Congress to Obama: Enforce N. Korea sanctions against Chinese banks

Three weeks before North Korea’s fifth nuclear test, I wrote, “The Obama administration isn’t following Kim Jong-un’s money. Congress should ask why.” Unfortunately, subsequent events soon affirmed that criticism; fortunately, Congress is asking, and it’s asking the right questions. The failure of the administration’s North Korea policy has even become an election-year liability for Hillary Clinton, forcing her to distance herself from the President and his policy (or more accurately, the lack of one).

The Obama administration’s single greatest North Korea policy failure in eight years has been its failure to apply the kind of secondary sanctions that proved so effective against North Korea a decade ago. Some of that blame lies with the bad advice the President has received from certain think tanks, which has made its way into the State Department and the National Security Staff. After every North Korean nuke test, attack, or other outrage, a nothing-we-can-do chorus of China-friendly scholars and State Department retirees steps up to misinform gullible, ill-informed reporters that we have no options but appeasement, because the Chinese government will never push North Korea to the brink of collapse.

Yet for years, a Panel of Experts appointed by the U.N. Security Council has published extensive evidence implicating Chinese banks, businesses, nationals, and state-owned companies for a pattern and practice of violations that can only be willful, as I’ve argued here and here (see the U.N. POE’s reports from 2010, 2012, 2013, 2014, 2015, 2016). We have a North Korea problem because China, which has recently emerged as an accomplished bully when it comes to our allies, denies that it has the means to influence Kim Jong-un. 

And in fact, we have pushed North Korea to the brink of collapse before, without the cooperation of the Chinese government, by threatening the Chinese banks that hold North Korea’s slush funds with fines, penalties, and even the denial of access to the dollar-based financial system. U.N. Panel of Experts reports prove that most of those funds are denominated in dollars and wired through the U.S. financial industry. No bank can afford to defy such a threat, and Kim Jong-un couldn’t last long without that cash. 

This year, Congress finally lost its patience with the Obama administration’s passivity and drift and passed the North Korea Sanctions and Policy Enhancement Act, which mandates sanctions against third-country (read: Chinese) enablers of North Korea’s proliferation, arms trafficking, and money laundering. The bipartisanship of the vote (418-2 in the House, 96-0 in the Senate) was a minor political miracle in a polarized Congress in an election year, regarding an issue that had itself polarized Washington in previous years. Congress’s clear mandate to the administration was that it must break the link between Kim Jong-un’s regime and the hard currency that sustains his regime and legitimizes his rule.

Even before North Korea’s fifth nuclear test, Congress had begun to express its frustration at the Obama administration for failing to enforce the new law. It’s not that we don’t know who Kim Jong-un’s bankers are, either. In 2013, the Chosun Ilbo reported that the Treasury Department had identified hundreds of millions of dollars in North Koreans slush funds in banks in Shanghai. In January, Bonnie Glaser testified as follows before the House Foreign Affairs Asia Subcommittee:

In 2013, US and South Korean authorities uncovered dozens of overseas bank accounts worth hundreds of millions of dollars that were linked to top North Korean leaders, which they proposed including in UN sanctions lists, but Beijing refused. China has also strongly opposed levying sanctions on high-level North Korean officials such as the head of the North Korea’s agency responsible for conducting its nuclear tests. [link]

That same month, the New York Times reported, “The Treasury Department has identified similar institutions used by Mr. Kim’s son, the current leader, Kim Jong-un.” In February, the U.N. Panel of Experts implicated dozens of North Korean and third-country entities in China, Africa, the Middle East, and elsewhere in Asia. The Center for Advanced Defense Studies will soon publish a report implicating a large Chinese conglomerate in violating U.N. sanctions against North Korea; that report will also cast suspicion on the Bank of Dandong for handling some of its transactions. 

There’s plenty more where that came from in The Panama Papers. No doubt, there’s plenty more stored away in the laptops, cell phones, and human intelligence being collected from the North Korean diplomats and slush fund managers who’ve defected in Southeast Asia, Russia, China, and Europe recently. Which is to say, it’s not for lack of intelligence or lack of means that the Obama administration refuses to shut down Kim Jong-un’s access to the financial system. It’s solely due to a lack of political will.

In the wake of the test, China’s latest failures to enforce U.N. sanctions — and the Obama administration’s failure to enforce the law against Chinese banks and companies — has drawn a sharp reaction from Congress.

The House Asia Subcommittee has already held one hearing since the latest test, in which four separate witnesses recommended that the Obama administration apply secondary sanctions. Ed Royce, Chairman of the Foreign Affairs Committee, has been sharply critical of the administration’s failure to enforce the law.

But much of the discussion in Washington focused on the North Korea Sanctions and Policy Enhancement Act. Passed by Congress and signed by Obama earlier this year, it gives the Obama administration, among other things, new authority to sanction any individual who “imports, exports, or re-exports luxury goods to or into North Korea” or “engages in money laundering, counterfeiting of goods or currency, bulk cash smuggling, or narcotics trafficking that supports the government of North Korea or its senior officials.”

Rep. Ed Royce (R-Calif.), who chairs the House Foreign Affairs Committee and led the push for more sanctions authority, said Obama’s policies are “falling short” by not imposing sanctions on Chinese companies and banks.

Royce referenced a leaked U.N. report that accused China of lax enforcement and “cites evidence that Pyongyang moved tens of millions of dollars through a Singaporean branch of China’s biggest bank to evade sanctions,” according to a report in Foreign Policy magazine.  [Politico]

Small correction to Politico — the U.N. report is publicly available.

The report found that North Korea “has been effective in evading sanctions and continues to use the international financial system, airlines and container shipping routes to trade in prohibited items.” [Politico]

The Senate Foreign Relations Committee will hold a top secret briefing on the administration’s enforcement efforts today, and a letter signed by 19 Republican senators is a strong indication that the staffers will ask the right questions in that briefing. Last week, Senator Cory Gardner (R, Colo.), the Senate’s leading advocate of a tougher North Korea policy, assembled the group of senators, who signed this letter to President Obama. It’s a long quote, but worth reading.

On February 18, 2016, you signed into law the North Korea Sanctions and Policy Enhancement Act of 2016 (P.L. 114-122), but your Administration’s implementation of this legislation has been disappointing. While we commend the designation of North Korea as a jurisdiction of “primary money laundering concern” and the designation of top North Korean officials, including Kim Jong Un, as human rights violators, these actions only scratch the surface of the sanctions authorities provided to you under the new law.

First and foremost, you must begin to designate entities that are assisting the North Korean regime, especially those based in China — the country with which North Korea currently conducts an estimated 90% of its trade and that has historically served as Pyongyang’s largest military and diplomatic protector. 

As you know, Section 102 of P.L. 114-122 mandates, not simply authorizes, investigations against all entities, no matter where they are based, “upon receipt by the President of credible information indicating that such person has engaged” in illicit conduct outlined in the legislation.

As the Wall Street Journal wrote in an editorial on August 18, 2016: “The promise of secondary sanctions is that they can force foreign banks, trading companies and ports to choose between doing business with North Korea and doing business in dollars, which usually is an easy call…  But this only works if the U.S. exercises its power and blacklists offending institutions, as Congress required in February’s North Korea Sanctions and Policy Enhancement Act. The Obama Administration hasn’t done so even once.”

As the Wall Street Journal further noted, for instance, the Administration has not acted on information from the United Nations Panel of Experts report in March 2016 that the Bank of China “allegedly helped a North Korea-linked client get $40 million in deceptive wire transfers through U.S. banks.”  Moreover, there is ample evidence of increased North Korean efforts to evade sanctions with help from China-based entities.  According to the New York Times report on September 9, 2016, “To evade sanctions, the North’s state-run trading companies opened offices in China, hired more capable Chinese middlemen, and paid higher fees to employ more sophisticated brokers, according to Jim Walsh and John Park, scholars at MIT and Harvard.”

We respectfully ask you to immediately provide written answers to the following questions:

1) Has the Administration received credible evidence that entities based in China are engaging in illicit activities outlined in P.L. 114-122?   If so, what is the status of these investigations?  Why have no Chinese-based entities been designated to date?

2) Do you believe that China is in full compliance of UN Security Council Resolution 2270 and all preceding U.N. Security Council resolutions regarding North Korea?  Please provide a detailed account of China’s compliance or non-compliance and what actions, if any, have been pursued at the U.N. for China’s non-compliance. 

3) Why has the Administration not designated any entities for malicious cyber-enabled activities, as required by Section 209 of P.L. 114-122?

4) Does the Administration believe that the multilateral enforcement of UNSCR 2270 and its own enforcement of P.L. 114-122 has had a credible and measurable impact on North Korea’s regime ability to obtain luxury goods? 

5) Is North Korea’s state-owned Air Koryo airline involved in any activities outlined in Section 104 of P.L. 114-122 and if so, has the Administration initiated an investigation for the designation of Air Koryo under the law?  If not, why not?

6) What actions has the Administration taken to discourage the North Korean forced labor camps and trafficking of North Korean workers?  Is the Administration pursuing any designations for entities that are assisting in “the operation and maintenance of political prison camps or forced labor camps, including outside of North Korea”, as required by Section 104(a)(8) of P.L. 114-122? If not, why not?

Mr. President, we must send a strong message to Beijing that our patience has run out and exert any and all effort with Beijing to use its critical leverage to stop Pyongyang.  As Secretary Ash Carter stated on September 9, following the latest nuclear test:  “China shares important responsibility for this development and has an important responsibility to reverse it. It’s important that it use its location, its history and its influence to further the denuclearization of the Korean Peninsula and not the direction things have been going.” [full text here; link added by me]

The Hill, which also covered the letter, lists the names of the signatories.

The letter was signed by Republican Sens. Cory Gardner (Colo.); John Boozman (Ark.); Shelley Moore Capito (W.Va.); Tom Cotton (Ark.); Ted Cruz (Texas); Steve Daines (Mont.); Deb Fischer (Neb.); Johnny Isakson (Ga.); Jerry Moran (Kan.); David Perdue (Ga.); Jim Risch (Idaho); Jeff Sessions (Ala.); Pat Roberts (Kan.); Mike Rounds (S.D.); Marco Rubio (Fla.); Ben Sasse (Neb.); Richard Shelby (Ala.); Dan Sullivan (Ark.); and Roger Wicker (Miss.). [The Hill]

Separately, Senator Ted Cruz (R, Tex.) and Kelly Ayotte (R, N.H.) also called on the administration to hit Kim Jong-un’s Chinese enablers with secondary sanctions.   

Not to be outdone, Senate Democrats introduced a resolution condemning the test and calling for the U.N. to approve more sanctions against North Korea. Although the resolution highlights the passage of the NKSPEA in its findings, it stops short of criticizing President Obama for failing to enforce it. Hillary Clinton, on the other hand, offered some veiled-but-cryptic criticism of the President’s policy:

In a further effort to distance herself from current policy, Clinton also called for a “rethinking” of America’s strategy toward North Korea during a news conference in New York. Sanctions are “not enough,” she said, proposing an “urgent effort” to pressure Beijing into cracking down on Pyongyang. [Politico]

Will the administration finally act? I suspect not. Instead, it is running out the clock. Instead, it is negotiating yet another resolution with China, which China will also fail to enforce. As long as those negotiations continue, the administration probably won’t want to provoke China with secondary sanctions. And to be sure, there are loopholes in the current resolutions that should be closed, new sanctions that should be imposed, and new designations that should be made.

But in the end, all of North Korea’s profits from exporting coal, gold, weapons, and slaves ultimately end up in banks, mostly in China. If we freeze the accounts where those earnings are deposited, and from where the proceeds are spent, it won’t matter how much earnings potential those revenue sources have in the next two years. We could nullify North Korea’s profits from any gaps in the sanctions, and effectively enforce the sanctions that already exist, by beginning an earnest effort to penalize Kim Jong-un’s accomplices in the banking industry. Which is why, when China balks at passing a tough new resolution, our diplomats should not be afraid to walk away and act in concert with their allies in Japan, South Korea, Europe, Canada, and Australia. It would be far better to enforce the sanctions we have now than to enforce nominally tougher sanctions poorly.

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