Global Financial Body Blacklists North Korea

One of the most important offices in the subterranean warrens of the Treasury Department is the Financial Crimes Enforcement Center, or FINCEN, whose mission is to combat illicit finance and money laundering, and whose global power derives from its influence within a global body of counterpart agencies from governments worldwide known as the Financial Action Task Force, or FATF, which in turn has the power to exclude any bank and most countries from the global financial system, rendering the target insolvent.

Yesterday, FINCEN announced that that several governments had failed to enact, implement, and/or enforce adequate adequate money laundering legislation, and as a consequence, FINCEN effectively warned all financial institutions — a much broader term under banking regulations than just banks — that they dealt with the subject nations at their own peril. The targeted nations include both money laundering havens and rogue states. Significantly, Iran was targeted for countermeasures for terrorist financing, and North Korea was targeted for “enhanced due diligence” due to its refusal to enact, or even discuss the enactment of, legislation to combat money laundering and terrorist financing.

What follows may be dull reading, which is why I predict most of the news media will fail to grasp its significance. But as you read this, imagine yourself as a Chinese banker who is asked to help finance some part of Beijing’s newly announced bailout of Kim Jong Il’s bankrupt regime. What potential profit could you make in North Korea that’s worth risking your access to global finance and your correspondent accounts in U.S. banks?

Based on the FATF’s adoption of the ICRG’s findings, a decision by the FATF in which the United States concurs, FinCEN is advising U.S. financial institutions of their increased obligations under Section 312 of the USA PATRIOT ACT, 31 USC § 5318(i). Accordingly, U.S. financial institutions should apply enhanced due diligence, as described under implementing regulations 31 CFR § 103.176(b) and (c) when maintaining correspondent accounts for foreign banks operating under a banking license issued by Angola, DPRK, Ecuador, and Ethiopia.

Although it’s doubtful that North Korean-licensed banks have any remaining correspondent accounts in U.S. banks today, bear in mind that the FATF’s member agencies are issuing similar warnings around the world, in places like Switzerland, Austria, Liechtenstein, Macau, Singapore, and Hong Kong. And Seoul, the very place Daniel Glaser just visited, and where a North Korean-controlled entity still holds accounts used for processing payments to Kim Jong Il’s yacht fund North Korean workers at the Kaesong Industrial Park.

Note well the reference to Section 312 of the PATRIOT Act, one of the provisions that nearly destroyed Banco Delta Asia, lest anyone miss the meaning of this warning.

Enhanced due diligence is required for any correspondent account maintained for a foreign bank that operates under a banking license issued by a foreign country that has been designated as non-cooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization of which the United States is a member and with which designation the U.S. representative to the group or organization concurs.

As required under 31 CFR § 103.176(b), covered financial institutions should ensure that their enhanced due diligence programs, which address correspondent accounts established, maintained, administered, or managed in the United States for a foreign bank, include, at a minimum, steps to: conduct enhanced scrutiny of such correspondent account to guard against money laundering and to identify and report any suspicious transactions, in accordance with applicable law and regulation; determine whether the foreign bank for which the correspondent account is established or maintained in turn maintains correspondent accounts for other foreign banks that use the foreign correspondent account established or maintained by the covered financial institution and, if so, take reasonable steps to obtain information relevant to assess and mitigate money laundering risks associated with the foreign bank’s correspondent accounts for other foreign banks, including, as appropriate, the identity of those foreign banks; and determine, for any correspondent account established or maintained for a foreign bank whose shares are not publicly traded, the identity of each owner of the foreign bank and the nature and extent of each owner’s ownership interest.

The regulations at 31 C.F.R. § 103.176 really boil down to “don’t say you weren’t warned.” They don’t strictly prohibit transactions with North Korea or North Korean entities. They merely help prosecutors and regulators defeat protestations of innocence by financial institutions that get sanctioned or prosecuted for facilitating suspicious transactions. The kicker is that North Korea is so opaque financially that no bank in the world really knows what happens to money paid, sent, or lent to North Korea. Practically speaking, no one can meet a reasonable set of due diligence restrictions on transactions involving North Korea. This understated regulatory action could serve to frighten capital — most critically, Chinese capital — away from regime-sustaining dealings with Kim Jong Il.