North Korea, a heavily sanctioned country, is using a vast network of shadowy criminal entities to undertake comprehensive and sophisticated evasion tactics, particularly in maritime trade, where it can potentially earn hundreds of millions of dollars every year, to finance illicit nuclear and missile proliferation.
The maritime industry has to remain vigilant against these sanction-evasion tactics in order to limit the risk of involvement. It is thus critical that companies involved in maritime trade access their risks and implement a robust compliance control program to address any identified gaps.
Maritime Fairtrade (MFT): Why did the US government impose increasingly stringent sanctions on North Korea?
Baker & McKenzie (BM): The US government has imposed sanctions against North Korea in one form or another since the Korean War in 1950. While there have been a number of reasons for the US sanctions, the overriding motivation has been to pressure North Korea to denuclearize by starving it of cash and trade. The United Nations has also imposed extensive sanctions against North Korea, but the US sanctions have exceeded the scope of the UN sanctions to capture a broader range of activities and business.
Over the years, US sanctions have undergone a cycle of expansion and temporary relaxation. On several occasions, the US government has expanded and strengthened the sanctions in response to advances in North Korea’s nuclear weapons program or after its testing of ballistic missiles, only to relax those sanctions during nuclear negotiations in which North Korea promised to freeze its nuclear program, dismantle nuclear facilities, and/or stop ballistic missile testing. When the US government perceived a lack of cooperation or compliance with agreed commitments, it would once again impose more sanctions.
Overall, the trend has been towards increasingly strict sanctions against North Korea. In 2007, the US imposed an export ban on North Korea, which in 2011 became a full-fledged trade embargo prohibiting virtually all trade in goods or services if there were any US nexus whatsoever, such as involvement of US companies, US citizens, permanent residents, or US dollars.
In 2017, the Countering America’s Adversaries Through Sanctions Act (CAATSA) was passed by the US Congress and signed by the President into law. CAATSA included provisions specifically targeting the shipping industry, including a prohibition on the entry of certain North Korea-connected vessels into the United States. CAATSA also expanded the risk that non-US companies and vessels that do business with North Korea could themselves become sanctioned by being added to the Specially Designated Nationals and Blocked Persons List (SDN List), which is maintained by the Office of Foreign Assets Control (OFAC) in the US Treasury Department, which is the main US sanctions enforcement agency. North Korea remains on the US State Department’s list of state sponsors of terrorism.
Over the past few years, OFAC has imposed additional layers of sanctions on parties in North Korea determined by the US Government to be engaged in human rights violations, cyberattacks, and money laundering. These have included parties outside North Korea, including in Russia and China. These parties are designated as SDNs and they, along with their subsidiaries, are effectively blacklisted from the US market. OFAC has said that it is “aggressively targeting” anyone who facilitates a significant export to or import from North Korea, or who engages in the North Korean transportation industry.
Basically, the US sanctions prohibit virtually any shipments or other transactions involving North Korea where there is any US nexus, which as noted above is broadly defined. Even if there is no US nexus, non-US companies engaging in business with North Korea may risk being added to the SDN List. This often has a devastating effect on non-US companies, as most banks and non-US companies are reluctant to do business with companies or vessels on the SDN List even where there is no US nexus.
MFT: What are the common tactics that North Korea and its accomplices take to evade sanctions vis a vis maritime route?
BM: North Korea’s extensive efforts to evade sanctions are well-documented. The US Government has issued several advisories to help companies in the shipping industry identify possible sanctions evasion and mitigate related sanctions compliance risks. This includes the “Updated Guidance on Addressing North Korea’s Illicit Shipping Practices” published by the US Departments of State, Treasury, and the Coast Guard in May 2019, and the “Guidance to Address Illicit Shipping and Sanctions Evasion Practices” published by those same agencies in May 2020. I will provide a few examples of common tactics taken to evade sanctions.
Vessels that have been sanctioned or are engaged in sanctionable trade with North Korea have been known to paint over their names and IMO numbers in order to hide their identities. They have also been known to falsify their flags. Parties engaged in illicit trade have reportedly falsified documents, such as bills of lading, certificates of origin, invoices, and packing slips, to hide the fact that cargo was going from or to North Korea.
Another common tactic is to disable or manipulate automatic identification systems (AIS) in order to conceal a vessel’s movements or ports of call. Vessels with cargo originating from or destined to North Korea might engage in ship-to-ship transfers to avoid stopping at North Korean ports.
MFT: What features should a good sanctions compliance program have?
BM: First of all, OFAC expects any company that conducts business in or with the United States to have a sanctions compliance program, not just US companies. OFAC has stated this explicitly in its “A Framework for OFAC Compliance Commitments”, which was published in May 2019. This expectation was reiterated for the shipping industry in the “Guidance to Address Illicit Shipping and Sanctions Evasion Practices”.
OFAC’s framework outlines and describes the five “essential components of compliance” which are: (1) management commitment (senior management promotes a “culture of compliance”); (2) risk assessment (the company identifies and assesses the sanctions compliance risks in its customers, supply chain, services, etc.) ; (3) internal controls (the company has an effective written compliance program); (4) testing and auditing (that compliance program is tested and audited to make sure it is effectively mitigating the relevant risks); and (5) training (which should be periodic and appropriately tailored for the varying roles of different employees).
MFT: What best practices can the shipping industry adopt to detect deceptive shipping practices and potential sanctions evasion?
BM: As a starting point, companies in the shipping industry should conduct risk assessments to identify where they might encounter attempts to evade the sanctions, including by counterparties. On the basis of that risk assessment, the company should develop or update its sanctions compliance program to specifically address the identified risks.
Even within the shipping industry, the specific risks vary depending on the type of company and its role in a particular shipment. This is why the US government, in its “Guidance to Address Illicit Shipping and Sanctions Evasion Practices”, provides guidance on the policies and procedures that might be helpful for different types of companies involving in the shipping industry. This includes ship owners, managers, operators, brokers, ship chandlers, flag registries, port operators, shipping companies, freight forwarders, classification service providers, commodity traders, insurance companies, and financial institutions.
It is critical to train employees to recognize red flags indicating the possibility of sanctions evasion in a transaction. In fast-moving transactions, it might be easy for someone to miss a piece of information that, if reviewed critically, might indicate that a vessel is, for example, carrying cargo from North Korea or otherwise involved in sanctions evasion.
For instance, as part of your due diligence, consider whether a vessel has a history of turning off its AIS responder. Monitor ships throughout the entire lifecycle of the transaction. Watch out for sudden transfers in the ownership of a vessel between companies controlled by the same beneficial owner. These are just a few examples. I recommend reading the US government’s advisories, getting to know them well, and incorporating that guidance into a thoughtful, risk-based compliance program aimed at conducting appropriate due diligence as well as identifying and addressing possible red flags.