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Federal prosecutors in Washington, D.C., over the past three years have diversified the range of authorities they use in response to suspected violations of American sanctions by North Korean nationals, their global proxies and the banks that process transactions for them.

The expanded arsenal includes novel applications of a half dozen Bank Secrecy Act-related measures to bolster criminal charges against suspected sanctions evaders, force foreign banks to cough up data on their non-U.S. clients, and gauge how well U.S. financial institutions monitor correspondent transactions.

“These cases demonstrate that the U.S. Attorney’s Office for the District of Columbia is not only investigating sanction violations through traditional authorities, but also through enforcement of the BSA,” Assistant U.S. Attorney Zia Faruqui told ACAMS moneylaundering.com.

Last year, before a federal appeals court in Washington, Faruqui’s team successfully defended the use of a subpoena under a little-known provision of the U.S. Patriot Act, Section 319(b), to obtain records stored overseas by a Chinese lender that held a U.S. correspondent account but otherwise maintained no presence in the United States.

“Prior to the Patriot Act, there was no way to get records from foreign banks with no branches in the U.S. but that engaged in correspondent banking activity,” Faruqui said.

In an April 15 advisory on North Korea-related cybercrime, the Treasury Department’s Office of Foreign Assets Control, or OFAC, formally cited the authority, transposed as 31 U.S. Code § 5318(k), as one of several that U.S. officials can bring to bear against sanctions violators.

The advisory notes that the provision gives U.S. financial institutions 10 business days to terminate any correspondent account they may hold for foreign lenders that the attorney general or Treasury secretary have deemed noncompliant with a Patriot Act subpoena. Institutions that fail to close such accounts will incur “daily civil penalties,” according to the advisory.

Non-U.S. banks that do not have branches or other operations in the U.S. and continue to facilitate North Korean business should expect U.S. officials and investigators to use “whatever means” they have to glean insights into that activity, including 319(b) subpoenas, said Sean Thornton, head of U.S. legal financial security for BNP Paribas.

“Even if you are not a bank, they could subpoena your bank for records about your activities,” Thornton told attendees of the ACAMS24+ virtual conference on June 2. “Let’s imagine a Chinese manufacturer exporting goods to North Korea … the U.S. government could have a window into that activity by subpoenaing the bank.”

Prior to last year’s case against the Chinese lender, federal prosecutors had used 319(b) only once, in July 2009, to subpoena Saudi Arabia’s Al Rajhi Bank for records on $150,000 of deposits made the decade prior by Al-Haramain Islamic Foundation, a Saudi charity suspected of funneling funds to terrorists. Al Rajhi held several U.S. correspondent accounts but no U.S. branches at the time of the deposits.

Al Rajhi petitioned a federal court to quash the request but did not appeal the court’s decision to uphold it.

The Chinese lender targeted by prosecutors in Washington D.C. last year, unnamed in court documents but identified as Shanghai Pudong Development Bank in news reports, instead appealed the subpoena in June 2019, arguing that compliance would have put it in violation of Chinese laws, among other things.

In their July 2019 decision, federal judges David Tatel, Patricia Millett and Cornelia Pillard recognized the U.S. government’s “heightened national interest” in investigating North Korea’s nuclear weapons program, marking the first time a 319(b) subpoena was considered, and ultimately approved, by a Circuit Court.

The judges further found that prosecutors can use 319(b) to subpoena records of any transaction that constitutes part of a scheme to access the U.S. financial system through a correspondent account, regardless of whether the transaction itself passes through that correspondent account and where records of it are held.

Patriot Act subpoenas will likely become more common as tensions between the U.S. and China impede bilateral cooperation against crimes involving both jurisdictions, said Daniel Tannebaum, a partner at New York-based consultancy Oliver Wyman, during the ACAMS24+ conference.

“I think there’s a struggle that some of these institutions face, not wanting to be completely uncooperative, but also trying to be responsive to their domestic government and prudential regulators as well,” Tannebaum said. “For some of these institutions, it has put them in a difficult situation for how to proceed.”

Bank Secrecy Act, Bank of Nova Scotia

Prosecutors have not accused SPD of any wrongdoing, but have sought data from it as part of a far-reaching probe into alleged sanctions evasion, unlicensed money transmission and money laundering by Mingzheng International Trading Limited, a Hong Kong-based firm they claim is little more than a front for North Korea’s Foreign Trade Bank, or FTB, and other entities.

SPD and two other Chinese lenders, identified in news reports as Bank of Communications and China Merchants Bank, allegedly moved an estimated $100 million through their U.S. correspondent accounts on behalf Mingzheng.

Prosecutors would not confirm or deny the identity of the three Chinese banks to moneylaundering.com.

OFAC blacklisted FTB in March 2013 and Mingzheng in August 2017.

As part of their investigation, prosecutors have sought to identify potential failures by certain U.S. banks to scrutinize correspondent transfers linked to alleged fronts for Pyongyang as required by the BSA and North Korea’s separate designation under another measure, Section 311 of the Patriot Act.

Failures to flag “surreptitious” transactions involving North Korea may expose U.S. lenders to civil and criminal liability, said Faruqui, the assistant U.S. attorney.

“This is a novel approach to enforcing strict due diligence AML checks by banks,” Faruqi said, adding that prosecutors may also use the same approach against Iran—the target of a Section 311 designation last year.

Investigators have also sought information from the other two Chinese banks that allegedly handled Mingzheng funds, Bank of Communications and China Merchants Bank, through “Bank of Nova Scotia” subpoenas, essentially regular grand jury subpoenas that prosecutors can issue to a foreign bank’s U.S. branch for records stored overseas.

SPD and the two other Chinese lenders unsuccessfully appealed against the requests last year.

The D.C. Circuit Court’s upholding of both the Patriot Act and Bank of Nova Scotia subpoenas affirmed the federal government’s authority to obtain records held outside the U.S. and made overseas parties aware of that longstanding power, said Nick Turner, a sanctions and AML attorney at Steptoe & Johnson in Hong Kong.

“Historically, most financial institutions that are subject to [Bank of Nova Scotia] requests have been able to reach a mutually agreeable accommodation, sometimes with the awareness of their home government,” said Turner. “U.S. investigators can be flexible, provided a bank is cooperating to the best of its abilities.”

Kingpins and frauds

Federal prosecutors subsequently charged more than 20 officials from the North Korean bank, FTB, with violating U.S. sanctions, laundering funds across borders and six other counts, after alleging that they helped the institution funnel $2.5 billion through the U.S. financial system with the help of more than 250 shell companies and 30 other conspirators.

The 50-page indictment also charges the FTB bankers and their associates with bank fraud and violating a rarely used measure, the Financial Crime Kingpin statute, which carries a 10-year prison sentence for any defendant found guilty of orchestrating a large-scale operation to steal from banks.

As part of their bank-fraud strategy in the ongoing case, prosecutors have argued that “the foreign front companies were causing U.S. banks to process transactions that they would have otherwise refused if they knew their true nature due to their AML/BSA compliance obligations,” Faruqui said.

Faruqui’s team has also taken steps towards applying a legal tool traditionally used against domestic criminals to lock North Korean funds out of the U.S. financial system: damming seizure warrants, which require U.S. lenders to freeze any correspondent funds from a targeted account for 14 days, without allowing any withdrawals.

In May 2017, the U.S. District Court for the District of Columbia approved prosecutors’ request for damming seizure warrants for correspondent accounts at eight U.S. lenders that processed some $700 million of transactions for Dandong Zhicheng Metallic Material and four other front companies allegedly involved in a scheme to buy North Korean coal with U.S. currency.

Contact Valentina Pasquali at vpasquali@acams.org