On Nov. 2, 2017, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to further alert financial institutions to North Korean schemes being used to evade U.S. and United Nations (UN) sanctions, launder funds, and finance the North Korean regime’s weapons of mass destruction (WMD) and ballistic missile programs.
The advisory was issued in conjunction with a final rule pursuant to Section 311 of the USA Patriot Act prohibiting financial institutions from opening or maintaining a correspondent account for, or on behalf of, Bank of Dandong. These actions follow the targeting, by the Department of Treasury’s Office of Foreign Assets Control (OFAC), of several representatives of North Korean financial institutions on Sept. 26, 2017. The advisory provides a list of red flags that will assist financial institutions in identifying and reporting suspected illicit activity involving the North Korean government and its financial institutions.
FinCEN references the UN Security Council “Report of the Panel of Experts established pursuant to resolution 1874,” (February 2016) which found that North Korean state-owned enterprises typically orchestrate elaborate trade-based payment schemes involving the sale of prohibited natural resources, mainly to China-based companies which in turn sell these natural resources to the Asian market.
“The North Korean state-owned enterprises indirectly receive payment, from the China-based companies, through a complex layering scheme involving front companies, shell companies, shipping or trade businesses based in Asia (often registered in Hong Kong), and other companies based in various offshore jurisdictions (e.g., British Virgin Islands, Marshall Islands and the Seychelles).”
These front or shell companies are used to purchase and ship commodities, which may include goods that can be used to further the WMD and ballistic missiles programs, to North Korea.
Red Flags of Potential North Korean Illicit Financial Activity
FinCEN notes that many North Korean-related front companies, financial representatives and corporate service providers working on behalf of the North Korean government often share similar characteristics. Financial institutions should consider the below red flags in reviewing and assessing financial activity to ensure that their correspondent accounts are not being used to facilitate prohibited transactions and to assist in reporting potentially suspicious transactions to FinCEN.
- North Korean-born representatives often use Chinese aliases or Chinese facilitators to establish and operate bank accounts and front or shell companies. They may also appear as signers for accounts maintained by the front or shell companies.
- North Korean-born representatives appearing as corporate officers of multiple, seemingly unrelated, front or shell companies that also often transact with each other.
- Use of multiple companies with the same owners or managers. These companies also frequently share addresses, telephone numbers and employees, and they may transact with similar business partners.
- Front and shell company addresses frequently recycled and used for multiple business registrations, particularly addresses in the Jiadi Square area in the city of Dandong in the Liaoning province of China, where the North Korea Dandong Consulate is also located.
- Front and shell companies registered in either the Liaoning province in China—specifically in the municipalities of Dalian, Dandong, Jinzhou and Shenyang—which border North Korea, or in Hong Kong, a major financial center with a variety of corporate service providers.
- Substantial financial activity involving front or shell companies unrelated to stated areas of business or lacking a business purpose.
- Lack of online presence despite significant financial activity.
- Correspondent account transactions conducted by, or on behalf of, Liaoning-based banks, including, but not limited to, institutions located in the cities of Dalian, Dandong, Jinzhou and Shenyang.
- Financial activity transacted through front and shell companies, often sharing the same address, occurring in cycles, whereby one company will pay a common beneficiary for a period of time and then cease payments, which will then be made through another company sharing the same address.
- Front or shell companies using shipping and import/export businesses including textile, garment, fishery and seafood businesses as well as coal and other commodity trading businesses.
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Perspective in FinTech
 See https://www.fincen.gov/resources/statutes-and-regulations/311-special-measures
 See https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170926_33.aspx.
 UNSCR 2371 prohibits imports of North Korean coal, iron and iron ore, lead and lead ore, and seafood. UNSCR 2375 prohibits imports of textiles, among other new measures.
Warren Averett is an independent member of the BDO Alliance USA. This article was borrowed with permission from BDO USA, LLP