Before the invasion in February, western countries had varied sanctions in place against Russia in response to a range of issues, including its abuse of human rights, regime corruption, and cyber-attacks. But the invasion changed this situation dramatically. Although the most substantial sanctions were imposed in the first few months after the invasion, new packages were introduced across the year as the invasion continued. 

The effectiveness of western sanctions on Russia

In light of global sanctions packages, the Russian economy underwent a severe contraction that will likely continue through 2023. The performance of the Russian military has also been undermined by sanctions, which have limited its ability to resupply. 

But despite these effects, sanctions still need to succeed in their primary aim: convincing President Putin to withdraw from Ukraine. While this is yet to be achieved, Putin’s past behavior suggests he has a high threshold for economic pain and is willing to accept difficulties as long as they do not cause levels of political unrest that might imperil his position. 

How Russia sanctions might evolve in 2023

The development of sanctions against Russia in 2023 is likely to hinge on results on the battlefield in Ukraine itself. If Russia is unlikely to win or quit, the conflict will continue into 2023. A ‘steady state’ will likely emerge, with Ukraine making incremental territorial gains, as in Kharkiv in September and Kherson in November. At some point, serious talks about ending the war will come, but it is unlikely that either side will be willing to make significant concessions at this stage. 

Western sanctions programs

It seems improbable that there will be any further EU moves on natural gas supplies or an attempt to remove all Russian financial institutions from the international financial architecture unless prompted by a significant escalation in Russian violence. 

However, new sectoral categories may be added in successive packages. More generally, we are likely to see new sanctions focus on the following:

• Extending lists of designations for pre-existing types of targets
• Shortened timetables for the implementation of some existing bans
• A strong focus on tackling sanctions evasion efforts through new designations, law enforcement, judicial action, and the practical implementation of ‘freeze to seize’ measures

At the same time, we are likely to see a limited scaling back of western sanctions in some areas, even as the number of designations overall will continue to rise. Any successful legal action by an oligarch to have their name removed from sanction lists will set a precedent to cause major problems for the western approach. Russia is also likely to seek concessions on sanctions as rewards for good behavior if talks develop. 

Key sanctions considerations 

The effectiveness of sanctions will be further scrutinized in 2023 in light of ever-growing sophisticated sanctions evasion techniques, the rejection of western sanctions by many non-western states, and unintended humanitarian consequences. 

Other considerations for the coming year include the following:

• The US will remain at the forefront of applying a national autonomous sanctions regime, as underpinned by its strategic review in October 2021
• European, Anglophone, and Asian countries that have their own sanctions regimes will use them more widely and will seek to coordinate and consolidate their approaches where there are key shared issues 

The importance of real-time AML risk data

Firms should prepare for further changes to the lists of Russian sanctions designations and have appropriately comprehensive and agile screening tools in place. According to our 2022 global compliance survey, 96 percent of firms believe real-time AML risk data would improve their response to sudden sanctions regime changes, like in Russia’s case. 

Having identified this need, compliance teams should ensure they work with vendors that can deliver for them. Firms must ensure they do not take a minimalistic approach to detect potential Russian sanctions exposure, especially since western government agencies will increasingly focus on improving private sector implementation and reducing evasion.

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A risk-based approach to sanctions compliance

In line with the FATF’s recommendation, OFAC calls on banks to implement a risk-based approach to sanctions compliance by developing, employing and routinely updating a sanctions compliance program. 

As not all financial products or instant payment systems present the same sanctions risks, OFAC highlights that there is no “one-size-fits-all” approach to managing sanctions risks. Instead, a financial institution should assess its associated risk according to its size, geographic location, and specific products and financial services.

OFAC also highlights the importance of complying with FinCEN’s Customer Due Diligence (CDD) rule by noting that the nature of a payment may be relevant in assessing the relative sanctions risks. Under the CDD rule, “covered financial institutions” must establish and verify the identities of their customers and understand the purpose and nature of customer relationships and conduct risk assessments to build customer risk profiles. 

Implementing innovative compliance solutions

Where appropriate, artificial intelligence (AI) tools and other emerging compliance solutions are recommended by OFAC due to their potential to enhance sanctions screening functions and reduce false positives. Innovative tools include those that leverage information-sharing mechanisms between financial institutions and real-time anti-money laundering (AML) data generation for sanctions and watchlist screening. 

Based on a firm’s risk appetite, OFAC advises using innovative tools and solutions to manage sanctions risks that could arise in instant payments. 

The Tango Card settlement

Between 2016 and 2021, Washington-based e-gift and prepaid card provider Tango Card Inc. violated multiple US sanctions programs due to deficient geolocation identification processes. During this time, Tango Card transmitted 27,720 merchant gift cards and promotional debit cards, totaling $386,828.65, to individuals with email or IP addresses associated with Cuba, Syria, Iran, North Korea, and the Crimea region of Ukraine. Tango Card’s voluntary disclosure of its sanctions violations and cooperation with OFAC is reflected in the settlement amount of $116,048.60. 

Tango Card’s settlement reinforces the significance of using relevant geographic information as part of a risk-based sanctions compliance program. Tango Card’s reporting process also highlights the importance of voluntarily self-disclosing apparent violations and providing thorough cooperation with OFAC during an investigation.

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A coordinated sanctions package 

The package announced on October 6, 2022, includes economic and individual sanctions against Russia. According to the European Commission, the package was “closely coordinated with our international partners” and introduces new EU import bans worth €7 billion to limit Russia’s revenues. 

The agreement also lays the groundwork for the required legal framework to implement a price cap on Russian oil. Proposed by the G7 in September 2022, these measures will prohibit the provision of brokering services or financial assistance related to the maritime transport of Russian crude oil or petroleum products. The Council notes that the price cap will both “drastically reduce the revenues Russia earns from oil” and stabilize global energy prices. 

The EU’s new sanctions package also

• Bans the provision of crypto-asset wallets, accounts, or custody services to Russian persons and residents, regardless of the total value of those crypto-assets
• Sanctions entities that have played a role in spreading disinformation about the war 
• Extends the list of restricted exporting items that may contribute to the development of Russia’s military defense and security sector
• Bans EU nationals from holding any posts on the governing bodies of certain Russian state-owned or controlled legal persons, entities, or bodies
• Prohibits providing architectural and engineering services as well as IT consultancy services and legal advisory services to Russia

According to the Council, existing and new restrictions will be applied to all Russian-occupied territories in Ukraine.

UK services sanctions and export bans

The UK’s response to the annexation also introduces new export bans on nearly 700 goods crucial to Russia’s industrial and technological capabilities. Additionally, the UK will prevent Russian access to:

• IT consultancy services
• Architectural services
• Advertising services
• Engineering services
• Transactional legal advisory services
• Auditing services

As of September 29, 2022, the Governor of the Central Bank of the Russian Federation, Elvira Nabiullina, was also added to the UK sanctions list, subjecting them to a travel ban and asset freeze. The decision to designate Nabiullina is due to their involvement in steering the Russian economy through the Russian regime’s war against Ukraine and extending the ruble into the Ukrainian territories annexed by Russia.

Global responses

Outside of Europe, further sanctions, travel restrictions, and financial penalties placed on Russian-backed separatists and senior officials have been imposed. On September 30, the US government announced the imposition of additional Russia sanctions, including the designation of 57 entities and visa restrictions on 910 individuals. On October 2, the Australian government introduced fresh sanctions on 28 Russian entities.

As western regimes grow and evolve, firms will need to closely watch developments and have access to data and systems that respond to changes with speed and agility.

Key takeaways

To keep up with the evolving sanctions landscape, financial institutions must understand their risk environment and legal obligations. Compliance staff should ensure that the policies, procedures, and controls in place reflect those realities and have the flexibility to be updated as necessary. Sanctions regimes are constantly changing, and ensuring a firm takes an appropriate response is an ongoing responsibility. 

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According to the amendment’s exposure draft, the definition of gold to feature in Schedule 1 of the Designation will correspond to the Combined Australian Customs Tariff Nomenclature and Statistical Classification code 7108 – “as unwrought or in semi-manufactured forms, or in powder form.”

Australia’s move to designate Russian gold as an import sanctioned good follows a commitment announced by Prime Minister Anthony Albanese at a press conference in Kyiv last month. As part of an effort to limit Russia’s ability to fund its military operation in Ukraine, Albanese pledged to prohibit Russian gold imports and impose sanctions on 16 more Russian ministers and oligarchs.

Russia sanctions regime

Ukraine’s allies have already prohibited most trade with Russia and blocked Russian banks from using the Society for Worldwide Interbank Financial Telecommunications (SWIFT), which facilitates financial transactions and money transfers for banks worldwide.

In addition to prohibiting the import and export of certain goods, Australia’s autonomous sanctions on Russia currently include restrictions on:

• Certain commercial activities, including providing loans or lines of credit to specified Russian companies
• Provision of certain services, including financial assistance or investment services
• Providing assets to designated persons or entities
• Dealing with the assets of designated persons or entities
• Travel bans on designated persons

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Restricting Russia’s access to the global financial system

Launched earlier this year, the Russian Elites, Proxies, and Oligarchs (REPO) Task Force is a multilateral partnership between the US and its allies in Australia, Canada, Italy, Germany,  France, Japan, the UK, and the European Commission to target the assets of Russian oligarchs to inflict maximum pain on entities close to the Putin regime. 

In a joint statement, the REPO Task Force reported blocking over $30 billion worth of sanctioned Russian assets in economic resources and financial accounts. To further restrict Russia’s access to the global financial system, the task force has also immobilized $300 billion worth of Russian Central Bank assets and seized luxury real estate. 

Key takeaways

To determine how these sanctions may impact operations and business relationships, firms operating in the gold industry should consider conducting an updated risk assessment. Compliance staff should also review compliance policies and update procedures where necessary to mitigate against new sanctions and anti-money laundering risks.

Furthermore, the Australian government advises potentially impacted persons or entities to seek independent legal or financial advice. Questions can be directed to the Australian Sanctions Office through the Pax online portal.

Firms should note that the public consultation closes at 5pm on 29 August 2022.

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According to OFAC’s press release, the Lazarus Group, a Democratic People’s Republic of Korea (DPRK) state-sponsored hacking group, laundered over $455 million in stolen funds through the mixer. The announcement follows OFAC’s designation of virtual currency mixing service blender.io and enforcement actions related to illicit activity from mixers Bitcoin Fog and Helix. 

Tornado Cash has now been added to OFAC’s list of blocked nationals and persons, known as the Specially Designated Nationals (SDN) and Blocked Persons List. The related wallets that have also been added to the SDN list can be found here. 

The Lazarus Group

Sanctioned by the US in 2019 in the largest known virtual currency heist to date, the Lazarus Group commonly uses virtual currency mixing services in crypto heists to help fund North Korea’s nuclear and ballistic missile programs. According to TRM Labs, these heists are a key technique of funding the “cash-strapped” DPRK government. 

“Over the last year or so, we’ve moved from a post 9/11 world into a new digital battlefield,” said head of legal and government affairs at TRM Labs, Ari Redbord. “Nation-state actors know to go after crypto businesses to fund real weapon proliferation. It’s not just some hackers trying to fund a lifestyle.”

According to a report from the UN Security Council’s Panel of Experts on North Korea, cyber actors of the DPRK stole a total of $400 million worth of cryptocurrency in 2021. These cyberattacks “made use of phishing lures, code exploits, malware, and advanced social engineering to siphon funds out of these organizations’ internet-connected “hot” wallets into DPRK controlled addresses.” 

Earlier this year, UN panel coordinator Eric Penton-Voak said North Korean hackers were at the cutting edge of cyber technology, as shown in the recent Axie Infinity video game hack. 

Regulating decentralized crypto entities 

Commenting on the Tornado Cash story for ComplyAdvantage’s Uncover podcast, Tom Robinson, Chief Scientist and Co-Founder at Elliptic, noted: “I believe this is the first time a decentralized protocol has had sanctions imposed on it.” Robinson argued it raises interesting questions about how effective sanctions can be on platforms like Tornado Cash. As there isn’t a central organization to target, sanctions applied to decentralized entities instead must focus on reducing the efficacy of the services they offer.

Key takeaways

Compliance teams should ensure they are implementing these new sanctions and adjust their anti-money laundering and combatting the financing of terrorism (AML/CFT) controls accordingly, keeping in mind that cryptocurrency mixing is a growing area of high-risk activity.

Compliance staff should also ensure blockchain analysis tools are used to identify wallets and transactions that may have “tainted funds” or exposure to Tornado Cash addresses. 

Additional information on illicit financing risks associated with mixers and other anonymity-enhancing technologies in the virtual asset ecosystem can be found in the 2022 National Money Laundering Risk Assessment. 

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Forms of over-compliance

Broadly, the UN defines over-compliance as “a form of excessive avoidance of risk.” While similar to the commonly discussed concept of de-risking, over-compliance is specific. The forms it can take include:

• Blocking all transactions with a sanctioned country, entity, or individual, “even when some transactions are authorized by humanitarian exemptions or fall outside the sanctions’ scope”
• Using complex documentation, higher charge rates/fees, and lengthy delays to discourage an authorized transaction
• Freezing assets not targeted by sanctions. Banks should be particularly mindful of this, as they could risk litigation if assets are frozen without due cause
• Denying individuals the ability to open a bank account or complete a transaction because they are nationals of a sanctioned country, even when they are refugees

Impact of over-compliance

Douhan argues that over-compliance leads to higher costs and delays in accessing humanitarian goods and services, including food, medicine, medical equipment, and spare parts. International organizations and NGOs are unable to pay employees operating in sanctioned countries. Individuals cannot access their properties, transfer money to/from their families, exercise business activities, and book flights/hotels.

The UN believes that, in some cases, over-compliance has prevented states, international organizations, and diplomats from participating in international fora. As a result, they “impede the normal functioning of diplomatic missions, missions of international organizations, and the implementation of humanitarian and development projects.”

Driving the “underground economy”

Douhan highlights the broader risk of a ‘shadow’ financial system emerging. Specifically, as firms and individuals look for ways to transfer money, the mechanisms of financial transactions become “opaque.” This drives an “underground economy” supported by smuggling, corruption, and other illicit activities. These can then spill into neighboring countries, even if they are not the subject of sanctions. 

Individuals may also seek to “escape poverty” through prostitution, drug trafficking, or “fall prey to powerful individuals who traffic them into criminal activities, for which, in turn, they are prosecuted and sanctioned, sometimes with death.” 

Recommendations for financial service providers 

The Special Rapporteur calls attention to the UN Guiding Principles for Business and Human Rights and General Commitment 24 of the Committee on Economic, Social and Cultural rights to help frame firms’ response to over-compliance risks.

She also lists ten key recommendations that compliance teams should review in full. They include guidance that firms should:

• Review their sanctions compliance policy to determine if the restrictions they impose on the provision of financial services are broader than those required by sanctions and to adjust their compliance to exclude any over-compliance to the extent possible
• Monitor the human rights impact of their sanctions compliance policy on an ongoing basis to eliminate, mitigate or prevent any harmful effect; due diligence relating to the human rights impact of over-compliance with sanctions is both an initial act and an ongoing process
• Provide for the free flow of payments for goods necessary to guarantee the basic needs of the population in targeted countries. These include medicines, medical equipment, raw materials, spare parts, food, seeds, fertilizers, electricity, water, housing, transportation systems, delivery of humanitarian aid and implementation of humanitarian and development projects.

Over-compliance and ongoing geopolitical conflicts 

The rise of the Taliban government in Afghanistan and the invasion of Ukraine have both called attention to the implementation of sanctions and the associated risks for vulnerable citizens. In September 2021, the US government directed financial institutions to continue processing personal remittances in Afghanistan to support the provision of humanitarian aid.

While the situation in Ukraine remains fast-moving, some analysts have argued firms worry about the impact of secondary sanctions. Primarily issued by the US, secondary sanctions impose additional pressure on firms outside the country’s jurisdiction. In her statement, Douhan wanted that secondary sanctions are illegal under international law. Technology firms such as Meta and pharmaceutical companies such as Pfizer have remained in Russia as they believe delivering their services is a moral imperative. 

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The growing use of embargoes has been especially notable since the end of the Cold War. Of the 28 mandatory UN arms embargoes, 26 were passed in 1990 or later. 

What are sanctions?

Sanctions are restricted measures that can be applied both broadly, on specific industries or countries, and selectively, on individuals. Sanctions can be issued to fulfil a wide range of purposes, from blocking the trade of certain commodities to complying with international obligations. Sanctions are being increasingly utilized by states to fight economically, rather than physically. As such, sanctions have become a common tool in foreign relations, peacekeeping and conflict resolution.

In order to ensure regulatory compliance, financial institutions are required to consult sanctions lists when conducting business with foreign customers. 

What are embargoes?

While sanctions may target specific trading activities or individuals, embargoes are applied much more broadly. They often comprehensively prohibit trade with a target country, or imports from, or exports to, that country.

Both are powerful tools used to restrict commerce or exchange with a specified person, entity or country, usually as a result of political or economic problems.

Types of embargoes

There are different types of embargoes. A trade embargo refers to the banning of imports or exports, or both, of goods from a specified country.

This can be narrowed down to specific strategic types of embargoes that restrict only the import and export of certain types of goods, to protect particular animals, people or plants for example.

Meanwhile, a military or arms embargo prevents the exchange of military goods with a country, while a fuel embargo will target only trades of oil or other fuels.

International Embargo on Russia

Following the Crimea invasion in 2014, Western nations placed a raft of sanctions and embargoes on Russia, including limiting access to Western financial markets and services, and embargoes on the export of high-tech oil exploration and production equipment, and military and dual-use goods. 

Russia hit back with embargoes on the import of a variety of food, including dairy products, from those countries.  

While Russian countermeasures have so far been limited in response to global sanctions relating to the Ukraine conflict, as time goes on these may become more significant.

In March 2022, the US and UK announced international embargoes on all oil imports from Russia, and Canada and Australia later followed suit. The EU has proposed banning Russian oil by the end of 2022, though tensions remain with some member states, especially Hungary, which has already been offered an extra year to find alternative sources. 

“We will make sure that we phase out Russian oil in an orderly fashion, to maximize pressure on Russia, while minimizing the impact on our own economies,” European Commission President, Ursula von der Leyen said.

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Other Globally Embargoed Countries

Of course, Russia is not the only nation impacted by global sanctions and embargoes.

Embargo on North Korea

Since 2006, the UN Security Council has adopted nine major sanctions resolutions on North Korea in response to the country’s nuclear and missile activities. These include embargoes on the import and export of weapons, including small arms. However, a March 2020 report by independent advisors to the UN revealed that North Korea continues to successfully evade these measures, while advancing its nuclear program. 

North Korea has also been a major focus of unilateral action by Japan, which imposed an import embargo on the country in 2006, and an export embargo in 2009. In April 2021, Japan extended these measures with a further two-year ban on all trade, and prohibited the docking of all North Korean-registered ships, or vessels that have called at a North Korean port.

Embargo on Cuba

Implemented by President Kennedy under the terms of the Trading with the Enemy Act 1917, the Cuban Assets Control Regulations came into effect on  July 8 1963, and represented a full trade embargo prohibiting all imports and exports between the US and Cuba. 

This comprehensive international embargo has served as the backbone of the US’s Cuba sanctions regime since the 1960s, applicable to any individual or entity subject to US jurisdiction. US-Cuba relations began to thaw in the 21st century, leading to an easing of sanctions under President Barack Obama. However, under the Trump administration, many of the moves to ease restrictions were reversed. While the Biden administration has eased restrictions on remittances and travel, it has left the trade embargo unchanged. 

Embargo on Iran 

Iran has been the subject of global sanctions and embargoes over the past several decades. These have broadly comprised economic restrictions in response to the Iranian government’s involvement in international terrorism, human rights violations and its development of nuclear weapons.

In 2015, the five permanent UN Security Council nations plus Germany reached a provisional agreement with Iran regarding its nuclear weapons program. Known as the Joint Comprehensive Plan of Action (JCPOA), it created a framework for lifting the majority of sanctions against Iran in return for limits on Iran’s nuclear programs that would last for at least 10 years. Following the agreement, most international embargoes and sanctions against Iran were lifted in early 2016. 

In 2018, the Trump administration withdrew the US from the JCPOA and reimposed measures. Some sanctions have since been dropped by the US in a “good faith approach” to ongoing negotiations.

Embargo on Libya

With the fall of Muammar Gaddafi and the onset of civil war in 2011, the UN-imposed an arms embargo on the country and a range of travel bans and asset freezes against regime figures. 

Embargoes on Syria

The country has been listed as a State-Sponsor of Terrorism by the US since 1979. With the advent of the civil war in 2011, the Assad regime has been subject to a complete export embargo by the US; an oil trade embargo by the US, EU, and other western countries; wide-ranging financial sanctions and asset freezes; and travel bans on senior regime members. In 2021, the EU extended its restrictive measures against Syria for an additional year. 

Sanctions and Embargoes: Do They Work?

Some analysts have argued that ongoing events such as military parades demonstrate that international embargoes on arms control focused on countries like Russia and North Korea have failed. Globally embargoed countries have sought ways to get around restrictions, using illicit networks to evade measures when possible.

The UN recommends the use of embargoes and sanctions only as part of a wider strategy, and there are suggestions that their impact is not always as intended. Unforeseen consequences have included harm to citizens in target countries, lost revenues for the issuing country and its allies, and increased economic isolation. 

Sanctions risk management 

It is easy for businesses to become focused entirely on the major developments of ongoing crises that are covered by the media, calibrating their controls to “headline” sanctions risks.

Instead, firms need to ensure that they are fully aware of all the potential risks they face, and have access to data and platforms that will reduce their risk of unexpected exposures. Breaches are breaches – regardless of how well-known the triggering cause might be. 

Teams need to monitor the increasing number of embargoes and sanctions, and assess what staffing and resources may be needed to maintain compliance over the medium-to-long-term.

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As permanent UNSC members, Russia and China exercise vetoes over any proposed resolutions. The final vote rested 13-2 in favor of the tightened sanctions. “For the first time in 15 years, a UNSC member has used a veto to stop the council from fulfilling its responsibility to hold the DPRK accountable for its unlawful proliferation,” the US ambassador to the UN said. 

UN sanctions on DPRK

China’s ambassador to the UN argued that instead of stopping its weapons program, new sanctions on North Korea may instead increase its level of testing. Ambassador Zhang Jun also said new sanctions could put further pressure on the humanitarian situation in the DPRK as it grapples with the effects of the COVID pandemic. Russia’s ambassador similarly cited the pandemic as a reason for its veto, noting sanctions had so far failed to bring about a change in behavior from North Korea. 

“The introduction of new sanctions against North Korea is a path to a dead-end,” said Russia’s UN Ambassador Vassily Nebenzia. “We have stressed the ineffectiveness and the inhumanity of further strengthening the sanctions pressure on Pyongyang.”

Since 2006 the UNSC has passed many resolutions sanctioning the DPRK for developing nuclear weapons and related activities, including bans on the trade of weapons and military equipment, restricting scientific cooperation, and freezing the assets of people involved in the nuclear program. Over the years the Security Council has steadily, and unanimously, increased sanctions to stop North Korea from funding its nuclear weapons and ballistic missile programs. Sanctions on Pyongyang were last tightened in 2017.

The UN Panel of Expert report on North Korea that is published annually provides an important overview of the latest geopolitical challenges related to the country. The last version, published in March 2022, documents tactics used by DPRK to evade sanctions, including the use of shipyards to disguise its vessels, cyber activities involving stolen identities and payment exchanges using goods such as coal to pay for fertilizer. 

Wider sanctions challenges 

The UNSC split highlights both the power and the difficulty of ensuring sanctions are enacted in a coordinated way. This was noted in a recent comprehensive review of US sanctions by the Treasury. Such divisions have also been evident over sanctions on Russia, where almost all measures have been enacted at the state level, leaving the UN on the sidelines.

Over the next two weeks, the UN General Assembly will discuss North Korea under a new rule that requires the 193-member body to meet every time a veto is cast by one of the five permanent members of the Security Council. Additional UN sanctions do however appear unlikely. 

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The Treasury press release highlights that the sanctions have been imposed in “the spirit of the Otto Warmbier North Korea Nuclear Sanctions Act of 2019”, which imposes unilateral sanctions on financial institutions related to North Korea. 

Targeted entities 

Far Eastern Bank and Bank Sputnik were designated by the Office of Foreign Assets Control (OFAC) for providing material support to Air Koryo, North Korea’s national airline, and for conducting transactions on behalf of DPRK entities. Bank Sputnik is North Korea’s primary foreign exchange bank and has been subject to UN sanctions and US economic penalties since 2017.

North Korea’s use of regional proxies to bypass international sanctions also remains a national security threat. According to OFAC, Belarus-based Jong Yong Nam was sanctioned due to his involvement with DPRK’s Second Academy of Natural Sciences, an organization responsible for researching and developing the country’s ballistic missile and WMD programs.

The Air Koryo Trading Corporation is also being sanctioned for allegedly supporting Pyongyang’s Ministry of Rocket Industry. According to the Treasury, the ministry planned to utilize the trading company “to acquire various electrical components and dual-use goods, including transistors and hydraulic system components.” 

DPRK sanctions

The sanctions imposed on North Korea as a result of its WMD program are wide-ranging. They cover all financial transactions and investments, embargoes on arms and luxury goods, as well as stringent import and export controls on an expanding list of items, including precious metals, machinery, electronics, coal, iron, lead, oil and gas, textiles and food. The sanctions have also placed travel and work restrictions on North Korean citizens, and rights of boarding on North Korean ships.

Under Secretary of the Treasury for Terrorism and Financial Intelligence, Brian Nelson said, “the Treasury is targeting supporters of the DPRK’s WMD and ballistic missile programs, as well as foreign financial institutions that have knowingly provided significant financial services to the DPRK government.”

“The United States will continue to implement and enforce existing sanctions while urging the DPRK to return to a diplomatic path and abandon its pursuit of weapons of mass destruction and ballistic missiles,” he added.

Key takeaways

While issues such as cyber warfare have been a recent focus of DPRK sanctions, these measures are a reminder that “traditional” WMD proliferation remains a key strategic threat. To remain abreast of North Korean proliferation financing techniques, compliance staff should ensure they are familiar with the latest annual UN Panel of Expert report on North Korea that is published annually, which provides an important overview of the latest geopolitical challenges related to the country.  

The section titled “Finance” not only covers the illicit generation of revenue through cyber activities but also notes a case in which the US-based subsidiary of a Canadian bank was penalized for processing 1,479 transactions totaling over $382,000 to the benefit of the DPRK. 

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OFAC has added three Ethereum addresses to its Specially Designated Nationals and Blocked Persons (SDN) list, in addition to a previous listing tied to what is thought to be one of the world’s largest decentralized finance (DeFi) hacks. It is believed all three addresses had received sizable inbound transfers of stolen currency from the originally sanctioned wallet.

DeFi – financial services provided on public blockchains –  is increasingly being used for scams and money laundering as the volume of transactions it deals with increases. 

The hack saw an attacker gain control of validators’ nodes to forge withdrawals of cryptocurrency which was then laundered through other addresses with layering and mixing used to try and disguise the source of funds.

Layering is one of the biggest anti-money laundering (AML) typologies associated with crypto – and within this, mixing is a key tactic used by illicit actors to try and disguise the source of funds. Mixing, or tumbling, involves blending various transactions across several exchanges, making transactions harder to trace back to a specific exchange, account, or owner.

According to OFAC, the Ronin bridge hack may have been tied to a North Korean hacker syndicate called Lazarus Group. Lazarus Group is thought to have been involved in other major crypto and ransomware hacks and is associated with the North Korean state. It is alleged that cryptoassets stolen by Lazarus Group may be used to fund the state’s nuclear and ballistic missile programs. 

Evading Economic Sanctions

North Korea (DPRK) has tried different ways to evade global economic sanctions, including the use and exploitation of designated non-financial businesses and professions (DNFBPs) to move money illicitly. A report from the UN Security Council says cyber actors working for the DPRK stole a total of $400m worth of cryptocurrency in 2021, through seven intrusions into cryptocurrency exchanges and investment firms.

A US citizen, Virgil Griffith, was in April sentenced to five years in prison and a $100,000 fine for helping North Korea evade sanctions, by speaking at a cryptocurrency conference held in the country. 

“Griffith and his co-conspirators provided instruction on how the DPRK could use blockchain and cryptocurrency technology to launder money and evade sanctions,” said the US Department of Justice.

The risks of crypto and ransomware being used to circumvent sanctions has become a growing problem for US regulators, with FinCEN sharing SAR filing data to raise awareness of the issue. 

For sanctions professionals, there are wider takeaways beyond this immediate case concerning North Korea. Sanctions are becoming the default tool of Western statecraft, as the appetite for military action remains low in many countries. 

This is currently happening with Russia, and there is a good chance that we will see more ‘rogue’ states that are subject to sanctions resorting to measures like these to fund their economies, and disrupt countries they see as penalizing them. Sanctions professionals need to keep across the latest developments to minimize their risk exposure.

The case also highlights the increasing need for firms to understand the intersections between cryptocurrency and traditional finance, in order to pinpoint the risks at these moments. 

To keep up with the latest developments in North Korea, compliance teams should review the reports issued annually by the UN Panel of Experts, with a particular focus on the ‘finance’ section.

Explore the latest on the evolving use of sanctions and geopolitics in our new guide.

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