Chinese banks are cracking down on N. Korean money laundering again. Will it last this time?

Several news sources are reporting that Chinese banks, particularly in China’s northeast, have started to freeze or close accounts held by North Korean individuals and businesses. The Daily NK, citing unnamed local sources, was the first to report this potentially important development. It says both large state-owned banks (such as the China Construction Bank) and regional banks (such as Pudong Bank) recently banned all North Koreans from opening new accounts and ordered the closure of existing accounts. It also quotes a March 2017 report by Radio Free Asia that “[p]rivate Chinese banks are beginning to close bank accounts held by North Korean nationals” and that “North Korean laborers earning foreign currency in China have been issued an emergency alert.”

Kyodo News, citing “sources familiar with the situation,” says that the new measures have made it “nearly impossible to do business between the two countries.” It reports that the Bank of China, the China Construction Bank, and the Agricultural Bank of China branches in Yanji, have all banned North Koreans from opening accounts. The banks have not yet frozen the accounts, meaning that the North Koreans can still withdraw cash, but they can’t make deposits or remittances. According to an unnamed employee of one of the banks, “This is being influenced by international sanctions against North Korea.”

Kyodo speculates that either “China may have become more serious about curbing its nuclear ambitions,” or that the measures were “intended to help major Chinese banks avoid being hit by sanctions imposed by the United States and other countries,” like the Bank of Dandong was. Interestingly, it also attributes a 75 percent decline in North Korea’s imports of refined petroleum products over three months, and a corresponding rise in fuel prices inside North Korea, to the fact that “North Koreans were having difficulty paying for petroleum product imports because of the banking restrictions.”

Reuters, citing a bank teller in Liaoning, reports that the China Construction Bank “completely prohibited business with North Korea” starting on August 28th. A customer service representative for the Industrial and Commercial Bank of China also told Reuters that the bank “had stopped opening accounts for North Koreans” and (for good measure) Iranians on July 16th, but didn’t explain further. Those dates closely follow a series of forfeiture complaints, seizures, and designations by the Justice and Treasury Departments, most of them targeting financial flows through Chinese banks, involving North Korean front companies, which turn out to be less well hidden than many “experts” had assumed.

The Bank of China, which became a bête noire for Congress much earlier than other Chinese banks over revelations that its Singapore branch willfully helped Chinpo Shipping facilitate money laundering (and indirectly, arms smuggling) for His Porcine Majesty, stopped allowing North Koreans to open accounts at the end of last year. Or so says an unnamed teller at the BoC’s Dandong branch, who adds that the BoC also froze existing North Korean accounts. A teller at the Agricultural Bank of China branch in Dandong also said that BoC was refusing to open new accounts for North Koreans.

The Financial Times also reports that “multiple bank branches,” including those of China’s big five banks, “had imposed a freeze on new accounts” for North Korean individuals and companies, and that some of the banks were also “cleaning out” existing North Korean accounts and banning North Koreans from making new deposits. Officials at all of the banks refused to comment.

Both the FT and the Daily NK note that the banks’ new measures exceed what new U.N. sanctions require, but all of the reports fail to note that these actions would be completely consistent with stricter U.S. financial regulation on North Korean money laundering, along with the aforementioned recent actions by the Treasury and Justice departments, showing that the feds can trace North Korean transactions through specific Chinese banks — including those named in these reports — and are willing to take legal action against them. Some sources told the FT that corporate told them to freeze North Korean accounts in August; others said they were told in January.

Unfortunately, the Daily NK reports that North Koreans affected include not only “consular officials” and state trading companies, but also “laborers,” who may be either illegal (and increasingly scarce) migrant workers or state-contracted slave laborers (the report didn’t specify). Either way, that’s an unfortunate and unavoidable consequence of what would be an extremely important development — if it lasts. The FT quotes a Chinese professor of North Korea studies, who puts a brave face on the actions, saying that the actions benefit China, and that “China takes sanctions very seriously.” Stop laughing, dammit — this is a serious, adult conversation about banking regulation.

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The FT calls this “unprecedented,” but it really isn’t (of the five news sources I cite here, only the Daily NK gets this). There is, of course, the example of Banco Delta Asia and what we too easily forget — the Bush administration’s global campaign of financial diplomacy that persuaded banks around the world to close North Korean accounts. We now know that that strategy put Kim Jong-Il’s regime under severe financial strain, until Bush lost his nerve, lifted the pressure, and exchanged invaluable sanctions relief for a handful of worthless North Korean promises.

Then, in 2013, after Pyongyang’s third nuclear test, after Treasury sanctioned the DPRK Foreign Trade Bank, and after Ed Royce first introduced the bill that would later become the NKSPEA, which mandates secondary sanctions, big Chinese banks began to freeze and close North Korean accounts. It didn’t last, because the banks soon saw that Xi Jinping wanted those accounts open more than Barack Obama wanted them closed. The same pattern repeated itself in early 2016, and again (as Justice Department filings later showed) it was right back to business as usual a few month later, again because the Obama administration wasn’t willing to back its sanctions with enforcement actions.

Is this time any different? The answer depends on why the banks are doing this. As noted, what the banks are doing here doesn’t exactly align with what the U.N. resolutions require, but it aligns perfectly with what I’d expect inexperienced Chinese compliance officers to do to protect their banks from rising legal risks under U.S. banking and sanctions laws. In this post, I explained the importance of distinguishing the interests and actions of the Chinese government from those of individual Chinese banks, which are actually global corporations with global exposure. In other words, “Chinese” banks may be bending to Treasury’s will for the same basic reason that U.S. tech companies have collaborated with Chinese censors. My belief that the Chinese security establishment is fundamentally hostile to U.S. interests and thus willfully weaponizing North Korea remains unmoved. On balance, it seems more likely that the banks are doing this to protect their own reputations, credit ratings, and share prices — just as the Chinese Finance Ministry wants them to, and just as the Defense and Foreign ministries don’t.

Also, when is the last time an American Secretary of the Treasury said anything like this?

“If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system — and that’s quite meaningful,” Mnuchin said during an event at CNBC’s Delivering Alpha conference in New York on Tuesday. [….]

“North Korea economic warfare works,” Mnuchin said. “We sent a message that anybody that wanted to trade with North Korea — we would consider them not trading with us.” [Bloomberg]

Next, read this excerpt from the written testimony of Assistant Secretary of the Treasury Marshall Billingslea before the House Foreign Affairs Committee yesterday. Billingslea first explains that Treasury works closely with U.S. allies, the intelligence community, and the State Department to “conduct detailed forensic investigation and analysis” to “deny North Korea its current, principal source of funds.” He goes on to say that while we prefer to have Beijing’s voluntary cooperation, we’re also perfectly willing to hit Chinese targets we don’t get it.

For instance, on August 22, we struck at the heart of North Korea’s illegal coal trade with China.  Treasury designated 16 individuals and entities, including three Chinese companies that are among the largest importers of North Korean coal.  We estimate that collectively these companies were responsible for importing nearly half a billion dollars’ worth of North Korean coal between 2013 and 2016.  These funds are used to support the Government of North Korea and the Workers’ Party of Korea, including its nuclear and ballistic missile programs.  On top of that, we know that some of these companies were also buying luxury items and sending an array of products back to the North Korean regime.  On August 22 we sent two clear messages.  The first was to North Korea: we intend to deny the regime its last remaining sources of revenue, unless and until it reverses course and denuclearizes.  The second message was to China.  We are capable of tracking North Korea’s trade in banned goods, such as coal, despite elaborate evasion schemes, and we will act even if the Chinese government will not. [….]

China is even more central to a successful resolution of the crisis caused by Kim Jong-Un.  China accounts for at least 90 percent of North Korea’s exports.  North Korea is overwhelmingly dependent upon China for both trade and access to the international financial system.  China’s full and effective enforcement of UN sanctions is therefore essential.  Unfortunately, I cannot assure the Committee today that we have seen sufficient evidence of China’s willingness to truly shut down North Korean revenue flows, expunge the North Korean illicit actors from its banking system, and expel the North Korean middlemen and brokers who are establishing webs of front companies.  We will continue to work with the Chinese to maximize economic pressure on North Korea, but we will not hesitate to act unilaterally.  If China wishes to avoid future measures, such as those imposed on Bank of Dandong or the various companies sanctioned for illegal trade practices, then it urgently needs to take demonstrable public steps to eliminate North Korea’s trade and financial access. [Treasury Dep’t]

Then, watch his testimony on video.

Mr. Billingslea shows great promise. Let’s hope we have the next Stuart Levey or Juan Zarate on our hands, because we’ve never needed one more than we do now.

Of course, it’s The Boss, House Foreign Affairs Committee Chairman Ed Royce, who has been pushing for this strategy for years. Two laws, one presidential election, and three nuclear tests later, Royce looks to have finally gotten his way. Speaking at a hearing of his Committee yesterday, Royce called on the feds to “target major Chinese banks, including Agricultural Bank of China Ltd. and China Merchants Bank Co., for aiding Kim’s regime.” Royce was referring to a letter he sent to Mnuchin listing some of the banks that keep showing up in Justice Department indictments, forfeiture complaints, and seizure warrants as having effectively provided sanctioned North Korean banks with indirect correspondent account services in violation of this Treasury Department regulation, and asked the Treasury Department to sanction them.

Personally, I don’t expect Treasury to do anything as blunt or binary as a total asset freeze or a 311 action to most of those banks (on that point, Billingslea told the Committee that the 311 action on the Bank of Dandong had “a very clear effect” on its operations, but didn’t elaborate). Instead, I expect Treasury to start auditing the big banks and their correspondents for compliance with its new North Korea-specific regulation, with an eye toward civil penalties and fines like those imposed against European banks that skimped or cheated on anti-money laundering compliance on behalf of Iran and other sanctioned countries. Those fines often amounted to hundreds of millions of dollars (or, in the case of BNP Paribas, $9 billion). There may be such a thing as “too big to fail,” but there is no such thing as “too big to fine.”

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The Daily NK reports that small traders are already adapting to the new measures by going to a cash-based business model. Reporters are fond of saying that Pyongyang can easily evade financial sanctions by carrying around briefcases full of cash, but that’s mistaken on several levels. First, a typical briefcase only holds just over $2 million, which is enough to fuel the sort of cross-border trade in food and consumers goods that we shouldn’t want to stop, but hardly an efficient way for a Syrian arms client or Burmese middleman to pay a KOMID dealer for a shipment of machine tools or vacuum dryers. Needless to say, it’s not nearly enough to feed a million-man army or sustain an entire government. After all, China may not really care about policing bulk cash smuggling — notwithstanding its occasional, short-lived pretenses to the contrary — but countries like Bangladesh and Sri Lanka do.

That is to say, one potential outcome of these restrictions could be to break up larger, regime-controlled trading blocs in favor of smaller traders whose wares are more likely to end up in the homes and bellies of the poor. That would be a largely positive development. Our goal should not be a complete embargo of North Korea, which is why I was actually relieved that the U.N. didn’t impose a total fuel ban in its latest sanctions resolution. Our goals ought to be to expose and destroy Pyongyang’s state-controlled overseas trading networks, to freeze its cash reserves (which sit in Chinese banks, and which Pyongyang may be depleting rapidly), to de-fund its military and security forces to give the North Korean people a little breathing space and freedom from fear, and to create the “death spiral” that will cause money launderers who can’t make their kick-up payments to defect and bring us yet more valuable financial intelligence, which will help us find and freeze yet more assets.

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