Two days after North Korea’s successful long-range ballistic missile test, the U.S. District Court for the District of Columbia unsealed a memorandum opinion which granted the Department of Justice “damming” warrants to seize all funds in bank accounts belonging to five Chinese companies which allegedly were used to hide transactions with North Korea using U.S. currency in violation of U.S. sanctions and money laundering laws. The underlying conduct allegedly resulted in over $700 million of prohibited transactions being processed by eight international banks. The opinion is noteworthy not only because it demonstrates the important relationship between money laundering laws and foreign policy, but also for the government’s use of anticipatory warrants to seize the assets upon arrival to the targeted accounts, and to prevent those assets from exiting.
The opinion reveals that the DOJ applied for eight damming warrants for the seizure of all funds into and out of correspondent bank accounts belonging to Dandong Zhicheng Metallic Material Co. Ltd. and four related front companies (known as “the Chi Yupeng Network,” named for the majority shareholder of Dangdon Zhicheng). Reportedly, in 2013 Dangdon Zhicheng represented at an industry conference in China that it imported 1.8 million tons of North Korean anthracite coal, worth approximately $250 million, making the company one of the largest suppliers of North Korean coal to major steel producers in China.
The government alleged the companies purchased coal from North Korea with U.S. currency using various obfuscations tactics. The front companies allegedly engage in these transactions “in support of purchases ultimately benefitting sanctioned North Korean end users, including the North Korea military and North Korea weapons programs.” These allegations were corroborated by two North Korean defectors, deemed to be reliable, who described that “Kim Jong-un puts over 95% of North Korea’s foreign currency earnings generated from coal exports toward the advancement of . . . North Korea’s military and North Korea’s nuclear missiles and weapons programs.”
The proposed seizure warrants targeted funds originating at offshore U.S. Dollar accounts which are routed through correspondent accounts maintained at eight banks in the United States. Prosecutors represented that the grand jury subpoena returns from the banks indicated that each bank transacted over $20 million for the Chi Yupeng Network between 2009 and present, for a total of an estimated $700 million processed for the entities with links to North Korea. Nothing in the court filings indicates that any of the banks knowingly violated the U.S. sanctions against North Korea.
The government requested eight so-called “damming” warrants, which prosecutors described as warrants that place “a metaphorical dam at the financial institution in question to catch all incoming funds during the 14-day time period of the warrant, while preventing any funds from exiting the financial institution.” Following the expiration of the 14-day period the warrant directs the financial institution to immediately effect the seizure of any property collected during the time period and tender the property to law enforcement.
The warrant applications were originally denied by a magistrate judge in April 2017. The magistrate judge ruled the court lacked authority to issue the damming warrants pursuant to the federal rules because (i) such warrants were not contemplated by the statute or the rules; and (ii) the target funds were not currently located in the United States nor were they located in an interbank account.
The legal issue the court was grappling with is the propriety of anticipatory seizure warrants pursuant to Federal Rule of Criminal Procedure 41 and the Constitution. The Supreme Court addressed this very question in United States v. Grubbs, 547 U.S. 90 (2016). The Court defined an anticipatory search warrant as a “warrant based upon an affidavit showing probable cause that at some future time (but not presently) certain evidence of a crime will be located at a specific place.” Id. at 93. The Court found such warrants are not per se unlawful, but unlike conventional warrants anticipatory warrants require two probable cause showings: “[i]t must first be true not only that if the triggering condition occurs, ‘there is a fair probability that contraband or evidence of a crime will be found in a particular place,’ but also that there is probable cause to believe the triggering condition will occur.” Id. at 96.
Applying the Grubbs reasoning to the forfeiture context, the District Court held that seizure warrants may authorize the seizure of items (or funds) not then present so long as there is probable cause to believe both that the items will also be present and that a crime for which forfeiture is appropriate has occurred.
The District Court found the government’s affidavit readily established probable cause to believe the triggering event – an attempt to deposit or withdraw funds into the accounts at issue – would occur. The government affidavit described that the eight banks collectively had processed more than $700 million from January 2009 to present, including collectively processing more than $52 million in the past seven months.” In addition, there was probable cause to believe that a crime warranting forfeiture of the target funds had occurred, as the affidavit described in 80 pages of detail how the Chi Yupeng Network engages in transactions designed to conceal the true origin and designation of funds routed through the U.S. correspondent banks and are consistent with generalized patterns of North Korean money laundering identified by defectors and other sources. The affidavit further described that the majority owner and manager of Dandong Zhecheng, the main company associated with the Chi Yupeng Network, utilizes U.S. dollar accounts in the names of their employees and at least one relative for the transactions. Therefore, the District Court found probable cause to believe that funds routed through U.S. correspondent by the Chi Yupeng Network are subject to forfeiture based on violations of the money laundering statute, 18 U.S.C. § 1956(c)(7)(A), the International Emergency Economic Powers Act, 50 U.S.C. § 1705(a), and the North Korean Sanctions and Policy Enhancement Act of 2016, 22 U.S.C. § 9201, et. seq. On May 22, 2017 the District Court issued the eight warrants for seizure of accounts held by the Chi Yupeng Network.
Although the results of the seizure are not known, the anticipatory warrants seem to be a particularly apt tool for freezing out funding by prohibited actors and enforcing U.S. sanctions. The government is likely to use this tactic going forward to chill unwanted transactions and enforce money laundering laws.
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