Nov 4, 2016 4:44 pm ET
The U.S. on Friday finalized a proposal from June to further isolate North Korea from the banking system.
The U.S. Treasury Department said it issued a final rule that prohibits U.S. financial institutions from opening or maintaining correspondent accounts for North Korean banks, and it tells them to apply additional due diligence measures to prevent North Korean money from gaining improper access to the U.S. financial system.
Although North Korean financial institutions don’t maintain corespondent accounts with U.S. banks, the Pyongyang government uses state-controlled banks and front companies to surreptitiously conduct illicit international financial transactions, Treasury alleged.
“North Korea continues to use front companies and agents to conduct illicit financial transactions…and evade international sanctions,” said Adam J. Szubin, acting undersecretary of Treasury for terrorism and financial intelligence, in a statement. “Such funds have no place in any reputable financial system,” he said.
In June, Treasury issued a finding under Section 311 of the U.S.A. Patriot Act saying that North Korea is a jurisdiction of “primary money laundering concern” engaging in illicit financial conduct, effectively barring financial institutions from transacting with the Asian nation. The proposal finalized Friday flowed from the finding. Pyongyang called the June proposal a declaration of war.
North Korea conducted its fifth nuclear test in September, putting pressure on the U.S. to respond. Since that time, the U.S. indicted a Chinese businesswoman, and her trading company, for allegedly helping North Korea evade sanctions. And a U.S. official told The Wall Street Journal last month that a new sanctions package, targeting, among other things, coal exports, is advancing through the United Nations.
On Friday, Treasury said the final rule “supports international sanctions already in place” against North Korea, and it “provides greater protection for the U.S. financial system” from North Korean illicit activity. The move follows an October statement from the Financial Action Task Force, an international anti-money-laundering standards body, telling banks around the world to close their correspondent accounts with North Korean financial institutions.
“FATF has serious concerns about the threat posed by DPRK’s illicit activities related to the proliferation of weapons of mass destruction (WMDs) and its financing,” the body said in a statement, using Pyongyang’s formal name.
Treasury has previously used the Patriot Act’s anti-money laundering provisions to target North Korean illicit activity. In 2005, it named Banco Delta Asia, a small Macau-based bank, saying Pyongyang had used it to move ill-gotten wealth. Though the measures were later lifted in exchange for cooperation on nuclear issues, the U.S. shook Pyongyang with the effort, which was considered innovative at the time.
Juan Zarate, chairman of the Center on Sanctions and Illicit Finance at the Foundation for Defense of Democracies, was a Treasury official who led the move to target Banco Delta Asia. In his memoir, “Treasury’s War,” Mr. Zarate wrote that the use of Section 311 “was a modern act of financial warfare.”
Using Section 311 served as a “financial indictment” of the bank and North Korean illicit activity, he wrote. Once the findings made their way around the banking world, he wrote, it “sparked a chain of market-driven rejections” of North Korean accounts and transactions.
“The taint of Section 311 unleashed financial furies the likes of which the regime had never experienced,” wrote Mr. Zarate.
Write to Samuel Rubenfeld at Samuel.Rubenfeld@wsj.com. Follow him on Twitter at @srubenfeld.
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