For North Korean banks, 2016 has been like that Corleone baptism montage

Years from today, North Korean bankers will remember 2016 as their annus horribilis. In February, a month after the North’s fourth nuclear test, Congress passed, and the President signed, the North Korea Sanctions and Policy Enhancement Act. Section 201 of the new law all but compelled the Treasury Department to designate North Korea a Primary Money Laundering Concern under section 311 of the Patriot Act. Section 311 allows for a menu of special measures to protect the financial system against offenders, but in March, the U.N. Security Council approved Resolution 2270, requiring member states to cut their correspondent relations with North Korean banks. That set the stage for Treasury to invoke the fifth and toughest of those measures, denying North Korean banks direct and indirect correspondent account services and isolating them from the international financial system. By then, the Financial Action Task Force had also called on banks and finance ministries around the world to apply “countermeasures” against North Korean money laundering.

As of January 2016, just eight North Korean banks’ assets had been blocked by the Treasury Department, including the Foreign Trade Bank and Korea Kwangsong Banking Corporation, or KKBC. Over the course of 2016, eight more North Korean banks would be blocked, six of them last Friday alone: North East Asia Bank, Koryo Credit Development Bank, Rason International Commercial Bank, Kumgang Bank, and Koryo Bank. That’s as close as financial regulation gets to this:

For banks that were already designated and had been slipping their payments through the net, events have also taken a darker turn. For years, Korea Kwangsong Bank accessed the financial system illegally through a Chinese conglomerate, Dandong Hongxiang Industrial Development. They would have gotten away with it, too, if not for those meddling (and also, brilliant) kids at the Center for Advanced Defense Studies, who used a shoestring budget and open-source intelligence to expose their international money-laundering operation. Shortly after C4ADS released its report, Treasury froze DHID’s assets, and the Justice Department indicted DHID and filed a complaint to forfeit its accounts in a dozen Chinese banks. 

If the Chinese banking industry is North Korea’s financial Abbottabad, the SEALs have begun to break down the doors of its safe haven. Treasury has not yet cavity searched the (metaphorical) harem by fining the Chinese bankers who’ve flunked their know-your-customer obligations, but by now, those bankers have surely seen the video of Senators Menendez, Rubio, and Gardner calling for their heads.

Is that all? No, that is still not all. Last week, it was a matter of intense speculation when NK News noticed that the CEO of Egyptian conglomerate Orascom Telecom, Naguib Sawaris, had landed in Pyongyang on his private jet. Sawaris had made himself scarce in Pyongyang since last year, when North Korea effectively confiscated Orascom’s profits from a cell phone network joint venture called Koryolink and caused Orascom share prices to plunge like Thanksgiving turkeys from a helicopter. It wasn’t long before we learned the reason for Sawaris’s visit — later that week, Orascom announced that Orabank, its joint banking venture with the DPRK Foreign Trade Bank, would shut down. Scratch seven banks in two weeks (but it’s still only Wednesday).

Orascom shares fell more than five percent the day it announced the failure of Orabank. It blamed sanctions, but its North Korea joint ventures were already write-offs due to Pyongyang’s own confiscatory restrictions before sanctions were strengthened in 2016. The exact cause of Orabank’s death wasn’t the 2013 designation of the DPRK Foreign Trade Bank for proliferation financing. The impending termination of Orabank’s correspondent relationships probably played a role, but I suspect that the investigative reporter George Turner inflicted the fatal wound when he exposed the links between Orabank and the FTB (more meddling kids). Even without the 311 action, knowledge of Orabank’s links to the FTB put Orascom’s corporate officers at risk of prosecution.

This week, Sawaris announced his resignation as CEO. No kidding. If I were an Orascom shareholder, I’d have wanted him defenestrated. Sawaris is one of those larger-than-life corporate caudillos who tend to be susceptible to hubris and delusions of omnipotence. He should have known better. North Korea has a long and near-perfect record of bankrupting its investors and ruining their reputations. As they say, fools and their money are soon parted. The Pulitzer Prize-winning novelist, Adam Johnson, probably put it best when he said, “[E]veryone who deals with them eventually gets burned.”

North Korea may soon enter uncharted territory. Within a few months, it may be the only industrialized state in modern history to have no banking industry to speak of. That will have the immediate benefit of forcing it to rely on third-country banks, which will have more dollar exposure and more incentive to avoid handling transactions for illicit cargo and designated entities. As of today, however, a few North Korean banks still live on. In 2014, the U.N. Panel of Experts published a table with a partial list of them. I copied that table and shaded the columns gray for banks that are designated by Treasury, and a trendy shade of tan for banks that appear to be defunct.

For comparison, here is a list of North Korean banks that have been designated by the Treasury Department’s Office of Foreign Assets Control (it looks longer than it really is because many of these names are aliases and alternative spellings).

Not all of the banks designated by Treasury are on the U.N. list. If some of them are really the same banks using different names, there should be more gray on the first chart. Still, some of the 13 undesignated survivors are significant, including the DPRK Central Bank and the Korea Commerce Bank. Hana Banking Corporation may become especially important to Kim Jong-un’s sanctions survival strategy, as it deals in Renminbi. I’d expect to see a ruble bank arise in the near future, too, but as the Justice Department recently revealed, the North Koreans have already tried that strategy and found its limits. Other banks on the list appear to be small, fly-by-night operations. They may have less global exposure and be more likely to survive a loss of their interbank access; after all, even Banco Delta Asia still survives (in much-diminished form) by dealing in Renminbi and Macanese patacas. Will a few small, non-dollar banks and couriers carrying briefcases full of cash be sufficient to sustain the government of a nation of 23 million people? Not for long, but that will depend on how aggressive we are, and how much time they have.

You will soon read much haughty analysis from aspiring Nobel Peace Prize laureates that sanctions against North Korea will not be airtight. That is true. No sanctions regime has ever been airtight, and no sanctions regime ever needed to be. The effectiveness of sanctions isn’t measured in absolute terms; it’s measured in relative terms. Sanctions work when they force despots to make difficult choices, catalyze corruption and indiscipline, instigate inter-factional knife fights over dwindling resources, and convince the tyrants that they’re losing control. How many brigades can they afford to feed? Will they have to cut back on pay and rations, and will that mean more border guards frag their officers, or carry their guns over the border and rob Chinese villagers? How many diplomats and slush fund managers will defect when they realize they can’t make their kick-up payments, and how many more bank accounts will they finger when they do? Can Bureau 39 buy enough big-screen TVs for the boys in both the SSD and the MPS, and how will the ones who get stuck with crappy Samjiyon tablets feel about that? Will keeping all the goon squads happy only come at the cost of fixing flood-damaged bridges and railways? Will the consequence of not fixing them be that the affected regions drift out of Pyongyang’s orbit? How long will Xi Jinping have their back if secondary sanctions start to cause pain in China’s precarious banking sector, or in its rust belt? Will Xi’s paternal benevolence end if Kim starts a regional arms race, or causes a breakdown in relations with the United States? 

Those are the difficult choices that sanctions can drive, and in the not-too-distant future, those choices will become matters of regime survival. I hasten to add that sanctions aren’t the only strategy that can threaten the regime’s stability. We don’t just have to pick one; in fact, they can complement each other well. Pyongyang’s goal will be to relieve itself of those difficult choices without making the two most difficult decisions of all: first, the decision to disarm completely, verifiably, and irreversibly; and second, the decision to accept enough transparency that anyone possessed of common sense would believe that it really made the first decision. Our discipline must be to multiply and intensify those difficulties until Kim Jong-un — or more likely, someone more reasonable who deposes him — makes those two most difficult decisions.

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