Indictment Again Highlights the Role of Correspondent Banking in Money Laundering
On May 28, 2020, the U.S. Department of Justice (“DOJ”) unsealed a 50-page indictment against 28 North Korean and 5 Chinese bankers accused of using more than 250 front companies to obscure $2.5 billion in illicit financial dealings (“the Indictment”). The complex and far-flung scheme purportedly involved covert branches of North Korea’s state-owned Foreign Trade Bank (“FTB”)—all opened in foreign countries in an attempt to access the U.S. financial system, and to circumvent sanctions intended to guard against threats to national security, foreign policy, and the U.S. economy. The Indictment charges the individuals with conspiring to launder money, violations of the “international” prong of the money laundering statute (about which we have blogged), bank fraud, and violations of the International Emergency Economic Powers Act.
Although the Indictment is interesting standing alone, it also represents the latest in a series of enforcement actions involving North Korea and the U.S. financial system.
The multi-year scheme dates back to 2013 when the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), as part of its efforts to impede North Korea’s ballistic missile and weapons of mass destruction programs, placed the FTB on the Specially Designated Nationals and Blocked Persons list. U.S. persons, including U.S. financial institutions, are generally prohibited from dealing with individuals and companies on this list. In addition, the Financial Crimes Enforcement Network (“FinCEN”) deemed the entire North Korean financial sector as a jurisdiction of primary money laundering concerns in 2016 under Section 311 of the Patriot Act. The Indictment observes that FinCEN implemented the most severe special measures against the entire North Korean financial sector when it “cut all North Korean financial institutions—and entities acting on their behalf—off from any trade in U.S. dollar transactions via correspondent banking.”
To evade these prohibitions, the defendants and their co-conspirators allegedly opened covert branches of the FTB in various countries, such as Thailand, Libya, Austria, Russia, Kuwait, and China. The covert branches then would use foreign financial institutions that regularly maintained accounts in the U.S. to process U.S. dollar transactions. The Indictment refers to these banks as “Correspondent Banks;” we frequently have blogged on the heightened anti-money laundering concerns relating to correspondent banking relationships. The Indictment describes how such relationships work as follows:
Foreign financial institutions regularly maintain accounts in the United States at banks that process U.S. dollar transactions (“Correspondent Banks”). Correspondent Bank accounts are broadly defined to include any account established for a foreign financial institutions to receive deposits from, or make payments or disbursements on behalf of, the foreign financial institution, or to handle other financial transactions related to such foreign financial institution. See 31 C.F.R. § 1010.605. Correspondent Banks serve to support international wire transfers for foreign customers in currency that the foreign customer’s overseas financial institution normally does not hold on reserve, such as U.S. dollars. It is through these accounts that the funds used in U.S. dollar transactions clear. [Specially Designated Nationals and Blocked Persons] are, among other things, prohibited from accessing Correspondent Banks in the United States through foreign financial institutions, either directly or indirectly.
Because North Korea’s involvement in these correspondent banking transactions was concealed, the Correspondent Banks processed payments that they otherwise would not have. The defendants are charged with making several misstatements, falsifying invoices, and changing shipping destination—all to conceal North Korea’s involvement. If North Korea’s association with a specific front company was detected, the defendants and their co-conspirators allegedly would open a new front company, resulting in over 250 front companies processing U.S. dollar payments.
Even though the defendants are not within the custody or jurisdiction of the U.S. and may be difficult to apprehend, the Indictment is another step in the increasing efforts by the U.S. to target foreign nationals involved in criminal activity. More specifically, the Indictment is yet another example of the sustained enforcement efforts involving North Korea and the U.S. financial system, including the following actions about which we previously blogged:
- On March 2, 2020 the U.S. government sanctioned and indicted Chinese nationals for helping North Korea launder nearly $100 million in stolen cryptocurrency. According to the related and detailed civil forfeiture complaint, these funds were only a portion of those stolen in 2018 by state-sponsored hackers for North Korea from a South Korean cryptocurrency exchange.
- On November 12, 2019, FinCEN issued an Advisory on jurisdictions identified by the Financial Action Task Force (“FATF”) as having anti-money laundering and combatting the financing of terrorism deficiencies. The Advisory notes changes regarding the FATF-named jurisdictions and directed financial institutions to consider these changes when reviewing their obligations and risk-based policies, procedures and practices relating to the two named jurisdictions — which were North Korea and Iran. To protect the international financial system from money laundering and terrorist financing risks posed by North Korea’s activities related to the proliferation of weapons of mass destruction, FATF continues to (1) call for countermeasures against North Korea; (2) request that jurisdictions give enhanced scrutiny to any business relationships with North Korean companies, or to those acting on their behalf; and (3) terminate correspondent relationships with North Korean banks.
- On August 6, 2019, the U.S. Court of Appeals for the District of Columbia kept in place $50,000-per-day fines on three Chinese banks for refusing to comply with subpoenas issued by the DOJ for records of a Hong Kong company that allegedly facilitated hundreds of millions of dollars of transactions for a North Korean state-owed entity, in violation of U.S. sanctions. The court held that a subpoena issued under a special provision of the USA PATRIOT Act allows access to records held by foreign banks that use U.S. correspondent accounts, including records of transactions that do not themselves pass through a U.S. correspondent account, if those transactions were part of a larger scheme to access dollar funding through a U.S. correspondent account.
- On February 13, 2018, FinCEN announced that it had proposed a special measure naming ABLV Bank, AS (“ABLV”) an institution of primary money laundering concern pursuant to Section 311. ABLV’s alleged illicit activity included transactions promoting North Korea’s missile programs.
- In July 2017, the U.S. District Court for the District of Columbia unsealed a memorandum opinion that granted the DOJ “damming” warrants to seize all funds in bank accounts belonging to five Chinese companies which allegedly were used to hide transactions with North Korea using U.S. currency in violation of U.S. sanctions and money laundering laws. The underlying conduct allegedly resulted in over $700 million of prohibited transactions being processed by eight international banks.