logo

Three Chinese Banks face potential US penalties for non-compliance with North Korea sanctions investigations

Written by Wendy Weng  
  • Jan 01, 1970
  • 7 min read

Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank denied that they were involved in probe related to a possible breach of the sanctions.

Three big Chinese banks suffered stock plunge following a news report by the Washington Post that three Chinese banks were found by a US judge to be in contempt for refusing to comply with subpoenas in a probe into North Korean sanctions violations. Meanwhile, this could cut off one of China’s largest banks from the US financial system. Although the banks were not identified, details in the court ruling align with a US civil forfeiture action against Bank of Communications (Bocom), China Merchants Bank and Shanghai Pudong Development Bank (SPDB) in 2017, according to the report.

US investigators subpoenaed these Chinese banks in December 2017, and these banks were required to hand over a wide range of bank records dating back to January 2012. The US Justice Department alleged that they worked with a Hong Kong front company, Mingzheng International Trading Ltd., to launder over $100 million on behalf of North Korea's sanctioned, state-owned Foreign Trade Bank.

The report said the bank that faces possible loss of access to the US dollar transactions appeared to be SPDB, as the bank’s ownership structure, limited US presence and alleged conduct with other banks matched with the details disclosed in the court rulings. The ruling means that US authorities can terminate the bank's US account and ability to process US dollar transactions.

All three banks issued statements saying they weren’t under investigations involving the suspected sanctions violations and have been operating in accordance with relevant international and Chinese laws. They argued that the requests for banking records should be carried out under the auspices of a legal assistance pact signed between the US and China. Bocom said that the US court had sought to obtain information about their clients outside of the US, and SPDB also said it is legally barred from disclosing clients’ information to overseas authorities without authorisation.

"We are consistently against the so-called long-arm jurisdiction imposed by the US authorities on Chinese companies. We hope the US will step up bilateral cooperation in financial regulation with other countries and come up with information sharing mechanisms in accordance with domestic laws, and share information through bilateral channels," Geng Shuang, a spokesman at the Chinese foreign ministry, said at a media briefing.

These Chinese banks have limited overseas business exposure and low reliance on foreign debt, and therefore the overall impact on these banks is expected to be manageable. A daily fine of $50,000 has been imposed on each of the three banks, which are stayed pending an expedited appeal by the banks. The report said that the subpoena battle will go before a federal appeals court in Washington on July 12.

This came amid US-China trade tensions, and the news report was published just ahead of the G20 summit in Japan. The US and China have agreed to resume trade talks at the G20 summit, and the US President Donald Trump also said the US companies will be able to sell technology to the Chinese tech giant Huawei. These bring about some great uncertainty, but no matter whether these Chinese banks will be sanctioned, it signals that the tensions between the two countries have been escalating.