved in this direction. Proponents of the US sanctions resolution passed in January argued for inclusion of such measures, although they were not ultimately required by the legislation. UN Security Council Resolution 2270 called for closing correspondent banking relations, but the entire resolution was caveated by permitting states to judge whether the transactions were related to the country’s WMD program, permitting plausible denial. In effect, the Treasury measure enforces a kind of secondary sanction and 2270 as well. But if there is credible evidence of North Korean involvement in the Bangladesh central bank case, these designations would certainly be warranted on those grounds alone (see my colleague Marc Noland’s post on the near-comic North Korean efforts to claim that they care about money-laundering).

The second and most important issue, though, is whether this will have material effect. We have been waiting for some time to see whether and how sanctions will have effect, and the exchange rate—my favorite indicator of whether the Chinese are acting—continues to hold firm. Now it will be interesting to see if this announcement has market effect. If not, the regime may be exploiting some unknown sources of reserves. But I continue to believe that between 2270, its implementation, North-South sanctions and now these financial measures, the screws are turning; if North Korea is not affected by this, then the only possible conclusion is that Beijing is effectively acting as a lender of last resort.

(Thanks to Bill Newcomb and Josh Stanton for comments). 

From the Treasury Notice of Proposed Rule-Making

“A covered financial institution may satisfy this notification requirement using the following notice:

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.” 

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