It has now been an inexplicably long four months since the Treasury Department announced its Notice of Proposed Rulemaking to designate North Korea as a jurisdiction of primary money laundering concern, in which it stated its intent to cut off North Korean banks’ access to correspondent accounts in the dollar financial system. Under section 311 of the Patriot Act, however, such a cutoff only becomes legally enforceable after Treasury publishes its final rule, which Treasury still has not done, and should have done months ago. To understand why Treasury’s action is potentially such a big deal, read this or this, or (if you haven’t already) read about how it affected a bank in Macau that Treasury accused of laundering money for North Korea in 2005.
Needless to say, Treasury would not have taken that action had Congress not forced its hand in section 201 of the NKSPEA. Shortly after the passage of the NKSPEA, the U.N. Security Council enacted a similar provision in UNSCR 2270, giving that cutoff the backing of a global legal mandate.
Although the U.S. Treasury Department is the capo di tutti capi of the world’s financial regulators, it is also the case that Treasury can’t effectively isolate a target without global cooperation (case in point: Cuba). Hence, the supreme importance of Global Financial Action Task Force, one of the few international organizations that actually works. FATF is a consortium of industry and government regulators, and critically, it isn’t under U.N. control or subject to a Chinese veto. Originally established to harmonize international money laundering regulation and prevent illicit finance from taking advantage of weak governance in certain jurisdictions, FATF has played a growing role in suppressing terrorist and proliferation finance since September 11, 2001. Most governments take its warnings seriously, and those warnings were an important part of why Iran sanctions worked.
For years, FATF has also issued warnings that jurisdictions should take “countermeasures” against illicit North Korean finance. In that regard, much of the language in FATF’s warning is nothing new.
Democratic People’s Republic of Korea (DPRK)
The FATF remains concerned by the DPRK’s failure to address the significant deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threat this poses to the integrity of the international financial system. The FATF urges the DPRK to immediately and meaningfully address its AML/CFT deficiencies. Further, FATF has serious concerns with the threat posed by DPRK’s illicit activities related to the proliferation of weapons of mass destruction (WMDs) and its financing.
The FATF reaffirms its 25 February 2011 call on its members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with the DPRK, including DPRK companies, financial institutions and those acting on their behalf. [FATF, Oct. 16, 2016]
Still, North Korea was concerned enough about those warnings to make nice with the FATF, and by applying to join one of its associated groups, the Asia/Pacific Group on Money Laundering. FATF’s warnings, however, amounted to little more than recommendations for enhanced due diligence about suspicious transactions, and in the Mos Eisleys of the financial universe, “suspicious” is very much in the eye of the beholder. Although news reports sometimes treated these same-old-same-old warnings like page one news, the warnings have been mostly consistent since 2011. Until now, that is.
Belatedly, FATF has finally begun to implement UNSCR 2270’s more stringent financial sanctions on North Korea, and this time, FATF is telling its members some very clear, specific, and potentially devastating things:
In addition to enhanced scrutiny, the FATF further calls on its members and urges all jurisdictions to apply effective counter-measures, and targeted financial sanctions in accordance with applicable United Nations Security Council Resolutions, to protect their financial sectors from money laundering, financing of terrorism and WMD proliferation financing (ML/FT/PF) risks emanating from the DPRK. Jurisdictions should take necessary measures to close existing branches, subsidiaries and representative offices of DPRK banks within their territories and terminate correspondent relationships with DPRK banks, where required by relevant UNSC Resolutions. [FATF, Oct. 16, 2016, emphasis mine]
This warning is a critical piece in the enforcement of a global crackdown on North Korean banks, which have a very long history of illicit and proliferation financing. By binding the issuers of other convertible currencies, it effectively closes the biggest holes in the global net closing in on North Korea’s banks, and gives Treasury and third-country regulators an internationally accepted basis to isolate other banks that fail to cut off North Korea’s correspondent accounts or close its bank branches. If Treasury gets off the dime and issues its own final rule — and there are reasons to question the administration’s political will to enforce it — we’ll have an opportunity to see, in a few months’ time, how much effect this has. I’ll also be interested in knowing whether Treasury will adopt the comment by Bill Newcomb and me on beneficial ownership.
Meanwhile, FATF’s action is a late step forward, but a very big one. If the U.S., Japan, and South Korea are serious about building a global coalition to put “crushing” pressure on North Korea, this action is a sine qua non toward achieving that.