Lender Beware: North Korea’s Foreign Trade Bank Sued in U.S. Federal Court

The Korea Times reports that since its establishment in 1959, North Korea’s Foreign Trade Bank has been the regime’s “main foreign exchange bank,” with “branch offices in France, Australia, Kuwait, Hong Kong and Beijing.” The Times also informs us that the bank now finds itself the defendant in a multi-million dollar lawsuit in a U.S. federal district court:

A state-run North Korean bank is facing trial in the United States for failing to pay a $5 million loan that it borrowed from a Taiwanese bank in 2001, according to sources Wednesday. The District Court for the Southern District of New York ordered the Foreign Trade Bank (FTB) of North Korea to make a court appearance on May 17 and submit a proposed case management plan and scheduling order.

The FTB reportedly borrowed $5 million from the Mega International Commercial Bank (MICB) in Taiwan on Aug. 25, 2001 on the promise to amortize the principal and interest in three installments by Sept. 15, 2004. No repayment was made until December 2008, when the FTB paid the MICB $100,000 to cover some of the interest. The North Korean bank has thus far paid off a total of $462,000 to the MICB, still owing $1.78 million in interest and $4.7 million in principal. [Korea Times]

Note that this default preceded the sanctions under UNSCR 1874, so the default by itself may not say much about the effectiveness of sanctions. Yes, it’s possible that this was somehow a residual effect of the Bush-era sanctions against Banco Delta Asia and UNSCR 1718, but I doubt it. The timing of this default actually coincides with a building boom in Pyongyang and evidence suggesting that the regime could have made its payments.

So why would North Korea suffer such an injury to the reputation of one of its main portals to the world’s most gullible lenders and investors? As with so much of what North Korea does, pure spite explains it as well as anything else can. North Korea has a long history of defaulting on international loans, and as a consequence, it hasn’t been able to borrow from more prudent lenders for many years.

The suit against the FTB implicates a different exception to the Foreign Sovereign Immunities Act than the terrorism exception invoked by all of these lawsuits. Ordinarily the FTB would be immune from suit as an entity of a foreign government, but the immunity does not cover ordinary commercial transactions, which are as amenable to suit as those of any private bank.

The order to appear for a hearing on case management and scheduling is pursuant to Rule 16 of the Federal Rules of Civil Procedure. It most likely follows a non-appearance by the North Koreans for a Rule 16(f) “meet and confer” with counsel for the plaintiffs, when the parties are supposed to try to agree on the acceptable limits of discovery, including the always nettlesome issue of “electronically stored information,” including e-mails. Judges in the Southern District of New York are particularly fastidious about enforcing these discovery requirements, and if the plaintiffs were smart enough to demand FTB’s relevant e-mails or correspondence from the servers and files in Pyongyang, we could be looking at a very interesting sanctions motion coming before the court.

Past history, however, suggests that the North Koreans will continue to fail to appear in court, and they’ll lose the entire case by default anyway. FTB could also be stuck paying the plaintiffs’ attorney fees.

I have mixed feelings about this suit. Sure, I’m always up for a little private-sector help with the enforcement of the financial squeeze against Kim Jong Il, but on the other hand, part of any risky borrower’s creditworthiness is the lender’s capacity to collect through the courts. Leaving aside the murky questions of jurisdiction and venue, it might be a more effective financial sanction against North Korea to legislate that U.S. courts have no subject-matter jurisdiction to enforce the commercial debts its government institutions owe.

Lender beware.