July 7, 2017 / 2:22 AM / 2 years ago

U.S. Treasury targets Chinese bank over purported ties to North Korea, new sanctions risk emerges

NEW YORK (Thomson Reuters Regulatory Intelligence) - The U.S. Treasury Department last week moved to sever a Chinese bank from the global financial system over concerns it was a conduit for illicit North Korean financial activity. The move signaled the United States is no longer willing to tolerate the actions of Chinese entities that support Pyongyang and plans to mete out punishment in the form of financial sanctions to alter behavior, experts said.

Damaged 100 yuan banknotes are seen on a table at a branch of China Bank in Foshan, Guangdong province, June 5, 2013.

“I think this is significant, not because of the effects of this singular action, but because it is, I think, the opening salvo of a broader campaign to pressure North Korea through the Chinese financial system. It begins to lay the groundwork for an isolation of Chinese actors that are facilitating illicit North Korean activity,” former senior Treasury and White House official Juan Zarate told Thomson Reuters Regulatory Intelligence.

Treasury’s Financial Crimes Enforcement Network (FinCEN) employed a seldom-used USA Patriot Act Section 311 authority to label the Bank of Dandong an institution of “primary money laundering concern,” thereby effectively excising it from the global financial system.

While Treasury’s action is technically a proposed rule rather than a final, binding rule, in practice it is a signal to banks around the world that they should immediately sever ties to Bank of Dandong. Banks are likely to do so rather than risk the loss of access to the U.S. financial system.

"The Department of the Treasury is committed to protecting the U.S. financial system from North Korean abuse and maximizing pressure on the Government of North Korea until it abandons its nuclear and ballistic missile programs," Treasury Secretary Steven T. Mnuchin said in a written statement(here). "While we will continue to seek international cooperation on North Korea, the United States is sending an emphatic message across the globe that we will not hesitate to take action against persons, companies, and financial institutions who enable this regime."

U.S. officials were continuing to look at other companies that may be helping North Korea and may roll out additional sanctions, Mnuchin told a press conference.

Treasury’s Office of Foreign Assets Control (OFAC) on Thursday also blacklisted two Chinese nationals and one Chinese company over their ties to Pyongyang. The blacklisted entity is Dalian Global Unity Shipping Co Ltd and the individuals are Sun Wei and Li Hong Ri, both of who reportedly are linked to North Korean banks that aid the regime’s illicit activity.

Bank of Dandong did not respond immediately to a request from Reuters for comment. A staff member at Dalian Global Unity would not comment on the sanctions and subsequent calls to the firm’s office in Dalian went unanswered.

CHINESE BANKS “ON NOTICE,” BETTER DUE DILIGENCE NEEDED TO ADDRESS RISK

Treasury’s action puts Chinese banks “on notice for either direct or indirect risk to North Korea,” said Zarate, now chair of a consultancy, The Financial Integrity Network. In other words, Chinese banks not only must avoid direct exposure to the North Korean regime, but would be wise to conduct due diligence necessary to ensure they are not serving peers with ties to the North Koreans.

“The big Chinese banks don’t want to be caught with their hand in the cookie jar with respect to North Korea any more than an American or European bank,” he said.

But Chinese banks are not alone in their potential peril. Any non-U.S. banks that want to maintain U.S. dollar-clearing capacities also must “worry about indirect risk assuming that they’re not directly trading with North Korea,” Zarate said.

“The tentacles may run deeper and broader than people think, so they’re going to have to engage in due diligence to worry about this now,” Zarate said.

Although the targeted Chinese bank is small, the FinCEN 311 designation “is a big deal,” said a former banker who led sanctions compliance at one of the largest institutions in the United States.

“The banks will have to ensure that the banks they have correspondent relations with are not acting on behalf of the Chinese bank. It will be carefully implemented and watched closely by regulators,” said the source.

Treasury’s action was only the latest taken by the U.S. government against a Chinese entity suspected of aiding North Korea. Earlier this month, the U.S. Justice Department filed a civil complaint seeking the forfeiture of more than $1.9 million held by Mingzheng International Trading Limited, a China-based company that prosecutors said was a front used to launder money for sanctioned North Korean entities.

(This article includes material from Reuters. It was updated throughout from the previously posted version)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on June 30. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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