Compliance Alerts

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The recent escalation of tensions between the US and Russia, North Korea and Iran has triggered the Trump administration to unveil new sanctions, implement additional export controls, and impose novel anti-money laundering measures directed at these countries – as well as companies and financial institutions that do business with or otherwise support those jurisdictions.

While the US’ stated policy goals for these measures have not included imposing economic pain on China, these actions have had important indirect consequences for many Chinese companies and financial institutions. During the past year, the US has targeted Chinese entities with severe sanctions, slapped massive fines on Chinese firms, and wholly cut off certain Chinese banks from the US financial system.

Newly enacted sanctions suggest the US will take similar action against Chinese firms that carry out certain types of business with North Korea, Russia and Iran. These developments in international risk enforcement underscore why it is important for Chinese firms to understand US law, as well as the severe and negative consequences that can flow to Chinese companies that fail to do so.


The Trump administration has utilized a variety of policy tools to punish Chinese firms that violate US law, or that support foreign governments that have strained relations with the US.

1. Economic sanctions. In June 2017, the US Department of Treasury’s Office of Foreign Assets Control (OFAC) added two Chinese citizens to its Specially Designated Nationals and Blocked Persons List (SDN List) because OFAC determined these individuals were operating front companies for sanctioned North Korean entities. Contemporaneously, OFAC also designated Dalian Global Unity Shipping, purportedly for smuggling luxury goods into North Korea in violation of a UN ban on such trade.

In November 2017, immediately after the Trump administration classified North Korea as a state sponsor of terrorism, OFAC designated four Chinese companies and a Chinese individual with longstanding commercial ties to North Korea for engaging in significant importation and exportation activities to and from North Korea, including computers, machinery and raw materials associated with the construction of nuclear reactors.

2. Anti-money laundering special measures. In June 2017, the Financial Crimes Enforcement Network (FinCEN), another office within the Treasury Department, proposed to designate the Chinese Bank of Dandong as a “primary money laundering concern”. FinCEN asserted that the Bank of Dandong served as a “conduit” for North Korea to access the US and international financial systems, by processing more than US$2.5 billion in transactions through its US correspondent accounts between May 2012 and May 2015.

Some of these funds were used to facilitate millions of dollars of transactions on behalf of companies involved in North Korea’s weapons of mass destruction and ballistic missile programmes. When FinCEN issued a final rule last November implementing these special measures, the Bank of Dandong was effectively cut off from the US financial system.

3. Damming warrants. The US government has also utilized so-called “damming warrants” to seize funds of Chinese firms acting on behalf of North Korea. When a damming warrant is placed on an account, the US government prevents all funds from exiting the account and seizes any funds that flow into the account during the pendency of the warrant.

In early 2017, a federal district court in the District of Columbia granted the Department of Justice’s (DOJ) application to attach damming warrants for correspondent accounts at eight US financial institutions that allegedly were used by Chinese firms to process tens of millions of dollars on behalf of North Korea. The DOJ ultimately seized more than US$4 million in funds routed through the correspondent accounts while the damming warrants were in place.

4. Multi-agency enforcement actions. The US government has targeted Chinese companies for violating sanctions and export control laws. In one notable recent enforcement action, the China-based telecommunications company Zhongxing Telecommunications Equipment Corporation (ZTE) pled guilty to violating the International Emergency Economic Powers Act and simultaneously entered into settlement agreements with the OFAC, the Department of Justice, and the Bureau of Industry and Security (BIS) related to allegations that it had wilfully evaded US sanctions and export control laws by building, operating and servicing telecommunications in Iran using US-origin equipment and software. ZTE agreed to pay a total of US$892 million to resolve its potential liability, with the OFAC collecting more than US$100 million. This penalty is the largest civil penalty that the OFAC has ever imposed on a non-financial institution.

In addition, various media reports indicate the US government has opened a similarly wide-ranging investigation to assess telecommunications equipment and service company Huawei Technologies’ compliance with US sanctions and export controls. Both the OFAC and BIS reportedly have issued subpoenas to Huawei demanding that it turn over information regarding its historical exports to Cuba, Iran, North Korea, Sudan and Syria. Such subpoenas would suggest that Huawei, like ZTE, also may have shipped products or technology to those countries in contravention of US law.

5. Criminal prosecutions. Chinese firms that violate US sanctions and anti-money laundering laws can face criminal charges. In fact, the DOJ and OFAC frequently collaborate on building criminal cases against foreign nationals who attempt to evade US sanctions.

In August 2016, the DOJ charged a Chinese trading company, Dandong Hongxiang Industrial Development, along with four company executives, with violating US federal law by using front companies established in offshore jurisdictions to assist a sanctioned North Korean company in evading US sanctions.

The DOJ also initiated a civil forfeiture action against the Dandong Hongxiang’s funds in 25 Chinese banks on the basis that those funds were implicated in a money laundering scheme. In parallel with the DOJ actions, the OFAC added Dandong Hongxiang Industrial Development and its executives to the SDN List for their conduct.


In the past year, new legislative and policy developments indicate that the US government intends to sanction additional Chinese companies that continue to engage in commercial activities with Russia and North Korea.

1. Countering America’s Adversaries Through Sanctions Act. In August 2017, US President Donald Trump signed into law the Countering America’s Adversaries Through Sanctions Act. The act granted the Department of Treasury broad authority to expand secondary sanctions against foreign entities and individuals that conduct business with Russia and North Korea.

The act requires President Trump to impose various secondary sanctions on foreign entities that knowingly make a significant investment in, or provide financial support for, Russian deepwater, Arctic offshore or shale oil projects. In addition, the president is obliged to designate foreign persons for inclusion on the SDN List who facilitate significant transactions on behalf of Russian persons targeted by US list-based sanctions.

Similarly, the act mandates President Trump to designate foreign nationals who knowingly engage in certain dealings with North Korea, including maintaining a correspondent banking account on behalf of any North Korean financial institution (except as specifically approved by the UN Security Council), and importing to or from North Korea any defence articles or defence services. President Trump also must designate foreign persons that utilize North Korean labourers unless specific conditions relating to working conditions and the use of wages are met.

Given China’s historical economic ties with Russia and North Korea, this legislation is likely to present particular challenges to Chinese companies and financial institutions.

2. New North Korea sanctions. Shortly after the act became law, President Trump imposed another broad set of sanctions on North Korea. These new sanctions authorize the OFAC to sanction North Korean nationals, as well as foreign companies and banks that do business with North Korea. Most notably, these sanctions permit the OFAC to freeze the assets of foreign entities that have engaged in significant cross-border, commercial transactions with North Korea – even if such transactions are unrelated to North Korea’s nuclear or ballistic missile programme. In addition, foreign financial institutions providing banking services to North Korea could be subject to asset freezes or lose their access to the US financial system.

Depending on how they are applied, these sanctions could represent a major shift in the US sanctions policy. Historically, the US has been reluctant to target large Chinese companies and major Chinese financial institutions because of the potential collateral consequences for US investors and the global financial system.

However, the sweep of these sanctions measures may signal that the US is increasingly willing to sanction large Chinese companies and banks that continue to engage in significant commercial dealings with North Korea, irrespective of any potential global impact.

3. Key takeaways for Chinese firms. We recommend that Chinese firms and financial institutions take the following measures to evaluate their potential exposure to US sanctions, export controls, and anti-money laundering enforcement:

(1).Understand the US legal regime. Chinese companies and banks should endeavour to understand US sanctions, export controls, and anti-money laundering laws. The scope and application of these laws and rules is not always intuitive, and they can apply to Chinese companies in unexpected ways. Chinese firms that invest the effort to review and understand these regulatory regimes will be well positioned to identify risk areas and potentially alter their conduct to mitigate those risks. In contrast, failing to understand how US laws operate and are applied can lead to significant liability.

(2).Scrutinize dealings with Iran, North Korea, and Russia. The US seeks to advance its national security objectives through economic sanctions, export controls and anti-money laundering laws. Iran, North Korea and Russia are the nations that currently pose the greatest threat to America, and the US government has implemented wide-ranging legal measures related to these countries. Chinese companies should assess and catalogue what types of dealings they have with these countries, and then evaluate whether continued interactions with such countries make sense in light of the applicable enforcement risk.

(3).Assess global compliance risk profile. Finally, Chinese companies should assess their nexus to the US and American businesses and financial institutions to determine what risk they may face under US law. A firm’s risk profile will turn on a number of factors, including whether it operates internationally, participates in cross-border transactions, and deals in source components or end products that could have a military application. In addition, the industrial sector in which a Chinese company functions can also be relevant. No two companies will encounter the same risks under US law, so it is important for companies to understand their specific risk profile.


The past year has illustrated the consequences that Chinese companies may face for violating US law or transacting business with sanctioned jurisdictions like North Korea, and new sanctions suggest that the US government will continue to target Chinese companies in the future.

In light of the increased scope of US enforcement efforts, and specific US national security objectives targeting traditional allies and trade partners of China, Chinese firms and financial institutions would be well served to understand their potential exposure under this rapidly changing risk landscape.

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Author: Michael Casey, Cori Lable, and Tiana Zhang

Source: CBLJ

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