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Hong Kong on the frontline in enforcing new North Korea sanctions

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Hong Kong has become one of the first jurisdictions to enforce the new, enhanced sanctions regime against North Korea pursuant to UN Security Council Resolution 2270 (the “Resolution”) passed on 2 March 2016.

On 9 March 2016, the Cambodian-flagged freighter MV Gold Star 3 (IMO No. 8405402) attempted to enter Hong Kong waters for refuelling and resupply. The Director of Marine refused entry on the basis that the freighter is among the vessels listed in Annex III of the Resolution. The Resolution requires UN member-states to refuse port entry to vessels owned or controlled (directly or indirectly) by designated entities. The Gold Star 3 is owned by Ocean Maritime Management, which was previously designated and subject to asset freezes for being supporting North Korea’s nuclear, ballistic missile, and/or weapons of mass destruction programmes.

The Resolution

On 2 March we issued an update noting the fifteen new or widened prohibitions concerning North Korea created by the Resolution. These changes broadly fall within the following categories:

•  Mandatory cargo inspections for shipments with a North Korea nexus;

•  Broadened definition of ‘luxury goods’ which cannot be sold or supplied to North Korea;

•  Broadening of the types of commodities which can no longer be imported from North Korea;

•  New additions to the list of goods prohibited for export to North Korea, including aviation fuel; and

•  Denial of aviation and maritime services to North Korean entities, aircraft, and vessels, including chartering, crew services, vessel registration, and port access.

These revisions, once implemented into domestic law in Hong Kong and Singapore, will drastically broaden the scope of the sanctions regime that entities in those jurisdictions must comply with. Current restrictions prohibit the provision of bunkering, maintenance and repair services as well as any other items necessary for the safe operation of a ship where there are reasonable grounds to believe that the vessel is carrying sanctioned items. There are also restrictions against the procurement or carriage of sanctioned items, the provision of technical training or services in respect of the same, or dealing with funds or economic resources connected to sanctioned entities or trade in sanctioned items.

Hong Kong law

This is a timely reminder that Hong Kong enforces the UN sanctions against North Korea through the United Nations Sanctions (Democratic People’s Republic of Korea) Regulation (Cap. 537AE).

It is important to note that Hong Kong sanctions apply to all persons within Hong Kong territory, and have extra-territorial effect on all Hong Kong-incorporated companies and individuals who hold both Hong Kong permanent residency and Chinese citizenship, as well as aircraft and ships registered in Hong Kong. Directors of Hong Kong-incorporated companies or foreign companies doing business in Hong Kong are also at risk of personal liability for any corporate breaches of Hong Kong sanctions, irrespective of the nationality or domicile of the director.

Recent findings by the UN expert panel on North Korea suggest that the sanctioned North Korean shipping entity, Ocean Maritime Management, has been operating in Hong Kong through a Hong Kong-based company for the purposes of evading the sanctions regime. This highlights the need for those in the Hong Kong maritime sector to exercise greater vigilance in identifying counterparties to avoid a breach of the sanctions regime.

Revisions to the Hong Kong sanctions regime to reflect the toughened requirements of the Resolution are expected in the near future.

The China angle

As a permanent member of the UN Security Council, no sanctions regime can enter force without Chinese support. However, as North Korea’s largest trading partner and closest ally, Chinese enforcement of North Korean sanctions has often been tepid. Recent statements from the Chinese Foreign Ministry appear to suggest that China will enforce those aspects of the sanctions regime pertinent to the North Korean nuclear programme, but will be far less zealous in relation to other goods and services.

Despite that ambiguity, there have been signals pre-dating passage of the Resolution indicating that the Chinese Government views the latest sabre-rattling by North Korea with substantial displeasure. Reports emerged in late February that ICBC and several other major Chinese banks had begun imposing asset freezes on bank accounts held by North Korean entities, particularly in the border province of Liaoning. Bank of China previously closed correspondent accounts for North Korea’s Foreign Trade Bank in 2013.

Singaporean sanctions

Singapore also enforces the UN sanctions regime against North Korea through the United Nations (Sanctions – Democratic People’s Republic of Korea) Regulations 2010, and the Monetary Authority of Singapore (Freezing of Assets of Persons - Democratic People’s Republic of Korea) Regulations 2009. These apply to all persons in Singapore and have extra-territorial effect on Singapore citizens, Singapore-incorporated companies, foreign companies registered in Singapore, as well as aircraft and ships registered in Singapore.

Under Singapore law, it is prohibited to knowingly do anything with the intention or effect of causing, assisting, or promoting a breach of the sanctions regime. There is also a statutory duty of immediate disclosure in the event that a person comes to have information or possession of any property linked to a designated entity or a proposed transaction involving property owned or controlled by a designated entity.

Like China and Hong Kong, Singapore has long been a centre for North Korean-related transactions. In January 2016, Chinpo Shipping Company (Pte) Ltd was prosecuted and fined S$180,000 in the Singapore District Court for its role as a financial conduit for sanctioned North Korean entities, and involvement in smuggling arms and military equipment from Cuba to North Korea. The prosecution marked the first time that UN law has been enforced in Singaporean courts.

Revisions to the Singapore sanctions regime to reflect the toughened requirements of the Resolution are expected in the near future.

Conclusion

The Resolution substantially widens the type of goods and services which are now subject to the UN sanctions regime. It also implements the most comprehensive restrictions yet in relation to shipping transactions involving North Korea, including total bans on port entry and service provision to North Korean vessels. It is now more important than ever for those in the maritime sector to carefully review the backgrounds of relevant counterparties to avoid a breach of sanctions law.

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