Inter-Korean Cooperation

An inter-Korean cooperation project is not governed by any single statute.

Domestic law, special statutes on inter-Korean relations, international sanctions, foreign-exchange and customs regulations, and various legal frameworks relating to the investment structure all operate at the same time.

A Framework Centered on the Inter-Korean Exchange and Cooperation Act

The Inter-Korean Exchange and Cooperation Act is the core statute in inter-Korean cooperation practice.

This Act governs the movement of goods between South and North Korea, the movement of people, the approval of cooperation projects, visit approvals, and payment and receipt procedures.

For most individual projects, therefore, including trade, processing on commission, tourism, investment, and cultural cooperation with North Korea, the approval or notification structure under the Inter-Korean Exchange and Cooperation Act must be reviewed first.

A Structure Running in Parallel With Sanctions and Their Measures

Inter-Korean cooperation cannot be carried out simply because it is permissible under domestic law.

If a North Korea project runs afoul of UN sanctions or the independent sanctions of the United States, the EU, and others, it can trigger refusal of payment by financial institutions, an inability to obtain insurance, refusal of shipment, the blocking of third-country transactions, and the risk of secondary sanctions.

A company must therefore review both "the possibility of domestic approval" and "whether the project runs afoul of international sanctions" at the same time.

Inter-Korean trade refers to the trade of goods with North Korea.

It can include the inflow and outflow of raw materials, machinery, consumer goods, industrial goods, and humanitarian supplies.

In these cases, it is not enough to review the sales contract; the inflow and outflow approval, customs clearance, country of origin, transport, payment structure, and whether the goods are strategic items must all be reviewed together.

Processing on commission is a structure in which a South Korean company sends raw and auxiliary materials into North Korea and brings the goods processed in North Korea back out.

On the surface it resembles an ordinary OEM or contract-processing transaction, but in practice the processing-fee payment structure, inflow and outflow approval, allocation of responsibility, defects and inspection, dispute resolution, and labor and production-facility management issues are intricately intertwined.

In particular, the financial structure needs to be designed carefully so that the method of payment is not assessed as a sanctions violation.

Pursuing a project in North Korea in the form of a joint-venture company, a joint-operation company, or a sole investment carries regulatory risk far higher than that of ordinary overseas investment.

From the project's establishment stage, the approval under the Inter-Korean Exchange and Cooperation Act, a review of North Korean investment law, the corporate establishment structure, board operations, tax and accounting, profit remittance, and the recovery of invested funds must be considered as a whole.

In particular, the central issues are whether profits can be remitted to South Korea or a third country after the investment, and, even where remittance is permitted, whether financial institutions will in fact accept it.

Tourism, performances, cultural events, academic exchange, sports exchange, and religious and private exchange are also a type of inter-Korean cooperation.

Such projects may appear to be subject to lighter regulation than economic cooperation, but in practice they call for a good deal of legal review, including visit approval, the export of goods, invitations, the payment of sponsorship funds, whether any consideration is involved, and the management of promotional content.

Cultural and tourism projects in particular are directly affected by changes in the political and diplomatic environment, so suspension, cancellation, force-majeure, and sanctions-change clauses must be carefully reflected in the contract.

Railways, roads, ports, power, telecommunications, the creation of special economic zones, and industrial-complex development are representative large-scale inter-Korean economic cooperation projects.

In these projects, issues can extend to PPP, project finance, joint management bodies, special-purpose entities, land and use rights, operating rights, cooperation with international organizations, and the participation of foreign investors.

Because infrastructure projects are also mostly long-term, the allocation of responsibility if a project is suspended due to changes in inter-Korean relations or tightened sanctions must be designed in advance.

Sanctions on North Korea are not solely a matter of UN Security Council sanctions.

In practice, the risks that companies feel most are U.S. OFAC sanctions, EU sanctions, the independent sanctions of Japan and Australia, and the internal sanctions policies of global banks.

OFAC risk review is especially important for transactions involving U.S. dollar settlement, routing through U.S. financial institutions, products that use U.S. technology, and U.S. persons or U.S. corporations.

In an inter-Korean cooperation project, the focus is not only on whether the counterparty is directly a North Korean agency; due diligence must also extend to related front companies, intermediary entities, third-country partners, logistics providers, financial institutions, and the ultimate beneficial owner.

The contract also needs clauses such as the following.

• Sanctions compliance clause
• Clause for termination or suspension of the contract upon a change in sanctions
• Payment-suspension clause
• Alternative-performance structure
• Clause allocating responsibility where government approval is not obtained

Inter-Korean cooperation differs greatly from ordinary international transactions in that designing a structure that does not violate sanctions comes before pursuing the business itself.

A company considering inter-Korean cooperation should confirm the following points in practice.

What companies most often overlook in inter-Korean cooperation is focusing only on whether the project will be approved while treating the actual payment, insurance, logistics, remittance, and termination structures as secondary.

Yet for inter-Korean cooperation, the project's sustainability and the ability to recover funds matter even more than getting it started, so the contract and the regulatory response should be designed together from the earliest stage.

Inter-Korean cooperation goes beyond interpreting the laws governing inter-Korean relations. It is a complex practice that combines international trade, investment structuring, export controls, economic sanctions, foreign exchange, insurance, and the handling of public regulation.

The key question is whether a transaction structure that can actually be carried out can be designed within the constraints of domestic and foreign sanctions and regulations.

Through an inter-Korean cooperation and sanctions response task force in which specialists in international trade, corporate law, finance, taxation, administrative regulation, and criminal and compliance matters work together, Daeryun Law Firm provides comprehensive legal services across the full range of inter-Korean cooperation projects.

Because inter-Korean cooperation is directly affected by shifts in the political climate, a company must consider not only how to pursue a project but also how to handle its suspension, withdrawal, loss settlement, equipment recovery, insurance claims, and termination disputes.

Daeryun provides legal response scenarios that help a company limit its losses even at the project's termination stage.

Unlike ordinary overseas investment or trade, inter-Korean cooperation is a demanding international trade practice in which policy shifts, international sanctions, government approvals, financial regulation, and the risk of recovering the project all come into play at once.

For that reason, it is important to design regulatory compliance, sanctions risk, contract structure, and the feasibility of fund recovery together from the project-planning stage.

If you need legal advice on a related matter, you may 🔗schedule a consultation with a customs attorney.