Bloomberg Law
May 9, 2023, 8:45 AM

BAT’s North Korea Sanctions Deal Hints at US Approach to Russia

Ben Penn
Ben Penn

The Justice Department’s $630 million settlement with British American Tobacco plc for evading North Korea sanctions offers a potential road map for multinationals facing heightened US scrutiny over dealings in Russia.

In one sense, the April 25 agreement may be impossible for law enforcement to replicate due to the record-setting penalty and willfully egregious behavior of an industry leader the US says effectively helped finance North Korea’s nuclear weapons program. BAT and a Singapore subsidiary, which pleaded guilty, used front companies to distribute cigarettes inside a rogue nation rarely penetrated by US authorities, the department said.

The government’s long-running investigation signals DOJ has the ability and resources to target complex financial schemes designed to circumvent sanctions regulations that ban international trade with adversaries. Plus, companies in Russia since the Ukraine invasion face a business scenario similar to the one BAT confronted in North Korea.

“The situation that BAT had is they were in the North Korean market, and then the sanctions grew more restrictive, which is exactly the situation you have in Russia now—there are many multinationals with a longstanding presence there,” said Nick Carlsen, a former FBI intelligence analyst who investigated BAT at an earlier stage.

“As sanctions ratchet up against Russia, a very similar situation might occur where in the course of doing what is appropriate today they may insert themselves in a situation that is illegal in the future,” said Carlsen, now an investigator at blockchain intelligence company TRM Labs.

Despite the unusual nature of DOJ’s resolution with the London-based manufacturer of Lucky Strike and Dunhill cigarettes, US lawyers are gleaning insights for corporations who’ve been trying to prepare compliance protocols without clear signs of how DOJ will structure a planned white-collar enforcement sweep at the intersection with national security.

While the BAT deal “has some unique aspects to it,” it also warns a broader array of companies that they must thoroughly vet the true identity of customers, said Kathleen Hamann, a Pierce Atwood partner and former DOJ international policy counsel.

That’s especially the case for businesses “who sell things that are of interest to those sanctioned regimes that have military uses,” Hamann said."You have to dig into it, you have to ask questions, you have to look for those risk factors, you need to make sure your folks are trained on that.”

FBI Breakthrough

The exact origins of how the government learned of the scheme aren’t disclosed in court filings unsealed April 25. But two sources familiar with the investigation said the FBI first caught on to suspicious transactions by reviewing companies known to do business in North Korea, along with their business partners.

The BAT investigation was spun off from another FBI probe into a Chinese trading company, which the department accused in 2016 of helping North Korea launder money through US banks, said the sources. Tracing the funds in that matter eventually led investigators to BAT.

By initially unearthing the misconduct on its own, rather than relying on an outside tip or corporate disclosure, DOJ reinforced its recently heightened pressure on companies to voluntarily turn over evidence of misconduct, or else pay the price.

A department official declined to comment on the specifics of the case.

But as the department continues dialing up sanctions and export control enforcement, expect further large penalties and guilty pleas, the DOJ official said in an interview. That includes “corporations that are not instantly coming through the door to be fully cooperative,” added the official, who spoke on condition of anonymity under terms set by DOJ.

The Justice Department is currently investigating whether Binance Holdings Ltd. was used illegally to let Russians skirt US sanctions, Bloomberg News reported May 5.

Notable Recovery

DOJ called the $630 million penalty its largest recovery in North Korea sanctions history, while the Treasury Department, in a concurrent settlement, said its Office of Foreign Assets Control has never assessed a higher penalty among non-financial institutions.

Department officials called out BAT for supporting the North Korean government’s practice of funding its development of weapons of mass destruction through tobacco sales.

The department noted in a deferred prosecution agreement reached with the parent company that BAT provided “valuable information” to advance a criminal investigation. DOJ separately indicted three Chinese facilitators and a North Korean banker—all of whom remain at large.

But by cooperating only after “the government comes knocking,” BAT didn’t “get the same degree, obviously, of credit,” said Stephanie Siegmann, a partner at Hinckley Allen who was previously national security chief at the US attorney’s office in Boston. DOJ is “trying to send a message that they will find out if you are evading the sanctions.”

The Scheme

The conduct involved the North Korean Tobacco Company, which established a joint venture factory in 2001 to manufacture BAT cigarettes for sale in North Korea, according to the filings.

In 2007, BAT’s unit announced the sale of its share of the factory to a company in Singapore, but the BAT unit “maintained control of all relevant aspects of the North Korean business,” according to the filings.

In its deferred prosecution agreement, BAT admitted that its Singapore unit structured transactions with the factory “to obfuscate” sales to North Korea, and so caused US banks to process correspondent US dollar transactions to help the company.

After diving into the unsealed case, lawyers spotted multiple areas that illuminate where law enforcement may be headed next.

For instance, the indictment of the four individuals revealed that for several months in 2019, an unidentified company permitted an undercover law enforcement agent to pose as the company’s representative in communications with two of the defendants.

The agent learned details from them about shipments to North Korea and how they aimed to sidestep a US bank freeze on their financial transactions.

“You don’t see undercovers in white-collar cases all that often, especially not transnational,” Hamann said. “Sometimes the use of undercovers or confidential informants can go badly for the government. But they’ve said we’re going to be using these tools more often, and this is an indication that they are.”

The DOJ official confirmed that covert tactics will become more common, adding that future probes will use “methods reminiscent of organized crime investigations.”

Some attorneys are reluctant to connect the tobacco manufacturer’s agreement with the US’s latest sanctions enforcement push. They point out the BAT probe started in a different administration, well before Russia invaded Ukraine last year.

But to Rob Slack, a trade and national security partner at Fenwick & West, the long term nature of BAT invokes parallels to Russia, where complex cases may come to fruition years later as sanctions become more severe.

“Companies are making risk decisions about whether and how to engage in that economy,” Slack said. “And you absolutely must believe that there are parties in and outside of Russia who are trying to develop similar schemes to continue to supply that economy.”

To contact the reporter on this story: Ben Penn in Washington at

To contact the editors responsible for this story: Seth Stern at; John Crawley at

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