The Rime of the Uninsured Mariner

Ah! Well a-day! What evil looks
Had I from old and young!
Instead of the cross, the albatross
About my neck was hung.

— Samuel Taylor Coleridge, The Rime of the Ancient Mariner

If last week’s posts on U.N. security council resolution 2321 and the recent Treasury Department designations have had a common theme, it’s that Treasury’s reasonably strong designations have done much to redeem a relatively weak U.N. resolution, and to warn Chinese banks and companies about the risks of sanctions-busting. Those warnings won’t mean much for long if the new Trump administration’s foreign policy team shows apathy or inattention to sanctions enforcement, but for now, in several cases, U.N. and U.S. sanctions have been two great tastes that taste great together.

Take the case of shipping insurance, one of the key elements of the success of Iran sanctions in pressuring Tehran to return to nuclear negotiations. One regard in which the U.N. resolution and the Treasury designations could complement each other especially well is UNSCR 2321’s ban on insuring North Korean ships, and the U.S. designation of the Korea National Insurance Corporation. First, the U.N. language:

“22.  Decides that all Member States shall prohibit their nationals, persons subject to their jurisdiction and entities incorporated in their territory or subject to their jurisdiction from providing insurance or re-insurance services to vessels owned, controlled, or operated, including through illicit means, by the DPRK unless the Committee determines on a case-by-case basis that the vessel is engaged in activities exclusively for livelihood purposes which will not be used by DPRK individuals or entities to generate revenue or exclusively for humanitarian purposes; [UNSCR 2321]

Two days after the Security Council approved this resolution, the Treasury Department blocked the Korea National Insurance Corporation. The basis for the designation was not, strictly speaking, to implement UNSCR 2321, but because it “is reported to generate substantial foreign exchange revenue that is used to support the regime in North Korea.” According to the U.N. Panel of Experts, KNIC is also associated with North East Asia Bank, which Treasury also designated the same day it designated KNIC.

The European Union actually blocked KNIC last year, also for proliferation financing. That Europe acted first may owe something to the fact that KNIC bilked European insurers Lloyds and Allianz (among others) out of millions of dollars in a reinsurance fraud scam. Regrettably for Lloyds and Allianz, their idiot lawyers failed to notice, until it was too late, that their reinsurance contracts with KNIC bound them to North Korean law (!) in case of disputes.

KNIC is an insurer of North Korean ships, but it may or may not be the only North Korean maritime insurer. KNIC’s web page — a hilarious masterpiece of North Koreanness — says it sells marine insurance, and markets a brand called “Golden Sea” to those drawn to a “SPECTACULAR SCENERY OF A GOOD CATCH OF FISH.” The 2015 report of the U.N. Panel of Experts, however, named another company, the Korean Shipowners’ Indemnity and Protection Association, as the insurer of the Chong Chon Gang, the Ocean Maritime Management ship that was seized in Panama in 2013. My informal inquiries lead me to believe that KSPIA is probably a subsidiary of KNIC, but I don’t have solid proof of this.

A 2013 report by Hugh Griffiths of SIPRI cited shipping sanctions as a potentially effective pressure point against North Korea, citing the example of a ban on insuring Islamic Republic of Iran Shipping Lines vessels. Shipping is also a vulnerability for North Korea, though probably not to the same extent it is for Iran. The regime monopolizes the cargo and the revenue of its merchant fleet, and sometimes uses it to carry cargo (weapons, drugs) that third-country shippers wouldn’t agree to carry. 

Although North Korea’s maritime insurers are likely part of a sanctions-proofing strategy intended to reduce its reliance on foreign insurers, it still relies on other nations for registration, bunkering services, and port access. In the same sense that you can’t buy stuff or get paid if correspondent banks in the U.S. won’t touch payments that have your name on them, you can’t operate ships if no one will insure or flag them, or let them dock, as Iran learned. 

Just weeks after the United States and the United Nations imposed new rounds of sanctions on Iran, Tehran’s ability to ship vital goods has been significantly curtailed as some of the world’s most powerful Western insurance companies cut off Iranian shippers out of fear that they could run afoul of U.S. laws, the insurers say. [Washington Post]

Like banks, insurers are sensitive to the legal and reputational risks associated with sanctions. According to the Post, U.S. secondary sanctions on Iranian shipping “forced ports and freighting companies across the globe to reevaluate their Iranian business,” and denied “dozens of Iranian vessels that transport crude oil, industrial equipment and other goods and supplies” to and from Iran access to insurance. It’s likely that other foreign companies are also insuring North Korean ships, or (more likely) selling reinsurance to KNIC or KSPIA. For example, North Korea (among other sanctioned states) recently used a New York-based insurance company, Navigators, which was consequently fined $271,000 by the Office of Foreign Assets Control.

“Iranian-flagged ships are facing problems all over the world as they currently have no insurance coverage because of the new sanctions,” said Mohammad Rounaghi, deputy manager of Sea Pars, an Iranian company that provides services for international ship owners and maritime insurance companies. “Basically, most ports will refuse them entry if they are not covered for possible damages.” [Washington Post]

In Iran’s case, it took a few years for the impact of shipping sanctions to show their full potential. Initially, the managing director of Islamic Republic of Iran Shipping Lines said that the “sanctions have not affected us much.” By 2013, the head of IRISL conceded that sanctions cut its revenue by half. India continued to buy oil from Iran using a rupee-denominated payment system, but at a steep discount and in steadily declining volumes. In January of 2016, the Obama administration lifted shipping sanctions against Iran as part of its nuclear deal, but insurers have been slow to re-engage with Iranian shippers, fearing that the U.S. could “snap back” the sanctions.

Sanctions also caused insurers to stop underwriting imports by Iran, most importantly of gasoline. Despite being an oil producer, Iran has little domestic refining capacity. In North Korea’s case, there has been some speculation that it might import oil from Iran, although China continues to supply its needs via a cross-border pipeline. According to a recent report, China has resupplied North Korea’s air force with jet fuel, which would be yet another case of China flagrantly violating U.N. sanctions (in this case, UNSCR 2270, paragraph 31).

There were also gaps in the enforcement of shipping sanctions against Iran, as noted by Claudia Rosett. Iran’s methods of evading shipping sanctions — changing ship names, re-registering, and re-flagging — will sound familiar to North Korea watchers. It is often (correctly) argued that North Korea has learned evasions skills while under U.S. and U.N. sanctions, but it is also true that Iran’s tactics have taught the U.S. and its allies some lessons that will be useful against North Korea. 

For example, UNSCR 2321 gives the 1718 Committee the authority to direct member states to de-register, impound, seize, or deny entry to specific North Korean ships if it has reasonable grounds to believe that those ships are involved in breaking U.N. sanctions.  Unfortunately, the 1718 Committee has sometimes been slow to designate entities even when the grounds are more than “reasonable.” One lesson is that if the 1718 Committee process is to be effective, the designation process must be more efficient than it has been before.

A second lesson from Iran is that shipping sanctions work better against a small number of big ships than against a large number of small ones. A review of any shipping tracker reveals that the vast majority of North Korea’s shipping runs between its ports and Chinese ports across the Yellow Sea. North Korea may be better positioned to shift some of that trade to short-haul shipping to China, or by relying on its (admittedly decrepit) roads and railroads for its exports. The NKSPEA anticipates this and provides for a policy response to it — cargo coming from Chinese ports that fail to enforce the inspection requirements of UNSCR 2270 may be subjected to more intrusive inspection when it enters U.S. ports.

A third lesson is that sanctions need an assist from diplomats, and vice versa. In March, UNSCR 2270 banned the registration and reflagging of North Korean ships, but in practice, progress toward canceling the registrations of North Korea’s ships has been uneven. Panama has complied; Mongolia and Cambodia are in the process of complying; Tanzania reflagged a series of North Korean ships shortly after sanctions passed but promised to de-register them after the registrations became an international embarrassment. Sierra Leone, Tuvalu, and other nations have given no indication that they’re complying.

So far, I’ve seen no evidence that the State Department has invested any diplomatic capital in asking other states to cancel the registrations of North Korean ships. South Korea has led the way in pressing other states to comply with U.N. sanctions, but the current political paralysis in Seoul and the transition in Washington mean that enforcement efforts could flag. To a lesser extent, Japan has begun to step forward to fill the diplomatic void. If and when the new Trump administration engages on this issue, it will find that diplomacy works better when it’s backed by a credible threat of secondary sanctions.

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