Korea, Democratic People’s Republic of: Best Practices for Financial Crime Risk Management

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The recent exploits by illicit actors to launder US funds through evasion of US economic sanctions against the Democratic People’s Republic of Korea (DPRK) highlight the evolving global threat environment. In this article, we examine the innovative tactics, techniques, and procedures (TTPs) used by the DPRK to launder funds through legitimate financial channels and explore measures that can be taken to maintain the financial integrity of institutions.

Recent Examples of DPRK Exploits

Illicit Activity in China

In September 2016, China-based company Dandong Hongxiang Industrial Development Co. Ltd. (DHID) and four Chinese nationals were charged with conspiring to evade US economic sanctions against the DPRK. The defendants established front companies globally and opened Chinese bank accounts to conduct financial transactions through the US financial system.

Front Companies and Money Laundering

In June 2017, the US filed a civil complaint to forfeit approximately $1.9 million from China-based company Mingzheng International Trading Limited (MITL), alleged to be a front company created for the purpose of laundering US funds on behalf of sanctioned DPRK entities.

Recent Seizure Warrants

Most recently, in July 2017, US authorities filed seizure warrants with eight global financial institutions in an attempt to seize millions of dollars associated with front companies connected to the DPRK. These banks allegedly processed more than $700 million of prohibited transactions on behalf of entities related to the DPRK since 2009.

Secondary Sanctions: US Government Response

The DPRK’s consistent and continued utilization of China to gain access to the global financial system has raised serious concerns pertaining to whether the US Department of the Treasury should place economic sanctions on China. In response, the current administration took action by issuing a notice of proposed rulemaking aimed at imposing secondary sanctions on Chinese companies that have done business with North Korea.

AML/OFAC Compliance Risk Mitigation

As the global threat environment evolves, so must US financial institutions’ compliance and risk management initiatives. Institutions should continually evaluate and strengthen their AML and OFAC programs to ensure they have safeguards in place to mitigate the current and/or potential risks associated with existing global events and threats.

Recommendations

• Revisit Customer Risk Rating (CRR) Methodology and Country Risk Rating Methodology
• Provide detailed training to AML and OFAC personnel on sanctions screening and risk management practices
• Integrate KYC program into AML/OFAC program with clearly defined policies and procedures
• Develop a methodically developed and revisited transaction monitoring strategy

Conclusion

The DPRK threat to the US and UN continues to escalate, and contemporary TTPs will be unearthed by illicit actors in their endeavors to exploit legitimate financial channels. As these TTPs may be at the hands of legitimate countries with which the US maintains agreeable relations, secondary sanctions may likely resurface in an effort to curtail money laundering efforts.

Institutions should remain proactive in risk mitigation practices and continually evaluate and strengthen their AML and OFAC programs to ensure they have safeguards in place to mitigate the current and/or potential risks associated with existing global events and threats. With the help of a dedicated financial crimes advisory practice, institutions can create a unique and forward-thinking program tailored to their own risk profiles.