The 2017 report of the U.N. Panel of Experts isn’t due to be published for another month, but a Kyodo News reporter has already obtained and published leaked excerpts. The focus of Kyodo’s story is the now-familiar (and unquestionably accurate) castigation of member state governments for not putting enough will or resources into the enforcement of North Korea sanctions, but I’d like to start with this revelation:
“An interdiction of the vessel Jie Shun was the largest seizure of ammunition in DPRK sanctions history,” according to the document. A source informed Kyodo News the Egyptian port was not the general cargo ship’s final destination, despite its strategic location near a number of regional conflict hot spots. However, the report said that seizures like it demonstrate “the country’s use of concealment techniques as well as an emerging nexus between DPRK entities trading in arms and minerals.” [Kyodo News, Seana K. Magee]
As recently as 2014, it was up for sale. Its current owner is Liaoning Foreign Trade Foodstuffs Co., Ltd. of 72 Luxun Lu, Zhongshan Qu, Dalian, China. That’s right next to the address listed in the Panel’s 2014 report for Dalian Sea Glory Shipping Company, which managed the suspected smuggling ship M/V Light. This is not a reputable neighborhood.
Shipping trackers last spotted the Jie Shun at “Skohna” (probably Sokhna), an Egyptian port on the Red Sea near the southern terminus of the Suez Canal.
Despite what the trackers say, the Panel’s report says the ship wasn’t headed for any port in Egypt. Egypt has been a buyer of North Korean missiles and missile parts, but not of large quantities of North Korean munitions, at least to my knowledge. Nope, this time, my top three guesses are Syria, Syria, and Syria:
[What do I win?]
Liaoning Foreign Trade also operates one other ship, the Chinese-flagged M/V Fu Yun 228, IMO 8888654. The small bit of good news is that if trackers still show the Jie Shun as stuck in Egypt, Egyptian authorities must have seized the ship as the resolutions require it to. Inshallah, Red Sea divers will soon have a nice new artificial reef, or the Somali Coast Guard will soon have a new Q-Ship for stalking pirates.
It’s unquestionably true that up to this point, Pyongyang has invested more effort in hiding its dollars and ships behind front companies and shell companies than we have in finding them. That’s why Anthony Ruggiero, who spent years at the Treasury and State Departments administering sanctions, asked Congress this week to give the feds more resources for these investigations.
Mandate additional resources to address North Korea’s activities. The North Korea Sanctions and Policy Enhancement Act of 2016 is a comprehensive law that provides a myriad of tools for the Trump administration to address the North Korean threat. It is important that Congress continue to address additional areas through legislation in the same overwhelmingly bipartisan nature, signaling to North Korea and China that focus on this issue will continue. Throughout my testimony, I have detailed the challenge we face with an adversary that seems to be one step ahead of us. Our entire approach to the North Korea issue needs to change. One area Congress can address immediately is providing additional resources to the Treasury Department, Justice Department, Intelligence Community, and other government agencies to investigate violations of the NKSPEA. [Anthony Ruggiero, Testimony before the House Foreign Affairs Committee, Feb. 7, 2017]
There are other, more immediate steps we can take, beyond those I recommended here. First, we should add the Jie Shun, Liaoning Foreign Trade Foodstuffs Co., Ltd., and (for good measure) the Fu Yun 228 to the U.N. designation list and the Treasury Department’s list of Specially Designated Nationals. Second, we should also demand that China expel any North Koreans involved in this transaction, freeze any accounts associated with the transactions or the parties to it, and prosecute any Chinese nationals involved.
[As Anthony explains, just after the 5-minute mark.]
For now, however, this is just the latest example of how China continues to be a part of the problem rather than a part of the solution. Almost weekly, we see fresh evidence that China’s cost-benefit calculation hasn’t changed. It’s time to use more forceful methods to shift that calculation:
The Treasury and Justice Departments’ actions in late September 2016 showed a troubling pattern of Chinese persons assisting North Korean-designated persons, including through the U.S. financial system. These transactions lasted six years, up to September 2015, making it hard to believe the Chinese government regulators were unaware of this conduct. It is important that Congress and the American people understand the extent of China’s efforts, or lack thereof, to combat money laundering, sanctions violations, and proliferation financing. I recommend that new legislation include specific sections on North Korea’s network within China. It should also address the broader issue of Chinese support for, and harboring of, North Korean nationals involved in prohibited conduct. In particular, the report could also focus on whether the financial institutions involved should have been designated or subjected to secondary sanctions. [Ruggiero testimony]
My next recommendation depends on whether the Cambodian government has retaken control of its shipping registry, as it promised to do last August, and whether it has de-registered the forty-plus North Korean ships it had reflagged, but is required by U.N. Security Council resolutions to de-register. For years, Cambodia’s shipping registry has been notorious for reflagging North Korean ships. What few of us knew until C4ADS informed us last year was that the International Ship Registry of Cambodia was “a joint venture between the Cambodian government and a South Korean company, the Cosmos Group.”
The seizure of the Jie Shun would have been around the same time as Cambodia promised to de-register rogue ships, and two months after South Korea very politely asked Cambodian dictator Hun Sen to enforce U.N. sanctions against Pyongyang. Good diplomacy always starts with a polite request, and also, it’s always backed by the prospect of ghastly and unspeakable consequences. That dual approach worked superbly the last time we tried it, in 2005, when Treasury officials Stuart Levey and Daniel Glaser went on their world Kim Jong-il Unplugged tour. If Cambodia didn’t act, it would make a damn good example for the likes of Tanzania, Sierra Leone, and other states that haven’t gotten the message about reflagging North Korean ships. And in the case of Cambodia, the Cosmos Group’s role gives us a willing South Korean partner with jurisdiction and a shared interest in shutting this dirty business down ppali-ppali.
The U.S. has an obligation to investigate how the financial transactions behind the shipment were denominated and processed — specifically, whether they were processed through the U.S. financial system. (Unfortunately, the seizure came before UNSCR 2321 banned the insurance of North Korean ships.) If the evidence shows that either the North Koreans or their Chinese partners misused our financial system to break the law, we should freeze and forfeit assets, issue indictments, and consider civil penalties or other appropriate enforcement actions against the banks involved.
Lastly, let’s not forget that under UNSCR 2270, China is supposed to be inspecting all of this North Korean cargo. The NKSPEA also provides a new legal tool for cracking down on ports that shirk that responsibility.
SEC. 205. ENHANCED INSPECTION AUTHORITIES.
(a) Report Required.—Not later than 180 days after the date of the enactment of this Act, and annually thereafter, the President shall submit to the appropriate congressional committees a report that identifies foreign ports and airports at which inspections of ships, aircraft, and conveyances originating in North Korea, carrying North Korean property, or operated by the Government of North Korea are not sufficient to effectively prevent the facilitation of any of the activities described in section 104(a).
(b) Enhanced Customs Inspection Requirements.—The Secretary of Homeland Security may require enhanced inspections of any goods entering the United States that have been transported through a port or airport identified by the President under subsection (a).
That means that if Dalian doesn’t comply with its requirements to inspect North Korean cargo, U.S. Customs and Border Protection might require more intrusive inspections of cargo coming from Dalian. Think of it as the shipping equivalent of a 311 action.
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Update: A reader writes that it’s just as possible that the weapons were headed for Hamas or Hezbollah. Yes, I suppose those are both plausible possibilities. North Korea is suspected of having sold arms to both groups in the past. Now that Hezbollah has a large contingent fighting in Syria, the easiest way to supply it would be by landing the ship at the Syrian ports of Tartous or Latakia. Supplying Hamas is a bit trickier, but would probably work something like this.
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Update 2: I want to take on the argument, suggested in the Kyodo report, that North Korea’s money laundering and smuggling networks are so well-hidden inside China that we couldn’t possibly uncover them. Yeah, how can we do that? We put resources on the problem, for once. We use the same methods we used to expose the equally sophisticated money launderers who worked for Iran, Al Qaeda, and the Cali Cartel. We do what C4ADS did, when two smart researchers with no classified access whatsoever exposed a sophisticated, well-hidden network of North Korean money launderers and smugglers operating from China. Just like the Justice and Treasury departments did when they added their law enforcement authorities to the mix and came up with an indictment and a civil forfeiture count that reached 5 individuals, dozens of front and shell companies, and 12 different Chinese banks. We do it like the U.N. Panel of Experts has done, year after year after year after year after year after year. If we’d simply investigate and/or designate the dozens of Chinese and other third-country entities exposed by the Panel’s open-source reports and their confidential annexes, we’d tear huge holes in that network. We do it by trying, for once, and by not being afraid to break some china along the way.
Finally, let’s not forget the role of human intelligence, which shows us why we don’t have to expose the entire network at once to damage the integrity of the whole thing. The number of North diplomats and money launderers who defected last year probably exceeded the numbers seen in any previous year. Every time a fund manager brings his laptop or some bank account numbers to U.S. or South Korean intelligence, we gain another invaluable clue about the dimensions of that network and who operates it. Apparently, we’ve done some damage, too.
“As sanctions against North Korea have strengthened, trading companies are turning to products that are not included in the sanctions list. The recent activity comes from a decision by the Ministry of Foreign Trade demanding that trading companies double their contributions,” a source in Pyongyang told Daily NK on February 1.
The North Korean authorities are increasing the amount of loyalty contributions to compensate for dwindling exports of weaponry, which had previously been a significant source of revenue. As a result, the companies have no choice but to explore alternative items for export. [Daily NK]
Every time we freeze or seize money in one part of the network, we make other parts of the network fearful that they’ll miss their kick-up quotas. There are some encouraging signs that sanctions can trigger defections, which in turn raise the burden on remaining parts of the network and provide intelligence to help us freeze even more money. Eventually, it all becomes a death spiral:
The undercurrents of desperation amongst the trading companies is largely due to Kim Jong Un’s use of fearpolitik. Some officials returning from abroad for the end-of-the-year review, he said, were dismissed for not completing their assignments, sparking fierce competition to complete the trade assignments set at the beginning of each new year.
“Some traders are complaining, ‘If you pull a rubber band too much, it will snap. This is why there are growing number of defections among dispatched workers,'” he added.
The executives in charge of North Korea’s international trading companies are expected to come under intense pressure. It remains to be seen whether this will spark an increase in high-level defections to South Korea or other countries this year. [Daily NK]
This also has ripple effects on the banks, who are our most valuable sources of financial intelligence, via the Know-Your-Customer rules, and the Suspicious Activity Reports and Currency Transaction reports they’re supposed to file. If Treasury puts out the word that we’re going to enforce those requirements strictly against North Korea — which is a 311 jurisdiction, after all — banks may step up their compliance out of fear of being exposed by defectors, and of paying the massive fines like those we imposed on banks that violated other sanctions regimes.