On North Korea sanctions, evidence of an inflection point

As I’ve mentioned previously, this has been a busy month for me, and a difficult one for keeping up with the many developments in North Korea sanctions enforcement. Over the last months, I’ve been keeping a tally of how those efforts are taking shape. The accumulating evidence now gives reason for guarded optimism that at last, the sanctions are starting to show significant effects.

Financial. Treasury Undersecretary Sigal Mandelker sent the right message to the financial industry in her recent testimony before the Senate Banking Committee:

Banks worldwide should take note that we are acting to protect the U.S. financial system from North Korean illicit financial activity.  The new authorities granted to the Treasury Department by the Executive order issued last week give us even greater ability and leverage to target foreign banks that support the Kim regime.  We now have the ability to suspend correspondent account access to, or designate and freeze the assets of, any foreign financial institution that knowingly conducts significant transactions in connection with any trade with North Korea or on behalf of any North Korea-related designated person.  These new financial sanctions will be forward looking, and will apply to behavior that occurs following the date of the Executive order.  These types of sanctions were used to great effect in the Iran context, and present a stark choice to banks around the world.

Treasury took an important step late last month when it designated most of the remaining active North Korean banks (see the list in this post for reference). The designation of North Korea’s Central Bank, which issues its currency and has historically sold gold overseas, could be the most significant. But the designation of 26 individual North Korean bankers, trade representatives, and diplomats (read: money launderers and arms dealers) also matters, because banks everywhere now have a legal duty to close and/or freeze their accounts. Targeting these operatives in larger numbers makes it harder for the regime to react and shift funds to other operatives. The regime probably can’t replace these operatives and their valuable contacts faster than we’re designating them now.

Financial sanctions are also having second-order effects. The decision by China National Petroleum to stop selling fuel to North Korea reflects a concern that Pyongyang can’t pay for it, although Beijing has historically supplied fuel to Pyongyang through a cross-border pipeline, free of charge, and without reporting it in its official trade statistics.  Last month, I noted that banks in China were freezing or closing North Koreans’ accounts.

Similarly, the North Korean coal industry, which has been sanctioned by the U.N., and (perhaps more significantly) targeted by the U.S. Treasury and Justice departments for asset freezes, seizure warrants, and civil forfeiture suits, is clearly suffering, according to Daily NK interviews of citizens living near the mines.

In late September, China reportedly ordered joint ventures with North Korea to shut down. Since then, other reports have suggested that North Korean workers are returning from China in large numbers — despite the fact that U.N. sanctions allow those workers to complete their three-year contracts — and multiple reports suggest that Chinese businesses that relied on the cross-border trade have been hurt or idled. In Russia, too, North Korean money launderers are having trouble remitting funds.

Although most press reports have assumed that these developments were the result of Beijing ordering Chinese firms to comply with U.N. sanctions, I’ve theorized that the actual reason for these changes may be, as one Chinese trader put it, that their North Korean partnerscan’t pay us.” That is most likely a consequence of Chinese banks’ fear of losing their access to the dollar system. Chinese firms may also be concerned that products made with North Korean labor or materials will lose their access to U.S. markets, or that millions in profits may be frozen in correspondent accounts.

Historically, actions by Beijing have tended to generate optimistic headlines until, a few weeks later, we’d learn that its actions weren’t being enforced. It’s too early to conclude that this trend will continue, but it bears watching.

Designations. And yet, there are still some surprising oversights. It is objectively difficult to understand why, months after the U.N. and C4ADS exposed them, the feds still haven’t frozen and forfeited the assets of large North Korean arms-trading fronts like Glocom and Vast Win Trading, unless we believe that Malaysia, Singapore, and China are going to do that for us. Belatedly, Treasury has also designated one of the Chinese companies that sold North Korea the chassis that it converted into transporter-erector-launchers for its missiles.

Lawmakers like Senator Cory Gardner (R, CO) and Ed Markey (D, MA) recently introduced new legislation to toughen the sanctions even more, and to emphasize human rights — a key component that has been missing from our diplomatic efforts to build a global coalition. It’s good that they’re keeping the pressure on, and offering this useful course correction. Legislation is one way to do that, but another is to demand regular classified briefings, which means that congressional committee staffs need more staffers with the right clearance levels.

Diplomatic. A month ago, I aggregated the evidence that State’s efforts to isolate North Korea diplomatically — efforts that only began in the final weeks of the Obama administration, and that began to increase last spring — were starting to pay off. Spain, Mexico, Italy, Kuwait, and Peru all cut diplomatic relations with North Korea. Poland, the Philippines, Malaysia, India, the Sudan, Taiwan, Vietnam, and Egypt all announced that they would reduce trade relations with North Korea, or expel North Korean money launderers, slave laborers, or arms dealers.

Since the publication of that post, Portugal and the United Arab Emirates have also announced that they would sever relations with Pyongyang. The UAE also joins Kuwait in ending its acceptance of North Korean workers. Treasury’s removal of a number of Sudan designations suggests that the administration believes that Khartoum has also stopped buying North Korean weapons. Malaysia has banned travel to North Korea, and will not be replacing its withdrawn ambassador, in the wake of a brief hostage crisis early this year following the assassination of Kim Jong-nam. The EU has imposed new sanctions that ban oil and gas exports, textile imports, joint ventures and investments, and new work authorizations for North Korean laborers.

Finally, sanctions are, if slowly, taking their toll on the North Korean embassies that remain to sell its weapons and launder its money, by requiring national governments to freeze payments and shut down the businesses the embassies use to fund their salaries and operations. These developments represent not just a loss of multiple revenue sources, but also nodes within a global, interdependent money-laundering network.

Domestic. As state industries have increasingly struggled to meet their quotas, the regime has turned increasingly to the taxation of domestic industry, including small businesses, for its revenue. A new yuan-denominated tax on license plates suggests that even the state may be losing confidence in the North Korean won. That’s not entirely a bad thing, as one consequence of it is that more people gain a greater degree of economic independence from the state, people have more access to the things they need, there are more opportunities for corruption to siphon off more of this revenue, and the tax collection process puts more citizens into conflict with the state and its corrupt petty despots.

Personnel changes within the regime suggest that it may be under financial strain. An unconfirmed South Korean report says that Pyongyang may have replaced the head of Bureau 39. And whereas until recently, people associated with Jang Song-thaek were under suspicion, some are now being promoted. Jang’s network of operatives in China was Pyongyang’s financial root system. Their restoration might — I stress, might — mean that in its financial desperation, the regime is now (at least, temporarily) prioritizing money over loyalty.

Domestically, the regime is increasingly coming into conflict with its people as the regime squeezes them to make up for the loss of revenue, but the regime can only squeeze them so much: first, there is hardly anything left to steal from them; and second, as with the Great Confiscation of 2009, the regime knows that it has historically been economic conflicts with the state that have caused North Koreans to resist it. In the last six months, prices of fuel and other commodities have risen. South Korea’s National Intelligence Service believes that North Koreans are already disgruntled over the economic effects of sanctions, and that the regime is “conducting a large-scale campaign” to suppress that disgruntlement. None of these developments is irreversible, but for the first time since 2007, there are clear signs that sanctions are starting to take a toll on Pyongyang’s access to the global economy.

4 Comments

  1. Thank you very much for the update. I hope these developments are driving Kim Jong Un crazy and he will starve himself to death.




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  2. Winter is coming, with these fuel import restrictions, is there a possibility that NKoreans will freeze to death? Bitterly cold winters up there. Although NK is an exporter of Coal, hopefully they can provide this for their own people???




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  3. I share your concern. In this case, for once, the urban population (which uses heating oil) may have it worse than the rural population (who can heat their homes with wood and coal). I have mixed views on oil sanctions, fwiw, although I would support them as a last resort.




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  4. RimJinGang shows us that the DPRK is using electric POWER in Hamgyong province to electrify the Chinese made barbed wire border fence. South Korea shows us defections are down. Asia Society this week published interview with 2014 highest level defector. He tells us about fuel shortages sabotaging DPRK industry. Those defection reductions are not because of an increase in DPRK patriotism or improved living standards, they are because the DPRK is trapping more would be defectors. Lets blame the system the keeps resources for winter heating to use for entrapment.




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