Why Treasury should require banks to keep records about N. Korean beneficial ownership

In my policy discussions about North Korea, two of the smartest sanctions skeptics I’ve debated are professors John Park and James Walsh. Not only are they both genuinely nice people, their skepticism points to flaws and gaps in the sanctions regime, and that skepticism ultimately serves to improve the quality of the sanctions and their enforcement. They’ve been particularly persuasive about the importance of pursuing “North Korea Inc.,” Pyongyang’s extensive and shadowy network of agents and trading companies in China, who facilitate not only its legal trade, but also act as money launderers and purchasing agents for its WMD programs and luxury goods demands. Such is the nature of money laundering; it uses legal trade to conceal illegal trade.

One answer to Park and Walsh’s criticisms is to add one additional special measure, found at 31 U.S.C. 5318A(b)(2), to the special measures Treasury previously announced on June 1st. This measure would require financial institutions to collect information on the beneficial ownership of property by North Korean persons, or of property in North Korea. That would mirror the European Union’s recent blacklisting of North Korea for money laundering, which triggers increased beneficial ownership reporting rules.

Happily, I’m joined in this view by the most accomplished North Korea sanctions expert I know, William J. Newcomb, who previously served with the CIA, Treasury, State Department, and the U.N. Panel of Experts (here’s a link to an address Bill gave to the Korea Society). Today, Bill and I posted a public comment on Treasury’s proposed special measures against North Korean money laundering. You can read the full text of the comment below the fold, annotated with hyperlinks. It should also be available on the federal regulations portal shortly.

To read the full comment, click the “continue reading” button below.

Comment by Joshua B. Stanton and William J. Newcomb

August 2, 2016

 

Summary: The undersigned recommend the Secretary of the Treasury invoke the special measure on the collection and retention of information on beneficial ownership specified in 31 U.S.C. § 5318A(b)(2) to enhance countermeasures taken to protect the U.S. financial system from money laundering and financing of proliferation threats posed by North Korea. 

Comment: We commend the Treasury Department for its long overdue designation of North Korea as a jurisdiction of primary money laundering concern. The invocation of special measures, including the special measure at 31 U.S.C. § 5318A(b)(5), is consistent with the North Korea Sanctions and Policy Enhancement Act of 2016, Pub. L. No. 114-122, and with United Nations Security Council Resolution 2270, which required U.N. member states to terminate correspondent relationships with North Korean financial institutions by June 2, 2016. Because these new special measures concentrate on North Korean financial institutions, however, they may fail to uncover North Korea’s reliance on individual agents, cash couriers, and non-bank institutions for money laundering and proliferation-related transactions. We believe that an additional special measure can help to close this gap in enforcement.

Thus, in addition to the special measures already imposed, we strongly recommend that the Secretary also invoke the special measure described in 31 U.S.C. § 5318A(b)(2), to require domestic financial institutions and domestic financial agencies to “obtain and retain information concerning the beneficial ownership” of property held by nationals of North Korea or their representatives, that is located in North Korea, or that otherwise involves North Korea. Such a measure would be consistent with multiple advisories of the Financial Action Task Force, warning financial institutions to take countermeasures against North Korea’s use of the financial system for money laundering, proliferation, and terrorist financing. It is also consistent with United Nations Security Council Resolutions 2094 and 2270, which require U.N. member states and financial institutions to apply enhanced monitoring to prevent North Korea’s use of the financial system for proliferation, arms trafficking, and luxury goods imports.

Reports of the U.N. Panel of Experts monitoring the enforcement of sanctions against North Korea describe North Korea’s extensive use of non-bank institutions and agents to conceal links between itself and suspicious transactions.

For example, in 2015, the Panel of Experts noted that Ocean Maritime Management Company (OMM), a North Korean shipping company designated by the U.N. Security Council and the U.S. Treasury Department for arms smuggling, “uses a broad range of techniques, including shell companies, foreign intermediaries and indirect payment methods, to obscure the nature of its business and dissociate financial transactions from logistics.” Although North Korea’s “networks appear complex, their key nodes consist of a limited number of individuals and intermediaries” who work through “trusted foreign partners, embassies and trade offices” of the North Korean government, and through shell companies it controls. The North Korean government frequently registers and dissolves shell companies, but “the individuals responsible for establishing and managing them have remained, often for years.” A requirement to disclose North Korean beneficial ownership would help to identify these individuals, expose their network, improve the enforcement of U.N. sanctions, and protect the integrity of the financial system.

In 2016, a report by the U.N. Panel of Experts cited the conviction of Chinpo Shipping Limited in a Singaporean court, for arranging wire transfers on behalf of OMM to facilitate arms smuggling in violation of U.N. sanctions. According to the Panel’s report, “Court documents make clear that Chinpo regarded OMM as part of the Government of the Democratic People’s Republic of Korea.” The Bank of China nonetheless assisted Chinpo with arranging for the wire transfer of $72,016.76 through correspondent accounts in the United States. Had the Bank of China been required to disclose beneficial ownership by North Korean persons or entities, the Bank of China’s U.S. correspondents might have refused the transactions, and the shipment might have been prevented.

The Panama Papers provide recent evidence confirming a beneficial ownership reporting requirement could help uncover and cause significant damage to this network. In some cases, the Panama Papers revealed financial links between sanctioned North Korean entities and shell companies. For example, in June 2013, the U.S. Treasury Department designated North Korea’s Daedong Credit Bank, DCB Finance Limited, and Daedong Credit Bank’s Treasurer, Kim Chol-sam, who lists his residence as Pyongyang, North Korea, under Executive Order 13382, for financing the proliferation of weapons of mass destruction. According to the Treasury Department, Daedong Credit Bank “used its front company, DCB Finance Limited, to carry out international financial transactions as a means to avoid scrutiny by financial institutions avoiding business with North Korea.”

DCB Finance Limited is registered in the British Virgin Islands and also operates out of China, using a Hong Kong company called Harris Secretaries as an intermediary. The use of an intermediary may have allowed DCB to evade sanctions and access the financial system.

Another entity, Hamgyong Mining, is nominally owned by citizens of the United Kingdom, registered in the British Virgin Islands, and directed by officers registered in the United Arab Emirates, suggesting no obvious links to North Korea. On closer inspection, however, Hamgyong is named for a mineral-rich region of eastern North Korea and shares several of the same corporate officers and beneficial owners as SRE Minerals, Limited. SRE Minerals has publicly solicited investments in a rare earth minerals exploration project in North Korea. An April 2016 report by the Australian Broadcasting Corporation, quoting a former member of the U.N. Panel of Experts, and one of the signatories to this comment, claims that SRE’s North Korean partner, National Resources and Development Investment Corporation (NRDIC), is an alias for Green Pine Corporation, a North Korean entity that has been designated by the United Nations since 2012. Green Pine was designated by the Treasury Department under Executive Order 13551 on August 31, 2010. NRDIC was designated as an alias of Green Pine on February 9, 2011.

Since March 15, 2016, the North Korean mining industry has been subject to sectoral sanctions under Executive Order 13722 because of its links to proliferation and arms dealing. Hamgyong also shares most of the same corporate officers as two other minerals companies with Korean names — Hawang Hae Metals Limited and Sunmin Gold Limited, both of which are registered in the British Virgin Islands. None of the three entities lists a North Korean address or beneficial owner, and none of them could be linked to North Korea before the unauthorized disclosure of the Panama papers.

Although we do not offer direct evidence that Hamgyong, Hawang Hae, and Sunmin are operating in violation of U.N. sanctions or Executive Order 13722, their names, and their links of ownership and control, suggest that further investigation of these companies is warranted. The exposure of these companies’ potential links to North Korea provides regulators with a basis for that further investigation. It suggests that requiring banks to apply their Know-Your-Customer requirements stringently, and to report beneficial ownership by North Korean nationals or entities, could provide regulators with a windfall of financial intelligence, and could help make existing U.S. and U.N. sanctions more effective.

Finally, we note that on July 14, 2016, the European Commission added North Korea to its list of high-risk third countries with strategic deficiencies in their Ant-Money Laundering regulations. This designation will subject North Korea to heightened scrutiny under EU Directive 2015/849. That directive, in turn, requires EU companies to maintain records on beneficial owners on whose behalf transactions are conducted. Thus, invoking Special Measure Two would bring U.S. countermeasures against North Korea’s money laundering and deceptive financial practices into closer alignment with those of the European Union.

 

Joshua B. Stanton                        William J. Newcomb

William J. Newcomb was a member of the United Nations Security Council Panel, DPRK (Democratic People’s Republic of Korea), Panel of Experts from 2011 to 2014. Previously, Mr. Newcomb has occupied senior economist positions at the U.S. Treasury Department and the Department of State, and has worked extensively on Asian economies. He has studied economic developments in North Korea for more than 30 years and, between 2002 and 2005, was deputy coordinator of the US State Department’s North Korea Working Group.

Joshua B. Stanton is an attorney in Washington, D.C. and blogs at http://freekorea.us. From 1998 to 2002, he served as a U.S. Army Judge Advocate in the Republic of Korea. Since 2013, he has advised the House Foreign Affairs Committee on North Korea-related legislation, and was the principal drafter of the legislation that was signed into law as the North Korea Sanctions and Policy Enhancement Act of 2016, Pub. L. No. 114-122. The views expressed are his own and do not represent views of the Foreign Affairs Committee or any government agency.