Money Laundering North-South Sanctions Sunshine

Kaesong investors beware: Treasury issues new warning about N. Korea money laundering risk

Precisely what North Koreans do with earnings from Kaesong, I think, is something that we are concerned about.”

– David Cohen, Undersecretary of the Treasury for Terrorism and Financial Intelligence

Just as Kaesong begins the process of reopening, and as the South Korean government seeks to “internationalize” investment there, the Treasury Department has issued a new warning about money laundering risks emanating from North Korea. The warning echoes longstanding concerns by the global Financial Action Task Force.

Every potential investor in North Korea needs to understand just how severe the potential consequences of turning a blind eye to money laundering can be, especially with respect to a place like North Korea, where Treasury has put the world on notice of the risks. Careless investors face multiple risks, including the blocking of their assets and accounts, civil penalties, and criminal prosecution. Assets that are co-mingled with criminally derived property, or that are co-mingled with assets involved in the commission of a money laundering offense, are subject to criminal or civil forfeiture.

Investors who may think that U.S. Treasury regulations don’t apply to them because they aren’t doing business in the United States may be shocked to learn that nearly all dollar-denominated transactions pass through U.S. Treasury-regulated banks, through correspondent accounts. Chinese and European banks that need their own access to U.S. financial institutions may also shun transactions with North Korea.

To further raise the political risk, new North Korean provocations are likely to cause President Obama, or a future U.S. President, to direct Treasury to further tighten financial restrictions on transactions involving North Korea.

Even today, investments in North Korea will attract greater scrutiny than investments in other countries. U.N. Security Council resolutions impose a duty to refrain from transactions that could help North Korea proliferate, and different jurisdictions have different blacklists of North Korean banks that are known to be involved in proliferation and money laundering.

It’s the investor’s duty to understand those complex and potentially tricky regulations governing transactions with North Korean nationals, something that no investor can do safely without specialized legal advice. Regulators will expect investors to ensure more financial transparency than they would if those investments were in places that did not pose the same money laundering risks. When it comes to the assessment of that risk, North Korea and Iran are in a class by themselves.

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