72 results found.
72 results found.
Here at OFK, we’ve chronicled a curious fact that few professional foreign policy scholars have noticed: China is opposed to unilateral sanctions, except when it isn’t. Last week — barely a week after President Trump returned from Beijing — he gave Xi Jinping something to oppose.
OFAC designated Dandong Kehua Economy & Trade Co., Ltd., Dandong Xianghe Trading Co., Ltd., and Dandong Hongda Trade Co. Ltd. pursuant to E.O. 13810. Between January 1, 2013 and August 31, 2017, these three companies cumulatively exported approximately $650 million worth of goods to North Korea and cumulatively imported more than $100 million worth of goods from North Korea. These goods have included notebook computers, anthracite coal, iron, iron ore, lead ore, zinc ore, silver ore, lead, and ferrous products.
OFAC designated Sun Sidong and his company, Dandong Dongyuan Industrial Co., Ltd. (Dongyuan), pursuant to E.O. 13810. Sun and Dongyuan were responsible for exporting over $28 million worth of goods to North Korea over several years, including motor vehicles, electrical machinery, radio navigational items, aluminum, iron, pipes, and items associated with nuclear reactors. Dongyuan has also been associated with front companies for weapons of mass destruction-related North Korean organizations. [Treasury Dep’t Press Release]
All told, last week’s designations include four Chinese companies, one Chinese individual, seven North Korean shipping or trading companies, two North Korean government agencies, and 20 North Korean ships. Most of the designations target North Korea’s shipping industry, and OFAC, the Office of Foreign Assets Control, even included photographs of North Korean ships doing ship-to-ship transfers of oil, in violation of UNSCR 2375, paragraph 11. If I had to guess, I’d guess that those photographs were taken by a spy satellite.
Treasury did not name the other ship or its nationality; however, in testimony at the House Foreign Affairs Committee in September, Treasury Assistant Secretary Marshall Billingslea showed other photographs “provided by the intelligence community” and named the ships, the flag states, and their destination ports (in China and Russia, of course).
The designation of the North Korean entities suggests that Treasury is pursuing a phased strategy. In the first phase, Treasury blacklists North Korean entities to put third-country companies, insurers, and banks on notice to avoid doing any business involving them. Treasury is still years behind the U.N. Panel of Experts, however, in naming the various persons and entities known to be involved in violating North Korea sanctions. Although a person designated by OFAC can sue to challenge the designation, the courts would apply a deferential standard and uphold any designation supported by “substantial evidence.” In most cases, the U.N. Panel’s careful and thorough work, including its annexes, would be more than sufficient to meet that standard.
Take, for example, the case of one of Treasury’s designations, the North Korean Maritime Administration. The U.N. Panel of Experts had recommended its designation in its most recent report, in September, for helping U.N.-designated North Korean arms smuggler Ocean Maritime Management evade sanctions. I’ve pasted the relevant text from the POE’s report below the “continue reading” link.
The next phase will require Treasury to hit some third-country targets to sever that business and warn others of the consequences of breaking that boycott. In the case of the Sun Sidong network, we’ve reached that second phase. Sun’s network first came to our attention last August, when a leaked U.N. report revealed that the Egyptian authorities had found a large shipment of PG-7 rocket-propelled grenades aboard a Chinese-flagged merchant ship, the Jie Shun, at the southern end of the Suez Canal. At the time, I’d guessed the rockets were headed for Syria, but the Washington Post later reported that the customer was none other than Egypt itself.
By June of this year, the Center for Advanced Defense Studies had pursued the POE’s clues and traced the ownership and control of the Jie Shun back to a Chinese national named Sun Sidong.
#SunSidong formerly owned the Jie Shun, a ship seized during a multimillion arms transfer from North Korea to Egypt, highlighting how “licit North Korean businesses are being used to facilitate North Korean illicit activity” (@JobyWarrick) https://t.co/WGlDscjFSn
— C4ADS (@C4ADS) November 22, 2017
It then released a remarkable report that not only exposed Sun’s network, it effectively mapped out most of North Korea’s money laundering network in China. C4ADS found that this network was “centralized, limited, and vulnerable” to sanctions. Sun and his companies account for a large portion of that network.
To put @USTreasury ‘s most recent set of #NorthKorea sanctions in context, it’s important to understand the layers of licit business that #NK uses to obscure illicit arms and tech trade via China https://t.co/EmQlYLlg4G pic.twitter.com/6hFRnnYcAh
— C4ADS (@C4ADS) November 22, 2017
For example, one of its subsidiaries, Dandong Zhicheng Metallic Materials Company, was until recently the single largest purchaser of North Korean coal.
“These companies will have a tough time continuing operations as even Chinese banks will increase scrutiny of their transactions, if not completely cut them off,” Anthony Ruggiero, a Senior Fellow at the Foundation for the Defense of Democracies, told NK News.
“These actions continue the narrative on the problem China has in Dandong and Dalian, something Treasury highlighted in its advisory where it noted the activities of Chinese banks and companies working with North Korea.” [NK News, Leo Byrne]
Last week’s designations are not the feds’ first strike on the Sun Sidong network. In August, the Justice Department filed a civil forfeiture complaint against DZMM. Last month, the Wall Street Journal reported that Sun was under investigation by the FBI, so it may not be the last strike, either.
This beautiful New York home was purchased with North Korean money – check out @freekorea_us on how “Sun’s network may have been Pyongyang’s since most important portal” into the global economy #sanctions https://t.co/eMXY1N3B87 pic.twitter.com/rYVGs3FUtj
— C4ADS (@C4ADS) November 22, 2017
One other company, the Korea South-South Cooperation Corporation, was designated for slave labor exports to “China, Russia, Cambodia, and Poland.” Technically speaking, UNSCR 2375 permits member states to allow labor contracts with North Korea to expire, but in this case, Treasury is telling the parties to those transactions to keep them out of the dollar system.
Although the designations came one day after President Trump announced that North Korea would be returned to the list of state sponsors of terrorism, the designations are not directly related to North Korea’s recent sponsorship of terrorism. It would not surprise me, however, to see future designations of North Korean nationals under Executive Order 13224. The President has indicated that we’ll see more designations soon.
President Donald Trump, in announcing Monday his administration’s decision to designate North Korea as state sponsor of terrorism, indicated that additional sanctions measures were on the way. “It will be the highest level of sanctions by the time it’s finished over a two-week period,” Mr. Trump said. [WSJ, Felicia Schwartz]
The designations also tell us a few things about the role of China in enforcing these sanctions. First, although I’d feared that Trump would get hoodwinked by Xi Jinping in Beijing and ease off on secondary sanctions, it’s clear that he hasn’t eased up entirely. It’s also clear that the visit by a Chinese emissary to Pyongyang, which was much ballyhooed on Twitter (including by the President himself) achieved exactly as much as I’d expected (bupkes). By now, all wizened Korea-watchers either know or should know that the words “great expectations,” “diplomat,” and “Pyongyang” can only be assembled into transitory delusions.
Don’t hold your breath. It was designed to appear to be doing something to please you. https://t.co/UPey7pdFOb
— Robert Manning (@Rmanning4) November 16, 2017
We soon learned that when Xi Jinping’s messenger showed up, His Porcine Majesty was conveniently out of town looking at things. No doubt, Xi is unhappy with both Donald Trump and Kim Jong-un now. But he’d have no reason to be unhappy with us now if he enforced the sanctions his government voted for at the U.N.
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The Chinese government unexpectedly arrested the head of a major company operating cargo ships linking North Korea and China, which the United States had designated as an entity subject to its independent sanctions, a joint investigation by The Dong-A Ilbo and Channel A found on Sunday. Beijing is reportedly conducting far-reaching investigation of all companies engaged in trade with North Korea, as well as Chinese firms and individuals Washington included in the list of entities subject to its independent sanctions since this past summer, and is taking disciplinary action if illegal acts are detected.
According to informed sources on North Korea, the Chinese government arrested a man identified by his last name Jin, head of Dalian Global Unity Shipping, and is probing him in a location other than Dalian. Jin, a Korean Chinese, is an entrepreneur widely known in the field who is almost monopolizing shipping service linking Dalian and North Korea. Since his arrest, the operation of all the vessels linking Dalian and North Korea has been suspended. The measure is reportedly putting heavy pressure on North Korea, with the North’s export to China having been halted. [Dong-a Ilbo]
Dalian Global Unity isn’t part of the current round of designations; it was added to the SDN List back in June.
Finally, OFAC designated Dalian Global Unity Shipping Co., Ltd. (Dalian Global Unity) pursuant to E.O. 13722 for operating in the transportation industry in the North Korean economy. Dalian Global Unity is reported to transport 700,000 tons of freight annually, including coal and steel products, between China and North Korea. According to the 2013 report by the UN Panel of Experts on North Korea, Dalian Global Unity was actively involved in eight cases of luxury goods smuggling incidents and is suspected of involvement in at least one other case. Middlemen from Dalian Global Unity gave specific instructions about how shipments and transactions could evade the UN-mandated luxury goods ban. [U.S. Treasury Dep’t]
Remember the ten-week rule: never celebrate any apparent Chinese compliance with North Korea sanctions until it has been in effect for at least ten weeks.
Two months ago, the Center for Advanced Defense Studies (C4ADS) released its groundbreaking report, “Risky Business,” which used open-source business records to trace the 5,233 companies that (according to C4ADS) comprise nearly the entirety of North Korea’s “limited, centralized, and vulnerable” financial networks in China. At the time, I speculated that we hadn’t heard the last word from the FBI, the Treasury Department, and Justice Department, and yesterday, my suspicions were confirmed.
First, Treasury designated a series of North Korean, Chinese, and Russian nationals for dealing with sanctioned entities through the dollar system, in violation of the International Emergency Economic Powers Act. The effect of the designations is to freeze any assets of those entities that are in the United States, prevent them from using the dollar system for future transactions, and prevent U.S. persons from providing them with any goods, services, or technology.
“Treasury will continue to increase pressure on North Korea by targeting those who support the advancement of nuclear and ballistic missile programs, and isolating them from the American financial system,” said Treasury Secretary Steven T. Mnuchin. “It is unacceptable for individuals and companies in China, Russia, and elsewhere to enable North Korea to generate income used to develop weapons of mass destruction and destabilize the region. We are taking actions consistent with UN sanctions to show that there are consequences for defying sanctions and providing support to North Korea, and to deter this activity in the future.” [Treasury Dep’t Press Release]
Among yesterday’s notable targets:
* China-based Dandong Rich Earth Trading Co., Ltd., for buying vanadium from sanctioned Korea Kumsan Trading Corporation, a front for the General Bureau of Atomic Energy.
* Russia-based Gefest-M LLC and its director, Ruben Kirakosyan, for procuring metals for sanctioned Korea Tangun Trading Corporation, a front for the Second Academy of Natural Sciences, which is involved in North Korea’s WMD and missile programs.
* China- and Hong Kong-based Mingzheng International Trading Limited (“Mingzheng”), the subject of this previous Justice Department forfeiture case, which acts as a front company for the Foreign Trade Bank (FTB) of North Korea. Treasury designated the FTB in 2013 for proliferation financing. The U.N. recently designated it in UNSCR 2371.
* Three more Chinese companies that are “collectively responsible for importing nearly half a billion dollars’ worth of North Korean coal between 2013 and 2016,” including Dandong Zhicheng Metallic Materials Co., Ltd. (“Zhicheng”), JinHou International Holding Co., Ltd., and Dandong Tianfu Trade Co., Ltd. Dandong Zhicheng was exposed by C4ADS as part of the Sun Sidong network in June. This is the single largest purchaser of North Korean coal. That’s going to leave a mark.
* Three Russians and two Singapore-based companies involved in providing oil to North Korea.
Transatlantic Partners Pte. Ltd. (“Transatlantic”), Mikhail Pisklin, and Andrey Serbin were designated pursuant to E.O. 13722 for operating in the energy industry in the North Korean economy. Pisklin, through Transatlantic, concluded a contract to purchase fuel oil with Daesong Credit Development Bank, a North Korean bank designated in 2016. Serbin is a representative of Transatlantic who worked with Irina Huish of Velmur Management Pte. Ltd. (“Velmur”) to purchase gasoil for delivery to North Korea. Velmur was designated for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, Transatlantic. Velmur also sold gasoil to North Korea. OFAC also designated Velmur’s executive director, Irina Huish, for acting or purporting to act for or on behalf of, directly or indirectly, Velmur, and she has also worked with Transatlantic to circumvent sanctions. Both of these companies have attempted to use the U.S. financial system to send millions of dollars in payments on behalf of North Korea-related transactions.
Lest anyone accuse Treasury of singling China out, the designation of Singapore-based entities should send a strong message to a state that has largely overlooked the enforcement of North Korea sanctions and consequently become a haven for Pyongyang’s money laundering. I was also pleased to see Treasury go after KOMID’s slave labor racket and arms factory in Namibia, which I’ve previously written about here, here, and here, although I maintain that the NKSPEA also requires the President to sanction the Namibian entities that have knowingly dealt with sanctioned North Korean entities like KOMID. I hope Angola will be next.
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Just over an hour after Treasury released those designations, the Justice Department filed two civil forfeiture complaints against $11 million belonging to Velmur, Transatlantic, and Dandong Zhicheng. I downloaded both complaints from PACER, for the good of humanity, so you don’t have to.
You’re welcome, humanity.
This complaint alleges that Velmur and Transatlantic Partners Pte. Ltd. (Transatlantic) laundered United States dollars on behalf of sanctioned North Korean banks that were seeking to procure petroleum products from JSC Independent Petroleum Company (IPC), a designated entity. The complaint also seeks a civil monetary penalty against Velmur and Transatlantic for prior sanctions and money laundering violations related to this scheme.
According to the complaint, designated North Korean banks use front companies, including Transatlantic, to make U.S. dollar payments to Velmur. The complaint relates to funds that were transferred through four different companies and remitted to Velmur to wire funds to JSC Independent Petroleum Company (IPC), a Russian petroleum products supplier. On June 1, 2017, the Department of the Treasury’s Office of Foreign Asset Controls (OFAC) designated IPC. The designation noted that IPC had a contract to provide oil to North Korea and reportedly shipped over $1 million worth of petroleum products to North Korea. [U.S. Attorney’s Office]
Don’t focus on the fact that the putative claimants were selling fuel. Focus on the fact that they were dealing with a sanctioned North Korean entity through the dollar system, which is a felony. (U.N. sanctions only ban exports of aviation and rocket fuel, and U.S. fuel export sanctions are discretionary and have humanitarian exceptions.)
The government is seeking to forfeit $6,999,925 that was wired to Velmur in May 2017. The U.S. dollar payments, which cleared through the U.S., are alleged to violate U.S. law, because the entities were surreptitiously making them on behalf of the designated North Korean Banks, whose designation precluded such U.S. dollar transactions. The government also is seeking imposition of a monetary penalty commensurate with the millions of dollars allegedly laundered by Velmur and Transatlantic. [U.S. Attorney’s Office]
Regarding Dandong Zhicheng, a/k/a Dandong Chengtai …
The government is seeking to forfeit $4,083,935 that Dandong Chengtai wired on June 21, 2017 to Maison Trading, using their Chinese bank accounts. The investigation revealed that Maison Trading is a front company operated by a Dandong Chengtai employee. These U.S. dollar payments, which cleared through the United States, are alleged to violate U.S. law, because the recent North Korean sanctions law specifically barred U.S. dollar transactions involving North Korean coal and the proceeds of these transactions were for the benefit of the North Korea Worker’s Party, whose designation precluded such U.S. dollar transactions.
This case relates to a previously unsealed opinion from Chief Judge Beryl A. Howell of the U.S. District Court for the District of Columbia, which found that probable cause existed to seize funds belonging to Dandong Chengtai. [U.S. Attorney’s Office]
As noted here. And lest we forget to give credit where it’s due …
The FBI’s Phoenix Field Office is investigating the case involving Velmur Management Pte Ltd. and Transatlantic Partners Pte., Ltd. The FBI’s Chicago Field Office is investigating the case involving Dandong Chengtai Trading Co. Ltd. Both investigations are being supported by the FBI Counterproliferation Center.
Assistant U.S Attorneys Arvind K. Lal, Zia M. Faruqui, Christopher B. Brown, Deborah Curtis, Ari Redbord, and Brian P. Hudak, all of the U.S. Attorney’s Office for the District of Columbia, are prosecuting both cases. Paralegal Specialist Toni Anne Donato and Legal Assistant Jessica McCormick are providing assistance. [U.S. Attorney’s Office]
Finally, let’s not forget the important work of C4ADS. Today, it will release an update to “Risky Business,” revealing that in addition to having funds in U.S. banks, the Chinese national who runs Dandong Zhicheng, Sun Sidong, owns real estate in the United States. Check C4ADS’s web site for the update.
When I read C4ADS’s reports, I’m often reminded of the line from “Lawrence of Arabia” when Mr. Dryden (delivered by the wonderfully dry and underrated British actor Claude Rains) learns that Lawrence has conquered the Turkish base at Aqaba with an army of Arab tribesmen: “Before he did it, I’d have said it couldn’t be done.” Indeed, for years, scholars at famous think tanks assured us it couldn’t be done. First, they told us that sanctions against North Korea were maxed out. Then, they told us that Pyongyang’s networks were needles in a field of haystacks, and that the field itself was obscured and beyond our sight. And yet, without so much as a single security clearance between them, two brilliant young analysts at C4ADS mined data from open sources and traced the networks. It may be on the brink of proving all the “experts” wrong.
~ ~ ~
Update: C4ADS writes in to say that the update was delayed, and will be released in a few days.
And so, the “maximum pressure” we’ve been waiting for begins in earnest. Yesterday afternoon, the Treasury Department announced a series of legal actions against Chinese enablers of North Korea’s proliferation, smuggling, and money laundering. First, Treasury’s Office of Foreign Assets Control froze the assets of two businessmen and a shipping company. One of those businessmen, Sun Wei, was the sole shareholder of Mingzheng International Trading, the Chinese company targeted in this recent civil forfeiture action. The shipping company was sanctioned for smuggling luxury goods to North Korea, in violation of UN sanctions.
The more potentially significant action, however, was Treasury/FINCEN’s action against a Chinese bank. The target was the Bank of Dandong, and the weapon was 31 U.S.C. 5318A(b)(5), otherwise known as the Fifth Special Measure of Section 311 of the Patriot Act — the same provision used against Banco Delta Asia in 2005. The action effectively makes the BoD a global pariah and cuts it off from the financial system.
[Alderaan shot first.]
Interestingly enough, if you had asked me to pick just one Chinese Bank to make an example of, I would have named the Bank of Dandong. Yes, the Bank of China was the most flagrant violator, but a large bank calls for a different strategy (which I’ll discuss below). Based on the open-source evidence, it was the BoD that had the most integration into Pyongyang’s palace economy. This 2013 report documented its ties to US- and UN-sanctioned Korea Kwangson Bank (KKBC). This report from early 2016 indicates that Chinese merchants trading with North Korea (temporarily) shifted away from the Bank of Dandong after the U.N. Security Council passed Resolution 2270. A few months later, the Justice Department indicted a Chinese company, Dandong Hongxiang Industrial Development, for laundering money for KKBC through 12 Chinese banks, including the BoD. Just a few days before, the Center for Advanced Defense Studies had revealed that DHID had an equity stake in the BoD.
To this body of evidence, the Treasury Department now adds a Notice of Proposed Rulemaking to support the 311 action. Treasury accuses the BoD of facilitating money laundering by trading companies that are fronts for North Korean banks and agencies designated for proliferation. Sorry for the long money quote, but it’s all worth reading:
Bank of Dandong serves as a gateway for North Korea to access the U.S. and international financial systems despite U.S. and UN sanctions…. For example, as of mid-February 2016, North Korea was using bank accounts under false names and conducting financial transactions through banks located in China, Hong Kong, and various southeast Asian countries. The primary bank in China was Bank of Dandong.
In early 2016, accounts at Bank of Dandong were used to facilitate millions of dollars of transactions on behalf of companies involved in the procurement of ballistic missile technology. Bank of Dandong also facilitates financial activity for North Korean entities designated by the United States and listed by the United Nations for WMD proliferation, as well as for front companies acting on their behalf.
In particular, Bank of Dandong has facilitated financial activity for Korea Kwangson Banking Corporation (KKBC), a North Korean bank designated by the United States and listed by the United Nations for providing financial services in support of North Korean WMD proliferators. As of May 2012, KKBC had a representative embedded at Bank of Dandong. Moreover, Bank of Dandong maintained a direct correspondent banking relationship with KKBC since approximately 2013, when another Chinese bank ended a similar correspondent relationship. As of early 2016, KKBC maintained multiple bank accounts with Bank of Dandong.
Bank of Dandong has also facilitated financial activity for the Korea Mining Development Trading Corporation (KOMID), a U.S.- and UN-designated entity. As of early 2016, a front company for KOMID maintained multiple bank accounts with Bank of Dandong. The President subjected KOMID to an asset blocking by listing it in the Annex of Executive Order 13382 in 2005, and the United States designated KOMID pursuant to Executive Order 13687 in January 2015 for being North Korea’s primary arms dealer and its main exporter of goods and equipment related to ballistic missiles and conventional weapons.
FinCEN is concerned that Bank of Dandong uses the U.S. financial system to facilitate financial activity for KKBC and KOMID, as well as other entities connected to North Korea’s WMD and ballistic missile programs. Based on FinCEN’s analysis of financial transactional data provided to FinCEN by U.S. financial institutions pursuant to the BSA as well as other information available to the agency, FinCEN assesses that at least 17 percent of Bank of Dandong customer transactions conducted through the bank’s U.S. correspondent accounts from May 2012 to May 2015 were conducted by companies that have transacted with, or on behalf of, U.S.- and UN-sanctioned North Korean entities, including designated North Korean financial institutions and WMD proliferators.
In addition, U.S. banks have identified a substantial amount of suspicious activity processed by Bank of Dandong, including: (i) transactions that have no apparent economic, lawful, or business purpose and may be tied to sanctions evasion; (ii) transactions that have a possible North Korean nexus and include activity between unidentified companies and individuals and behavior indicative of shell company activity; and (iii) transactions that include transfers from offshore accounts with apparent shell companies that are domiciled in financial secrecy jurisdictions and banking in another country. [FINCEN NPRM]
For a brief discussion of the BoD’s rights to challenge this action before it officially becomes final in 60 days, see this post. The Bank of Dandong can’t say it wasn’t warned; in its notice, Treasury cites its November 2016 regulation at 31 C.F.R. 1010.659, calling on banks to exercise enhanced due diligence with regard to North Korean customers, and to deny North Korean banks direct or indirect access to the financial system. That regulation was promulgated to implement Treasury’s designation of North Korea as a jurisdiction of Primary Money Laundering Concern in November, which in turn was in response to section 201 of the North Korea Sanctions and Policy Enhancement Act, which effectively forced Treasury to make that designation.
Naturally, the principal congressional leaders behind passing the law that led to this result welcomed Treasury’s decision. Rep. Ed Royce (R-CA), chairman of the House Foreign Affairs Committee called the action “a big step,” adding, “The administration is right to target any around the world who act as financial lifelines to Kim Jong-un, and to give them a clear choice: You can do business with North Korea or with the U.S., but not both.” Royce also called on the Senate to pass his KIMS Act. Senator Cory Gardner (R-CO) issued a statement applauding the action and calling it long overdue.
It’s hard to believe that it was a complete coincidence that Treasury took this action while Moon Jae-In was in town. The message thus sent is that the U.S. and South Korea must be aligned on sanctions enforcement. We cannot have a repeat of 2005, when South Korea undermined the sanctions the U.S. imposed (Roh Moo-Hyun opened Kaesong, which became a $100-million-a-year subsidy for Kim Jong-Il, just as the Banco Delta Asia sanctions were achieving their effects). Someone in the White House clearly understands that we cannot make a coherent policy of sanctioning and subsidizing the same target at the same time. Treasury Secretary Steven Mnuchin emphasized that yesterday’s action was directed at North Korea, not China, and expressed the hope that China would “continue to work with us” to pressure North Korea.
What should we watch for next? First, for North Korean money men to step up their bulk cash smuggling game, or shift to non-dollar currencies or trade-based money laundering as sanctions dodges. The excellent Noon in Korea Twitter feed, for example, points to a Korean-language report that authorities in Vladivostok have seized bulk cash from North Korean money launderers who are apparently having trouble sending wire transfers (an increasingly rare case of Russia enforcing sanctions). Interestingly, Treasury says that BoD also maintains “euro, Japanese yen, Hong Kong dollar, pound sterling, and Australian dollar correspondent accounts that would not be affected by this action.” That’s why it will be important for State and Treasury to engage in some good financial diplomacy to get those third-country regulators to blacklist the BoD under their own authorities.
Also, look for the “death spiral” — North Korean money launderers who defect because they can’t pay their kick-up quotas because of sanctions, who then provide us more intelligence, leading to yet more sanctions. Rinse and repeat. (We might as well put out the word now that they’ll get better living arrangements if they bring their ledgers and laptops.) For a fascinating interview of one of those money launderers who defected after the Jang Song-Thaek purge, read this. North Korean money launderers’ fear of coming home to Pyongyang short-handed may be one of our intelligence agencies’ best tools to be a major player in the sanctions game. For reasons I explained here, that death spiral could pose a serious threat to the survival of the regime.
We should also watch for local regulators stepping in to take over the Bank of Dandong to prevent a run and shield other local banks from secondary effects. We should look for more reports that other Chinese banks are closing North Korean accounts. We should also look for correspondent banks in the United States to raise their scrutiny of Chinese banks that try to clear dollar transactions on behalf of suspicious or poorly documented customers. If FINCEN plays its cards right, Chinese banks that don’t step up their compliance game may find it difficult to clear their transactions. For more on how EU and New York state regulators have applied similar strategies, see this post.
Finally, we should look for China to send more mysterious convoys to North Korea and engage in conspicuous sanctions violations to deter any more actions by Treasury. We must be prepared to escalate in kind. Chinese retaliation may be Trump’s excuse to do what some in his administration have wanted to do all along — hit China with, say, steel tariffs. Fortunately, Trump has backed off from a threat to withdraw from NAFTA. And needless to say, the worst possible time to drop or renegotiate the Free Trade Agreement with South Korea is when China is bullying it with unilateral trade sanctions. After all, you can’t wage a trade war with everyone at once. If you trade less with China and you aren’t willing to eat a recession, you have to trade more with someone else. Given that most of the economies that compete with China as providers of low-wage labor or high-technology manufacturing (or both) are in East Asia, Trump should consider making some face-saving changes to the Trans-Pacific Partnership and reviving it as part of a long-term plan to encourage an emigration of manufacturers from China to friendlier venues in Southeast Asia and Japan. While I’m not a fan of protectionism, Xi Jinping’s behavior in the South China Sea, North Korea, and Hong Kong has also convinced me that “peaceful rise” is a self-serving delusion, and that our economic interest in robust trade with China is outweighed by the threat that we’re selling Xi the rope to hang us with.
We also need a strategy for banks like the Bank of China that may think they’re too big to sanction. The Bank of Dandong is expendable, but the Bank of China is not. Unlike the Bank of Dandong, however, the Bank of China has deep links to the U.S. financial system, is under pressure from the Chinese Finance Ministry to improve its anti-money laundering compliance, and has a branch in New York (which regularly checks in on this humble blog for … for posts like this one, I suppose). The better approach for Treasury, then, would be to use FINCEN to treat the BoC’s North Korea ties as an anti-money laundering compliance problem and, in the event the feds smell something fishy, issue subpoenas with a mind toward doing to the BoC what it did to BNP Paribas — impose heavy fines and a deferred prosecution agreement for data stripping and flunking Know-Your-Customer obligations. That is to say, there is no such thing as “too big to sanction,” merely different strategies for different targets. Another advantage of a deferred prosecution agreement, of course, is that it can force a bank to cooperate by providing financial intelligence — intelligence the feds can use to take action against other targets.
Some of these effects should be evident within the next week or two. The effects that matter most, however, are on the stability of the North Korean system. To have any chance at all for a negotiated denuclearization of North Korea, we will have to force the regime to choose between its nukes and its survival. My guess is we’ll see effects of that kind within a year or two if — and only if — we continue to press the financial, law enforcement, and diplomatic campaign needed to starve the regime of funds.
After a long delay, the Treasury Department has issued its final rule prohibiting financial institutions operating in U.S. jurisdiction from providing direct or indirect correspondent account services to North Korean financial institutions. In English, that means North Korean banks are now denied a critical link for accessing the global financial system.
North Korea is now one of only three countries to be declared a Primary Money Laundering Concern by the Treasury Department, and is the only country subject to Special Measure 5. Under section 311 of the Patriot Act, the imposition of Special Measure 5 requires formal rulemaking — notice, comment, and publication of a final rule in the Federal Register — which explains some of the delay since late May, but not all of it.
The skeptics will have several responses to this. The first, that North Korea is already heavily sanctioned, I’ve already debunked, and most experts who actually understand sanctions will agree with me here. The second, that North Korea stopped using the dollar system years ago, has been refuted by the Justice Department’s recent indictment and U.N. reports. Indeed, Bill Brown’s analysis tells us that North Korea has dollarized its economy to stabilize it. The most recent counter-arguments are that North Korea doesn’t directly access the financial system through its banks, and that it effectively hides its money using front companies.
The latter arguments are best addressed by pointing to the example of C4ADS’s exposure of hundreds of North Korean ships, agents, and front companies using open-source research. That, in turn, led to the indictment of, and forfeiture action against, Dandong Hongxiang Industrial Development, which used its own bank accounts to provide indirect correspondent account services to a sanctioned North Korean bank, Korea Kwangsong Banking Corporation. The new 311 rule expands the prohibition on providing such services to cover all North Korean banks, not just those designated by the Treasury Department.
The DHID case is illustrative of one of the main strategies North Korea has used to adapt to the BDA action. It uses front companies like DHID, Chinpo Shipping, and 88 Queensway, and others that operate as unlicensed money transmitting businesses, which is itself a criminal offense. Those businesses then use their own accounts in Chinese banks to provide North Korea with indirect correspondent account services. In other words, the DHID indictments reaffirmed that North Korea continues to rely on the dollar system, and we have legal tools that are perfectly suited to shutting down that use — or would be, if the Obama administration had the political will to use them.
One discouraging sign is that Treasury did not also impose Special Measure 2, as Bill Newcomb and I recommended, apparently claiming a lack of jurisdiction.
As described above and in the NOF, FinCEN shares the concerns raised by the comment regarding North Korea’s extensive use of deceptive financial practices, including the use of shell and front companies to obfuscate the true originator, beneficiary, and purpose behind its transactions. However, FinCEN’s authority, as granted by Congress in 31 U.S.C. 5318A(b)(2), applies only to information concerning the beneficial ownership of “account[s] opened or maintained in the United States” and thus would not extend to information relating to the beneficial ownership of property writ large, or to property outside the United States as the comment suggested. [Final Rule]
This is a blue answer to a green question. What we were suggesting, of course, was exactly what paragraph (b)(2) of Section 311 authorizes — that Treasury may “require any domestic financial institution or domestic financial agency to take such steps as the Secretary may determine to be reasonable and practicable to obtain and retain information concerning the beneficial ownership of any account opened or maintained in the United States by a foreign person.” To the extent that North Korea’s front companies transact in dollars and use banks that operate in U.S. jurisdiction, FINCEN has the jurisdiction to impose this measure. Either Treasury is conceding that it has no jurisdiction to enforce this entire provision, or it simply isn’t willing to use it. And when North Korea’s sanctions evasion strategy is all about hiding its money behind shell companies and front companies, exposing these interests will be key to making sanctions work.
The new 311 action thus has one potential advantage and one potential disadvantage over Treasury’s 2005 action against Banco Delta Asia, the effectiveness of which is beyond serious dispute. Unlike the BDA action, Treasury’s new 311 action covers all North Korean banks, not just one small Chinese bank that enabled them. But the advantage that BDA had over Treasury’s final rule is that it signaled a willingness to reach third-party enablers, including Chinese banks, that the Obama administration hasn’t shown. The BDA action was followed by a campaign of global financial diplomacy that sent a clear message to North Korea’s bankers everywhere. Today, in contrast, the designation of North Korea would never have happened had Congress not forced the administration to act through legislation, and Congress seems unanimous in its frustration that the administration isn’t willing to enforce the law.
In theory, the new 311 action could be the single most powerful sanction yet imposed on North Korea. In practice, however, it will amount to nothing if the administration continues to refrain from enforcing the new sanction, by simply looking the other way at Chinese banks’ laissez-faire compliance with Know-Your-Customer rules, and even flagrant cases of money laundering.
All of which promises to set up major tensions between the U.S. and China during the next administration, but I’ll let you read Josh Rogin’s take on that, along with this, this, this, this, and this, all suggesting that if Clinton wins, she’ll intensify sanctions against His Porcine Majesty and his Chinese bankers. Speculate on your own as to whether this is just talk. Also, speculate on your own as to which of Trump’s advisors really speaks for a potential President Trump.
As of yesterday, and for the first time ever, the U.S. Treasury Department has frozen the assets of Chinese entities for violating North Korea sanctions, and the Justice Department has indicted them for sanctions violations, conspiracy, and money laundering. The company in question is the Liaoning Hongxiang Group of companies, of which Dandong Hongxiang Industrial Development Company Limited, or DHID, is the largest component. The individuals are Hong Jinhua, Luo Chuanxu, Zhou Jianshu, and Ma Xiaohong, the CEO of the Liaoning Hongxiang Group.
All were first implicated by the remarkable investigative work of the Center for Advanced Defense Studies and the Asan Institute, which is wonderful and also troubling, in that it should not have been left to a small nonprofit research group with funding from a South Korean think tank to do the work that the Treasury and Justice Departments should have done — protecting such core U.S. security interests as global nonproliferation, the integrity of the financial system, and freedom of speech in our own towns and neighborhoods. It is wonderful and disturbing that two very young and very bright people with a tiny budget and no security clearances have now done more damage to the financial networks that sustain His Corpulency’s misrule than the Obama administration did on its own in eight years. (Full disclosure: I met with C4ADS a few times since they started work last fall, to help them focus and target their investigation.) Here is how they did it.
To map these growing overseas networks, this report used open source databases, including corporate registries; court filings; Equasis maritime database records; customs and trade data provided by Panjiva, a customs trade data aggregator; and real time data on ship activities provided by Windward, a maritime data and analytics platform. The compiled information was consolidated using Palantir’s Gotham network analysis platform.
In Part I, we focused on building bulk datasets on companies, individuals, and ships. By using corporate and tax registries in East Asian countries, we were able to identify significant points of convergence across seemingly disparate networks and identify 562 ships, companies, and individuals within one degree of separation from known DPRK illicit and regime entities.
In Part II, we identified key nodes from our expanded dataset for a more in depth investigation. We focused, in particular, on one Chinese trading conglomerate that has conducted over $500 million of trade with the DPRK in the past five years. Within this network, we were able to identify its subsidiary and affiliated entities that have transacted an additional $300 million with sanctioned Burmese and North Korean entities, helped maintain the cyber infrastructure of the DPRK, and traded in various goods and services that raise serious non-proliferation concerns. [C4ADS]
The researchers also pulled and read court filings in China, Japan, and Hong Kong to uncover what appear to be significant pieces of North Korea’s overseas financial support and shipping networks. Typically for criminal networks, the North Koreans mix legal and illegal business to conceal their illicit activity and disguise the origin of their profits. The result is that some businesses “are likely to be inadvertently facilitating North Korean illicit activity,” while others, like DHID, do so willingly. I won’t try to do justice to C4ADS’s report here; just read the whole thing. Among its findings —
DHID’s parent company is a key facilitator of North Korea’s cyber architecture, which North Korea used in cyberattacks against SWIFT; against South Korean banks, nuclear power plants, and news media organizations; and against Sony Pictures. The empty brackets are for Chinese characters that WordPress can’t read:
Companies associated with the Liaoning Hongxiang Group provide services that are critical to the underlying cyber architecture of the DPRK, including the country’s primary email relay service, facilities from which hackers are alleged to operate, and IT firms producing software with possible military and regime applicability as will be discussed in this section. The Chilbosan Hotel [ ] in Shenyang, one of Liaoning Hongxiang’s joint ventures with the DPRK,117 is alleged to be the staging area for Bureau 121, a group of North Korean hackers.118 119 The source of the allegations is a North Korean defector, Kim Heun Kwang, a former computer science professor in Pyongyang, who escaped from North Korea in 2004 and gave detailed testimony on Bureau 121, a group that began large-scale operations in China in 2005.120 The group is reported to be comprised of about 1800 “cyber-warriors” and is considered the “elite of the military.”121 It has been widely reported that Bureau 121 may have been responsible for the 2014 Sony hack.122 The Chilbosan Hotel is majority owned by the North Korean Pyongyang Economic Exchange Society [ ], 123 which controls a 70% share of the company.124 The remaining 30% is owned by Liaoning Hongxiang Group member Dandong Hongxiang Industrial Development Co. Ltd.
The Chilbosan Hotel also shares a physical address with a company called Silibank.127 128 Silibank is an email relay service that charges for sending and receiving email through servers that connect from the DPRK, through China, and then to the outside world. Established in September 2001, Silibank is reportedly the DPRK’s first ISP provider,129 charging for its service in USD for each kilobyte sent.130 The company’s domain, silibank.com, is currently registered to a Chinese company called Liaoning Zhongtian Real Estate Development Co. [ ].
And finally, C4ADS found a link between DHID and North Korea’s WMD-related procurement operations:
Information found on Dandong Hongxiang Industrial Development Group shows that in several online classified ads and databases, Dandong Hongxiang sold products that could qualify as potential military and nuclear dual use products under the U.S. Department of Commerce Bureau of Industry and Security export restrictions.105 These goods included at least four dual use products: 99.7% pure aluminum ingots,106 aluminum oxide (Al2O3), ammonium paratungstate (APT), and tungsten trioxide (WO3).107 Information discovered using Panjiva customs records shows that Dandong Hongxiang Industrial Development Group sent two shipments of aluminum oxide worth a total of $253,219 to the DPRK as recently as September 2015.108 Classified ads posted by Shenyang Hongyang Fine Cermaics Co., which according to the Chinese business registry is owned by a Chinese national named Ma Xiaohong ???, listed “industrial spaceship” as a potential application for aluminum oxide (further investigation is required to confirm if they are the same individual).109 110
We cannot definitively identify the end-user of such goods, but there are clear dual use applications for the products listed. According to a leaked government cable, North Korea has sought to aquire aluminum ingots in the past. The cable further states that “these commodities have dual-use applications for the products listed. According to a leaked government cable, North Korea has sought to aquire aluminum ingots in the past. The cable further states that “these commodities have dual-use applications and could possibly be linked to the North Korean nuclear program.”111 Ammonium paratungstate and tungsten trioxide are byproducts of separating tungsten from its ore.112 A U.S. patent filed in 2010 states that tungsten trioxide is one of several oxidizing agents appropriate for use in a missile design with increased aerodynamic stability.113 According to the U.S. Nuclear Regulatory Commission, aluminum oxide is a component used to resist corrosion in gas centrifuges during uranium enrichment.114 In April 2013, a British company discovered that a firm they had been sending aluminum oxide to had links to the Iranian government’s nuclear program and immediately “ceased transactions. The article stated that “Aluminium oxide is an important material in gas centrifuges used to enrich uranium.”115 [C4ADS]
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Strictly speaking, the Treasury and Justice Departments sanctioned and prosecuted almost none of this conduct. Let’s turn to the Treasury Department designations first. The “NPWMD” means the assets were frozen under Executive Order 13382, which makes any transaction that facilitates North Korea’s WMD procurement not only sanctionable, but punishable with criminal penalties under section 206 of the International Emergency Economic Powers Act, or IEEPA.
“Today’s action exposes a key illicit network supporting North Korea’s weapons proliferation,” said Adam J. Szubin, acting Under Secretary for Terrorism and Financial Intelligence at the U.S. Department of the Treasury. “DHID and its employees sought to evade U.S. and UN sanctions, facilitating access to the U.S. financial system by a designated entity. Treasury will take forceful action to pressure North Korea’s proliferation network and to protect the U.S. financial system from abuse.”
OFAC designated China-based DHID for acting for or on behalf of North Korean-based KKBC. Specifically, DHID used an illicit network of front companies, financial facilitators, and trade representatives to facilitate transactions on behalf of KKBC. Ma Xiaohong, Zhou Jianshu, Hong Jinhua, and Luo Chuanxu were designated for acting for or on behalf of DHID.
KKBC was designated by OFAC under E.O. 13382 and the UN pursuant to UN Security Council Resolution (UNSCR) 2270 for providing financial services in support of the previously designated entities Tanchon Commercial Bank and the Korea Hyoksin Trading Corporation. Both of those entities were designated pursuant to E.O. 13382 and UNSCR 1718 for their roles in North Korea’s WMD and missile programs. [Treasury Department press release]
As a result of Treasury’s designations, all dollar-denominated assets of the five targets are frozen, and U.S. persons are prohibited from doing business with them.
Not to be outdone, the Justice Department has unwrapped an early Christmas present by unsealing an indictment of Hong, Luo, Ma, and Zhou, and DHID for conspiracy, money laundering, and IEEPA violations, for helping a sanctioned North Korean entity circumvent sanctions. That’s about as much as you’ll see about proliferation in these indictments; the only link to proliferation is the money DHID moved for a North Korean bank that had been sanctioned for proliferation. The Justice Department also filed a civil forfeiture action against 25 bank accounts belonging to DHID, deposited in a who’s-who of Chinese banks. Want to know the names of the Chinese banks? You know you do.
Contrary to what some news reports have written, a forfeiture action does not freeze assets; if effectively confiscates them. The ownership interest of the person who thought he owned the assets is legally extinguished if the government proves that assets are “involved in” illicit activity.
The banks themselves have no standing to challenge the forfeiture unless they can prove that they’d already closed the accounts. Typically, the feds will use 18 U.S.C. 981(k) to take an equivalent amount to the asset right out of the foreign bank’s U.S.-based correspondent account. It’s up to the foreign bank to make itself whole by taking an equivalent sum from the account holder, something that account holders usually agree to in the fine print of their account-holder agreements.
The actions are venued in the District of New Jersey because the Chinese banks that serviced DHID and the numerous shell companies it set up used Standard Chartered Bank and Deutsche Bank as their U.S. correspondent banks, and both banks based their dollar-clearing operations in New Jersey. I’ve explained how this works a few times before, but DOJ explained it well in its forfeiture complaint.
32. An interbank, also known as a correspondent bank, is a financial institution that provides services on behalf of another financial institution. It can facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of another financial institution. Correspondent banks are able to support international wire transfers for their customers in a currency that their customers normally do not hold on reserve. Correspondent banks in the U.S. facilitate these wire transfers by allowing foreign banks, located exclusively overseas, to maintain accounts at the correspondent bank in the U.S.
33. To obtain goods and services in the international market place, as North Korea must, it needs access to U.S. dollars as some international vendors require purchases to be made in U.S. dollars. As a result, North Korean entities, including designated entities such as KKBC, need access to the U.S. financial system.
The New Jersey venue is interesting, in that most correspondent banks operate in New York. (I wonder if that means we can expect to see another indictment in the Southern District of New York one day soon.)
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Although news reports have said that the indictment was for aiding North Korea’s WMD programs, that’s only indirectly true. The crux of the government’s case is that after August 2009, when Treasury designated Korea Kwangsong Banking Corporation (KKBC) for WMD proliferation and blocked its access to the dollar system, DHID stepped in to serve as KKBC’s workaround and to launder its money. (Broadly defined, money laundering means moving or spending money that is “involved in” certain specified unlawful activity, whether as proceeds or as an instrumentality.) I’m often asked at this juncture why the North Koreans don’t just use Renminbi. I’ll let the Justice Department answer that.
35. Following the KKBC’s designation as an SDN by the U.S. Department of the Treasury in August 2009, DHID began working to find ways to conduct trade on behalf of KKBC despite the U.S. sanctions. One means of doing so was to use Chinese currency rather than U.S. dollars to conduct commodities transactions, so as to avoid sending money through the U.S. in violation of IEEPA. In July 2010, the City of Dandong, China highlighted press reports of a pilot program between DHID and KKBC to allow Chinese Renminbi (RMB) transactions to facilitate trade between China and North Korea.
36. North Korea’s trading needs, however, cannot be met using only Chinese currency. As a result, KKBC has continued to access the U.S. financial system to facilitate the purchase of goods in violation of U.S. sanctions. KKBC has done so by using DHID and its front companies.
When KKBC wanted to buy something in dollars — in this case, sugar and urea (used for fertilizer and explosives, and also, ewww) — it would place an order with DHID, which then bought the merchandise at a substantial mark-up — as much as 23 percent, through any one of 22 different front companies or shell companies it set up for just that purpose. That’s the kind of premium that, at least according to our friends in the FBI, people only charge to take the risks associated with breaking the law. Ma and DHID were initially well-positioned to charge these commissions due to Ma’s connections with Jang Song-thaek. Only when the guns of Jang’s firing squad fell silent, Ma’s business kept right on booming.
DHID and KKBC kept a ledger where KKBC would credit or debit DHID’s dollar account in KKBC in Pyongyang. The most suspicious transactions — those that involved a North Korean nexus — were all kept off the wires. Instead, DHID set up a whole series of shell companies, mostly registered in the British Virgin Islands or the Seychelles, and listing fictitious addresses in Hong Kong.
And how did DOJ find all of this out? Much of it obviously began with the C4ADS-Asan investigation, but there is much evidence in the indictment and forfeiture complaint that C4ADS didn’t write about. And why sugar and urea instead of, say, aluminum oxide? I can only speculate that those transactions were the easy ones to prove. Prosecutors prefer to charge the conduct that’s easiest to prove, especially if some of the other transactions with more jury appeal might also require proving up a longer, more complex chain of shell companies and beneficial owners.
All of which is our cue for a round of “Panama Papers Bingo,” which will allow you to read fun stuff about the shell companies named in the indictment and their corporate officers. By all means, leave a comment if you find something interesting in there, although I may hold your comment unpublished for a while for legal reasons.
Although the forfeiture action doesn’t say how much money was in the 25 accounts, it describes multiple transactions in the millions of dollars, including one that was for around $11 million. It wouldn’t surprise me if we learned that the total was well over $25 million, the amount that was blocked (but not forfeited) in the case of the Banco Delta Asia action.
Anyway, now you know why we wrote a section on “forfeiture of property” into the NKSPEA. Originally, we tried to create a special fund to pay for North Korea sanctions enforcement, broadcasting, and humanitarian purposes. Because that funding provision ended up on the cutting-room floor, the Justice and Treasury Departments will put the forfeited money into their respective forfeiture funds and use the money to pay for law enforcement operations. Where, as here, DOJ and Treasury worked the case together, they’ll typically work a deal for splitting that money up between them.
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So what will the impact of all of this be? Financially speaking, DHID and Ma aren’t likely to survive the experience. Because 80% of DHID’s business was North Korea-related, His Porcine Majesty will probably feel a significant impact. DOJ’s indictment quotes a DHID powerpoint presentation that claims that as of 2012, DHID handled 20% of the volume of Sino-North Korean trade, and claims that DHID’s business was growing at 30 percent each year. I have no way of knowing if that’s true or not, but my guess is that these figures are exaggerated for shareholder consumption. After all, DHID was willing to file a false certification with a certain Panama-based law firm — any guesses, kids? — denying that it had any links to North Korea (exhibit 3).
The greater effect may be the in terrorem impact this action will have on companies like the 88 Queensway Group that had dealings with sanctioned North Korean entities and felt untouchable, possibly because they thought their Chinese political connections would protect them from Uncle Sam. Ma herself was a made member of the Chinese Communist Party, and Sam Pa was a former Chinese spy. Equally well-connected figures may feel less invincible today.
The bad news? Not only the fact that no Chinese banks are facing indictments for facilitating Hongxiang’s willful, long-standing money-laundering scheme, but also, the fact that in its press release, the Justice Department said that “[t]here are no allegations of wrongdoing by the U.S. correspondent banks or foreign banks that maintain these accounts.” I’ll discuss that in more detail in tomorrow’s post.
When the survivors of the U.S.S. Pueblo, joined by the widow of their captain, sued North Korea for the horrific torture they endured in 1968, the real question wasn’t whether they were entitled to compensation, it was whether they could ever collect any. North Korea, as it has done with all of the other suits against it in U.S. federal courts, refused to respond to the suit after being duly served at its U.N. mission. Consequently, the court entered a $68 million judgment for the plaintiffs (by contrast, North Korea has been litigious in the British courts).
I’ve periodically reviewed the public court records regarding each of these cases. My most recent review of the docket of Massie v. Democratic People’s Republic of Korea today indicates that Richard Streeter, who represents the Pueblo plaintiffs, is now poring through a trove of information turned over by the Treasury Department’s Office of Foreign Assets Control, or OFAC, about North Korean assets within American jurisdiction. This information is largely a matter of speculation to those of us whose access is limited to open-source information. Here, OFAC claims that public disclosure would be prohibited by the Trade Secrets Act. But as it has done in similar previous cases, OFAC agreed to share information about blocked North Korean assets with Streeter, subject to a protective order. Here’s some text from OFAC’s unopposed motion for that protective order:
OFAC has agreed to provide plaintiffs with certain information responsive to the subpoena, pursuant to the terms of the attached proposed protective order.1 Without a protective order, the release of this information might violate the Trade Secrets Act (“TSA”), 18 U.S.C. § 1905, which imposes criminal penalties for the disclosure of information falling within its terms without appropriate authorization of law. Thus, while OFAC does not waive any right, privilege, or immunity to which it may be entitled with respect to any further response, it respectfully requests that, in light of the prohibitions of the Trade Secrets Act, the Court authorize its disclosure of information responsive to plaintiffs’ subpoena via the attached proposed protective order.2
OFAC explains why the information must remain protected from public disclosure:
Here, the information OFAC is willing to disclose was provided to it pursuant to 31 C.F.R. § 501.603, which requires financial institutions and other holders of blocked property to file reports with OFAC within ten business days of 4 Case 1:06-cv-00749-HHK Document 16 Filed 10/05/09 Page 4 of 6 the blocking of the property, as well as annually. The requirement is “mandatory,” see id., and “[r]eports filed are regarded as privileged and confidential. Id. subsection (a). In the absence of a protective order, disclosure of information submitted to OFAC under § 501.603 would adversely affect OFAC’s administration of its programs relating to terrorist financing and economic sanctions, which depends in large part on OFAC’s ability to maintain the confidentiality of the information submitted to it.
This implies, but doesn’t necessarily mean, that there are assets within OFAC’s reach to satisfy the judgment. Note also that according to public court records, Streeter filed a writ of garnishment, presumably for something. This does not mean, however, that whatever assets there may be are subject to attachment. In fact, OFAC has carefully reserved its position on whether any blocked assets are subject to attachment under the Foreign Sovereign Immunities Act. One hopes that the government of this country will not frustrate the pursuit of justice by those who suffered so much to defend that same country. With Treasury now revitalizing its own hunt for North Korean assets to block, the various plaintiffs with claims against North Korea may have access to more attachable assets.
While this is an interesting glimpse at Streeter’s strategy, we’ll have to wait and see whether he manages to collect any of Kim Jong Il’s yacht money. Meanwhile, this is one more complication and disincentive for anyone contemplating new business transactions with Kim Jong Il’s regime.
Related: The Calderon-Cardona plaintiffs, who recently won that massive $378 million judgment against North Korea, filed a similar protective order, as agreed with OFAC, just last week. The court has also permitted them to register their judgment in other jurisdictions, noting cryptically that although the protective order prevents them from disclosing where the North Korean assets are, they aren’t within the District of Puerto Rico.
Meanwhile, the family of the Rev. Kim Dong Shik has also won a default against North Korea. Even so, the Foreign Sovereign Immunities Act requires a plaintiff to prove the liability of the defendant to the court’s satisfaction. No hearing date has been set, but it looks like it could happen this month.
The Treasury Department has announced that the governments of Sao Tome and North Korea will henceforth be subject to the “enhanced due diligence” requirements of Section 312 of the USA PATRIOT Act. The measures apply to U.S. financial institutions maintaining correspondent accounts for “foreign banks operating under a banking license issued by” North Korea.
By itself, this action is likely to have little effect, because it’s doubtful that any North Korean-licensed banks have U.S. correspondent accounts. The better question, however, is what effect this may have on banks in Europe and Asia, because the Treasury action was ordered in concert with the Financial Action Task Force. The FATF is the rarest of species in this world — an effective international institution. When the FATF speaks, it means that most of the world’s major finance ministries have promulgated guidance similar to Treasury’s, or soon will.
It will be weeks, and probably months, before we know whether this action will encumber the flow of laundered North Korean assets through European and Asian banks, but Treasury’s message should send a clear warning that non-complaint institutions will be targeted for the same treatment that Banco Delta Asia received in 2005 — the dreaded “fifth special measure,” which denies the offending institution access to its correspondent accounts in American banks and effectively cuts it out of the global financial system.
This is a hopeful sign, though by itself, it doesn’t necessary mean this administration has decided to turn Treasury and Justice loose to pursue the flow of illicit cash that sustains North Korea’s palace economy. But to do so now, just as the regime is purging old comrades and preparing for the succession of a new emperor, would be the most opportune timing imaginable.
One of the more maddening tropes I see in reporters’ coverage is a question that’s usually presented as dispositive to the success of sanctions: “Will China cooperate?” For reasons I’ve already explained and don’t have time to repeat today, I always answer that question by asking what the questioner means by “China.” The point being: yes, it would be nice if Xi Jinping finally came around to the rising risk that Kim Jong-un will bring war, instability, disrepute, and bankruptcy to China, but he hasn’t. He hates us more and fears us less than he hates and fears Kim Jong-un, and I strongly doubt that we’ve brought him close to that tipping point.
What matters more is whether the Chinese banks that hold North Korean accounts, and the Chinese businesses that deal with North Korea and also use the financial system that runs through New York, have developed a healthy fear of the Treasury Department. For some very good reasons, yes, I think the banks have and the businesses are starting to. Consequently, we continue to see reports from the China-North Korea border that some of the divergent interests we lump together into a million-person jiaozi we call “China” are indeed cooperating.
Is this mainly because of (a) Chinese government action to enforce sanctions, (b) fear of public or legal exposure by Chinese exporters that use North Korean labor or materials, or (c) the fact that both parties are having difficulty finding finance for North Korea-linked transactions? I can’t say for certain, and I suspect that (a), (b), and (c) are all factors to different degrees, but I’m going with (c). Why? First, because that’s consistent with reports I compiled in September, going back over the preceding weeks, that banks in China were freezing or closing North Korean accounts. Second, because we continue to see reports like this one.
The trader in the Chinese border city of Dandong has seen business all but dry up, and he spends his days scrambling to obtain payment from the suddenly broke North Korean state companies to whom he sold on credit.
“They have no money to pay us in cash, and the worst is that because of sanctions they can’t settle the bill with goods such as coal, as they did in the past,” said Yu, reached by telephone at the offices of his Dandong Gaoli Trading Company.
Yu said he’s owed about $1 million in all for deliveries of toothpaste, instant noodles and other household items. He’s trying to avoid laying off staff by continuing to export foodstuffs such as pine nuts and red beans. “If they become unemployed, it would be bad for both the state and society.”
Yu’s plight appears increasingly commonplace across Dandong, where the bulk of the cross-border trade is handled. Interviews with four trading companies and recent media reports indicate Chinese companies are hurting in a city where North Korean trucks used to rumble across the Yalu River bridge several times a week delivering metal scrap and returning with everything from televisions to toilet bowls.
The owner of another firm, Dandong Baoquan Commerce and Trade Co., which used to import iron ore and coal and export basic consumer goods, said he was owed around $200,000 by his North Korea clients.
“I had to lay off about 10 staffers, but I had no other choice because it was the government policy,” Han Lixin said, referring to the sanctions. “I’m still in business hoping to trade with other countries, but it takes a lot of time and efforts to develop customers.” [AP]
See also this report, indicating that the root cause of the trade slump is that the North Korean traders are suddenly broke; this report that North Korean traders can’t pay their debts to their Chinese partners; and this report on the slowing of trade in Rason. North Korean workers also continue to leave China, including its fishing industry. The Chinese businesses are now backfilling their production lines with Chinese workers.
In the interest of balance, and to give some very cautious credit where it’s due, there have also been some reports that the Chinese government has ordered North Korean businesses to close down. Adam Cathcart also points to a Chinese-language report of a corruption crackdown in the border region (I can’t read Chinese, so I’ll take his word for that). On the other hand, this report by the Financial Times tells us that sanctioned North Korean entities, including Minzheng International Trading, continue to operate freely in Hong Kong. Other reports confirm that China’s flagrant cheating on shipping and coal import sanctions continues (see here, here, here, and here).
An October report that the elites in Pyongyang were being deprived of rations has not been backed up by other reporting since then, and I’d add that rations almost certainly make up a very small portion of what the Pyongyang elites live on.
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My suspicion has long been that China tends to crack down on North Korean money laundering either (1) to make good headlines until we lose interest and quietly go back to business as usual, or (2) to claim credit for, and conceal our influence on, trends that occur for other reasons, such as market fears of secondary sanctions. There are still not enough such reports for me to feel confident that this is an across-the-board trend that will endure, but it has certainly introduced both uncertainty and additional cost into any supply chain that begins in North Korea.
Overall, the news encourages us that if the administration continues to accelerate its enforcement efforts, they will present Kim Jong-un with the difficult choice to disarm or lose the confidence of his crocodiles. There is still much more that we haven’t done, and there is no time to lose in doing it.
Our Treasury Department is off to half-decent start, but I’ll believe it’s really serious when I see 9-figure fines like these on the banks that are laundering Kim Jong-un’s money.https://t.co/59XixGqsF9 https://t.co/xOlvRbY2dh
— Joshua Stanton (@freekorea_us) November 30, 2017
Finally, an interpretive advisory for journalists: when you read Ambassador Haley’s threat to “take the oil situation into our own hands,” rather than immediately jump to alarmist conclusions and spread panic, consider a much more likely possibility — that Haley may be threatening that the U.S. will freeze and/or forfeit the assets of shippers, merchants, and refineries that deal with North Korea (see, e.g., the Treasury Department’s designation of Velmur and its corporate officers, and the Justice Department’s recent forfeiture suit against its funds). I have mixed feelings about oil sanctions, frankly, and will probably do a post on that at some point, but every policy decision is a balance of risks against threats, and I need not tell you that the threat is rising.
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Update: This interview with a resident of Pyongyang from mid-November, however, indicates that sanctions weren’t having much of an effect there. Yet.
The man who terminated the 37-year misrule of Robert Mugabe last week and then took his job is a general named Emmerson Mnangagwa with a history as ominous as his nickname: “the Crocodile.” Long one of Mugabe’s most ruthless cronies, Mnangagwa’s resume includes leading Zimbabwe’s feared Central Intelligence Organization and dispatching the North Korean-trained Fifth Brigade to Matabeleland in the early 1980s to wage a pogrom that killed up to 20,000 members of the minority Ndebele tribe. He draws support from the “war veterans,” a ruling-party goon squad that has beaten members of the opposition, violently seized the farms of white Zimbabweans, and redistributed their land to party loyalists. His cause is not the restoration of democracy or the relaxation of repression, but a succession contest between nepotism and cronyism, against Mugabe’s unpopular wife.
Even as the streets of Harare filled with Chinese Type 85 armored personnel carriers, the army swore that it was not carrying out a coup. Whatever you call it, some reports say that Mugabe’s long-time backers in Beijing green-lighted it. But if Mnangagwa wants to replace Mugabe’s dictatorship with his own, the crowds on the streets may have other expectations. They will demand jobs, food, and free elections. The generals could try to suppress them. The Ndebele still despise Mnangagwa for his crimes; his ascendancy could provoke a tribal schism or even civil war. This could all end very badly. So far, however, the coup and the street demonstrations that followed it have been bloodless.
~ ~ ~
As the coup unfolded, I became absorbed in old documentaries about the creation of Zimbabwe and the decline and fall of its predecessor state, Rhodesia. Contemporary prognostications about events we later call “history” fascinate me. They reveal how often the consensus gets it wrong, how badly, and sometimes why. My interest in Zimbabwe is partially a function of its uses and limitations as an analogy to North Korea, but also because it’s is a beautiful country whose people deserved better.
I visited Zimbabwe for a few days in 1990, at the chronological midpoint between 1965, the year of Rhodesia’s Unilateral Declaration of Independence, and Mugabe’s recent fall. The UDI was a white minority’s desperate gambit to protect its supremacy from a rising tide of anarchic decolonization. Three years before the UDI, a young Robert Mugabe gave an interview to Morley Safer in Salisbury, now Harare. Two of the three things that struck me about Mugabe were his extraordinary eloquence and the moderation of his rhetoric.
The third striking thing about Mugabe was the unmistakeable effeminacy of his mannerisms, but only because he would later call gay men “worse than dogs and pigs.” In his younger years, however, Mugabe was obviously charismatic. I can see how he fooled so many people into believing that he was really an inclusive moderate. By 1962, however, he was already the mouthpiece of Joshua Nkomo’s Soviet-aligned Zimbabwe African People’s Union. The following year, he joined a breakaway Maoist faction that called itself the Zimbabwe African National Union. The schism between ZANU and ZAPU was also tribal. Mugabe and ZANU’s other leaders were of the majority Shona tribe; Nkomo and most of his ZAPU supporters were of the minority Ndebele tribe, a northern branch of the Zulu people. (I once spoke a corruption of Zulu well enough to impress Africans, and non-Africans who’ve never heard click sounds; sadly, I forgot most of it long ago.)
After Ian Smith’s Rhodesian government refused to negotiate a return to majority rule, Mugabe and Nkomo formed an uneasy alliance and launched a guerrilla war. China armed and trained ZANU, and both ZANU and ZAPU adopted a Maoist strategy of infiltrating into rural areas to sow insurgency. ZANU did not “look east” or turn to China in response to western sanctions after it took power; it has been in China’s orbit since the early 1960s. One could argue that war was justified; people who are denied any peaceful means to claim their fundamental rights have a right to take up arms to reclaim those rights. But ZANU and ZAPU often fought their just war by unjust means. In the brutal Bush War that followed, they attacked farmers, villagers, and even civilian airliners.
The Rhodesians had the upper hand until 1975, when Portugal withdrew from Angola and Mozambique, and Rhodesia found itself nearly surrounded by guerrilla safe havens. By then, Rhodesia was isolated diplomatically and under crippling oil sanctions. An arms embargo prevented it from rearming itself. Guerrilla attacks taxed the morale and resources of a beleaguered white minority. Rising insecurity in the countryside cost the government revenue it needed to pay for the war effort. In 1979, Margaret Thatcher convinced Smith that he couldn’t hold out. Reluctantly, he agreed to one-man-one-vote elections. A black majority radicalized by civil war and polarized by tribe voted Mugabe and the ZANU into power.
Before she was famous, Samantha Power wrote at length about how Mugabe, for all his early promises of inclusion, moderation, and continuity, quickly consolidated power and gradually wrecked the economy. Not long after his inauguration in 1980, “Good Old Bob” (as the vanquished whites optimistically called him) visited Kim Il-sung in Pyongyang and met his totalitarian exemplar. He returned “a different man,” awed by Kim’s “absolute power and the apparent adoration of the North Korean people.” No one has chronicled the dark history of this “engagement” better than Benjamin Young did for NK News. Mugabe never achieved the same degree of totalitarian control as Kim Il-sung, but he certainly gave it a go: on the very eve of his overthrow, the editorials in his government newspapers could have been ghostwritten by KCNA.
Pyongyang also helped Mugabe subdue his potential rivals, the ZAPU. In the early 1980s, he sent the North Korean-trained Fifth Brigade into ZAPU’s Matabeleland stronghold in a brutal campaign called the Gukurahundi. The campaign killed up to 20,000 people, drove Nkomo into exile, and forced ZAPU to accept absorption into the ZANU. To this day, many Zimbabweans loathe North Korea for this, but it may be just what Pyongyang had in mind this week when it boasted of its “unsparing material and spiritual assistance to African nations.”
~ ~ ~
In 1990, when Robert Mugabe had been in power for ten years, I took a temporary job in South Africa. To a kid living on a vast, landlocked prairie, this was an irresistible chance to see the world and witness history. I arrived in Johannesburg three months after Nelson Mandela was released, as the repeal of Apartheid laws and the removal of “white only” signs were daily occurrences. (Apologies for the poor quality of my photography.)
[Johannesburg, May 1990. People dancing in the streets.
They were singing, “He’s free.”]
[Randontein, Transvaal, July 1990. A week before, the empty white spaces on
this sign said, “Whites Only” in English and Afrikaans. I came back
this day and saw that it had just been painted over.]
[Durban, Natal, June 1990. A calm, peaceful, low-key anti-Apartheid protest.
By then, the protesters were pushing against an open door. Moments after
I took this picture, a friendly policeman offered to take a photo of me
in front of the demonstration. I wish I could find that photo.]
In July, some friends and I decided to drive north across Zimbabwe to Victoria Falls, and then back through Botswana. By then, South Africa was already thick with ex-Rhodesian emigres called “whenwes.” If a whenwe heard you were visiting Zimbabwe, he’d give you plenty of travel tips and some dire warnings, and he might ask you to bring him back a bottle of Mazoe Orange.
The Zimbabwe I saw was a place where the roads were still being fixed, the buses still ran, the children still went to school, and food was still available. It was functional but moribund. There was no new construction, and little seemed to have been built since the end of the war. Conditions were far better than in Zambia or Mozambique, but not as good as in Namibia or Botswana (a small, stable, well-governed country thanks to an unsung hero named Seretse Khama who proved that black majority rule works perfectly well under principled and honest leaders who reject statist ideologies and embrace free markets).
Zimbabwe also showed me how dictatorships crush their people between the hammer of tyrannical efficiency and the anvil of economic inefficiency. Hyperinflation was still a few years away, but the government was propping up the currency with confiscatory exchange rates. Many merchants preferred South African Rand, and the black market knew what the money was really worth.
[The Zimbabwe Dollar in better days. These notes were printed
three years after Mugabe came to power. They were almost worthless in 1990.]
I won’t say whether I smuggled a few South African Rand into Zimbabwe to evade the official exchange rate and the functional confiscation of the money I’d need to make it to Victoria Falls, but I will say that in such a severe police state, this would have been an exceedingly stupid thing to do. Perhaps a person foolish enough to this in his youth shouldn’t have judged poor Otto Warmbier so harshly.
Zimbabwe was also the first place I felt physically afraid of a government. Most people were either cheerfully resigned or suspiciously dour. A few seemed ambitiously despotic. Our route took us through Matabeleland, where the Fifth Brigade had so recently done its gruesome work. The whenwes had warned us that the roads were not safe at night, but we drove them anyway. We’d already wasted too many hours at the Beitbridge border post being searched by suspicious border guards for smuggled Rand until, in their exasperation, they waved us through.
The reward of Victoria Falls more than compensated for this. No photograph or video can do it justice; nor can words describe the experience of seeing it, of hearing it from miles away, of feeling its quaking bass through the soles of one’s feet. It is still the most extraordinary place I’ve ever been. If you’re at work, put in some earbuds or close your door. Then, mute the video and start the audio file I’ve embedded below it. Finally, play the video on a full screen. You’ll thank me later.
We headed west for the Kazangula border post and crossed into Botswana. By then, I expected that things would only get worse in Zimbabwe, and they did. A few years later, amid rising inflation and unemployment, a pro-democracy opposition movement arose. Mugabe blamed the few remaining white farmers for supporting the opposition, appealed to racial hatred, and sent his war veterans out on a campaign of intimidation, confiscation, and murder that drove almost all them into exile. Without one of its main sources of foreign exchange — tobacco exports — Zimbabwe’s economy collapsed. A country that had been a major food exporter slipped into famine. As in North Korea, the regime used the famine to consolidate its hold on power.
The government’s most pervasive form of intimidation is also its most effective: the denial of food. While international aid groups try to feed Zimbabweans in rural areas, city folk must buy their maize and wheat from the sole distributor—the Grain Marketing Board. In order to get food they are often forced to produce a ruling-party membership card or to chant such slogans as “Long live Robert Mugabe!,” “Down with whites!,” and “Down with Morgan Tsvangirai!” Last year the former speaker of the parliament, Didymus Mutasa, stated, “We would be better off with only six million people, with our own people who support the liberation struggle. We don’t want these extra people.” [Samantha Power, The Atlantic]
Mugabe finally ran out of other peoples’ money to
steal nationalize, with predictable results.
I don’t know what Zibabweans have to complain about, they’re all trillionaires pic.twitter.com/LSjUiKpNVm
— David Burge (@iowahawkblog) November 15, 2017
Later, Zimbabwe gave up on its national currency and adopted the U.S. dollar (by which time, Mugabe and his top cronies, including his wife and The Crocodile, were blocked out of the dollar system for political repression and stealing elections). Apparently, no one in Mugabe’s government knew about Gresham’s Law. As soon as the banks had U.S. dollars, Zimbabweans rushed to withdraw and hoard them. When the government rationed withdrawals, people slept in the streets near banks just get to the teller’s window before the cash ran out each morning. Last year, the government printed low-denomination “bond notes” pegged to the dollar. Two months ago, a dollar bond note was worth just 80 U.S. cents, and the government threatened to arrest merchants who charged higher bond note prices.
Zimbabwe lost plenty to Robert Mugabe — three million people, at least half of its economy, and 95 percent of its jobs — but at least it still has North Korea. In recent years, Mugabe sold the Pyongyang Zoo two baby elephants (at $10,000 each) and other animals. He sent his congratulations for North Korea’s missile tests. Other commercial ties to Pyongyang may or may not have been strictly legal (see pages 16 and 24). Mugabe even chose the now-U.N. designated Mansudae Overseas Projects Group to build a statue of Joshua Nkomo for $5 million. Zimbabweans who remembered North Korea’s role in the massacre of Nkomo’s alleged supporters were outraged. In September, the U.N. Panel of Experts asked Harare to come clean on its dealings with Mansudae and threatened to designate the local companies that dealt with it. Shortly before Mugabe’s overthrow, the government promised to “investigate.”
You don’t have to embrace the Crocodile to see his coup as a potential opportunity to influence events for the better. The new regime has an interest in delivering a better standard of living. To deliver that, it needs foreign investors to return, and to induce investors to return, it must first reassure them that it won’t confiscate their investments, and that Zimbabwe will be safe and stable. Investors will want Harare to get sanctions lifted and avoid doing anything to invite more of them. That gives the U.S., Japan, Britain, and Europe leverage. We can send humanitarian aid, offer technical help to get industry back on its feet, and dangle the prospect of improved trade relations. In exchange, we should demand economic, political, and legal reforms. We should also demand the expulsion of the North Koreans and (as UNSCR 1718 requires) the seizure of any property of designated entities like Mansudae.
~ ~ ~
The limits to Zimbabwe’s utility as an analogy to North Korea should be obvious. Mugabe could never build a personality cult like Kim Il-sung did. Zimbabwe’s British parliamentary system and judiciary retain enough self-respect to maintain their procedural roles. The elites can travel abroad or emigrate. Last year, there were large anti-Mugabe protests. The state press gives North Korea’s a run for its money, but state censorship of opposition media has relaxed in recent years, and Zimbabwean newspapers and websites reflect a variety of viewpoints.
Still, most Zimbabweans may be more isolated than this evidence suggests. Although Zimbabwe claims a high literacy rate, many of its poor still have only a primary school education. The economic crisis drove many teachers out of the country. Outside the cities, few people speak English. High unemployment means that few of people have meaningful access to uncensored media or the time to consume it. Mugabe might have concluded that so few people would read the opposition press that relaxing censorship posed little real risk to his rule. And in any event, no vote could ever restrain him.
So, despite the limitations of Zimbabwe as an analogy, does Mugabe’s fall offer any lessons for North Korea watchers? I think it does, despite those limitations.
1. Engagement with Pyongyang only ends well for Pyongyang. It does not end well for foreign investors, for gullible reporters, for South Koreans, or for Africans. It never changes Pyongyang for the better, and sooner or later, it infects the engager with Pyongyang’s repressive and corrupt ways. Africans should remember Zimbabwe’s experience, where Pyongyang’s influence cost thousands of innocent Africans their lives.
2. A change of government will end as well or as badly as the political culture it arises from. The unaccountable, statist, and Maoist ideology of the ZANU-PF made its descent into Big Man totalitarianism, corruption, and famine inevitable, just as Seretse Khama’s commitment to openness, democracy, and free markets helped the desert country of Botswana, Zimbabwe’s neighbor to the west, achieve the highest Human Development Index in sub-Saharan Africa, including highly industrialized South Africa.
Like Botswana, Zimbabwe has large deposits of diamonds and platinum. Unlike Botswana, Zimbabwe’s deposits sit underutilized because of political risk, poor infrastructure, uneven energy supplies, and government meddling. In January, the government foreclosed on a swath of platinum leases. In May, it took control of the diamond mines (Mugabe and his cronies were already stealing the profits). Why does the “resource curse” afflict Zimbabwe and not Botswana? For the same reason it afflicts Angola, which has diamonds and oil, a much lower HDI, and a Marxist government. This does not bode well for Zimbabwe. Its statist kleptocracy won’t change as long as its government and people see confiscation and redistribution as the answer to whatever ails them. It needs a popular constituency for government accountability, individual rights, property rights, and the rule of law. That constituency won’t be built overnight.
For the same reason, a Choe Ryong-hae regime would probably behave like a muted form of the current one until a constituency arises to demand a less confiscatory and more accountable government. The question is whether the downfall of Kim Jong-un would unleash changes that would allow such a constituency to form. My sense is that North Koreans have a far better-developed sense of what they’re against than of what they’re for. Of course, there are things we could do to help change that. It’s all a question of resources, time, will, and vision.
3. To have an enduring influence on events, one must have an enduring influence on a people.
4. Once a tyrant falls, the flow of history seldom confines itself to the channels laid out by those who engineer it. Revolutions become what they unleash. They tend to unleash grievances of sect, race, class, and tribe because tyrannies incubate those grievances. Spain’s coup in 1936 unleashed class grievances; the 2003 invasion of Iraq unleashed sectarian grievances; and the 2011 popular uprising in Syria unleashed grievances of sect, tribe, and ideology. In each case, civil war followed. The ZANU and ZAPU radicalized rural Zimbabweans during a brutal civil war. Mugabe maintained his power (and destroyed Zimbabwe’s economy) by exploiting racial, tribal, and class grievances that Mnangagwa will not easily contain. The people have taken to the streets, and he has much to lose if he turns his guns on them.
5. It takes force to oust a tyrant. Mugabe maintained the appearance of democracy, but this was a sham. By the time his popularity waned, his control over the army was secure and the opposition wasn’t a real threat to him. When the people voted against him, he falsified the results. When they didn’t support his new constitution, he ignored the result. His place was secure as long as the generals’ interests aligned with his own. He would have died in office if he hadn’t tried to pass them over and install his wife as his successor.
6. Tyrants alienate their generals at their own peril. A North Korea watcher might cast an cast an envious glance at how a succession struggle between Grace Mugabe and the Crocodile — and a suspicious case of food poisoning — escalated into a rift and rumors of a purge, and may have forced the hands of the army and the war veterans. I give Kremlinology sourced to Korea’s National Intelligence Service only an even chance of being true, but NIS-sourced reports over the last two weeks claim that Kim Jong-un has either reprimanded, demoted, or purged two of his top minions, Hwang Pyong-so and Kim Won-hong, possibly at the instigation of Choe Ryong-hae. (Two years ago, Choe was also reported to have been purged, only to return stronger than ever, so take the new reports with a grain of salt.) There may also be a wider “inspection” of the military underway. True or not, Hwang and Kim (and Choe) saw what happened to Jang Song-thaek. They face far higher stakes than The Crocodile, whether they take the risk of moving against Kim Jong-un or wait patiently for their turn to face the guns.
7. No single factor brings a tyrant down by itself. Rhodesia might have survived sanctions, but it could not survive the combination of diplomatic isolation, oil sanctions, an arms embargo, declining tourist revenue, Chinese and Soviet support for ZANU and ZAPU, and the collapse of colonial governments all around it. Mugabe’s demise resulted from a combination of self-inflicted economic wounds, capital flight, foreign sanctions, diplomatic isolation, an exodus of the educated, and a failure to plan an orderly succession despite his advanced age. In each case, a small ruling elite acted in its own interests after concluding that the status quo was unsustainable. In each case, the elites sought to engineer a controlled descent to protect their own interests. Historically, more of these plotters crash more than land.
8. A resistance movement that cannot defeat a state militarily can still defeat it diplomatically, economically, and thus politically, by denying it essential external support, and by breaking or dividing the resolve of its oligarchy. Such was the case with the ZANU and ZAPU guerrilla war, and with the Nicaraguan insurgency, which forced a free election that brought a democratic opposition to power.
The best plausible outcome for North Korea may well be a coup d’etat. It is both a paradox and historically natural that liberating change can begin when a cabal of ruthless and undemocratic men seizes power. This happens when they conclude that the tyrant whose bidding they’ve done is leading them to ruin or represents a threat to their survival. As with the Soviet Union in 1991, they may think he’s changing too much, too fast. As some historians now suspect of Stalin’s demise, the plotters may feel that they’re next to be purged. As with Rhodesia, they may see that sanctions are depriving them of the means to feed the soldiers, police, and civil servants; and to maintain control of the countryside. As with South Africa in 1990, they may feel the world is closing in — that the loss of exterior financial and diplomatic support, combined with the spread of subversive information, is costing it the support of both the elites and the downtrodden. And if we can see evidence of a constituency for change outside Pyongyang, surely the crocodiles can see it, too.
In taking the risk of removing Kim Jong-un, the crocodiles could unleash forces that would overflow the confines of their own ambitions. We should hope so. They aren’t any less tyrannical or ruthless than Kim Jong-un, but they might be less impulsive and more pragmatic, and won’t have the awe of dynastic rule behind them. The greater the external pressures and internal demands for change, the more pragmatic they’re likely to be. We should also be ready to be pragmatic, including by offering assurances that in a reunified Korea, they would be given some degree of clemency for their crimes and their children would have promising futures. Elements of this may be difficult to accept, but it may be the only way.
The right policies and the right information strategies can do much to catalyze these sentiments. To argue that any one element of that policy (information operations, sanctions, or diplomatic isolation) will not do it alone is as true — and as irrelevant — as arguing that a case of food poisoning did not bring down Robert Mugabe. Pyongyang’s military strength can no longer mask its political and financial weaknesses. Those are the weaknesses we should seek to exploit.
I still remember my excitement, bordering on giddiness, when in May 2013, a few big banks in China froze some North Korean accounts. That action came two months after the Treasury Department designated North Korea’s Foreign Trade Bank, and just over a week after Ed Royce dropped the first draft of the NKSPEA. But as we’ve learned from our friends in the FBI and the Justice Department since then, big Chinese banks began clearing the FTB’s transactions as soon as they felt that the coast was clear.
The lesson I’ve learned from this and other, similar episodes is that one should be cautious before believing any highly publicized case of China enforcing sanctions against Pyongyang or applying economic pressure to it. I’ve seen this show enough times to suspect that China has a deliberate media manipulation strategy of making a big deal of enforcing sanctions until reporters lose interest.
For example, reports that China has halted tourism to North Korea just before President Trump arrived in China seem suspect. Technically, there are no U.N. sanctions prohibiting tourist travel. North Korea’s business partners — UNSCR 1718, paragraph 8(d) if you doubt me — are obliged to “ensure” that they aren’t indirectly funding WMD programs and other prohibited purposes (spoiler alert: in a place like North Korea, they can’t), but I doubt that most Chinese businesses either know or care about that obligation yet. Instead, remember the ten-week rule: check back in ten weeks and I’ll tell you if it’s for real.
~ ~ ~
Take the coal export cap under UNSCR 2321, which later became a coal ban in UNSCR 2371. Remember August, when China announced that it was halting coal imports from North Korea? We’ve since learned that this is yet another case of China initially complying with an obligation, only to resume its cheating as soon as reporters looked the other way. The flaw in this strategy is that nowadays, too many reporters don’t look the other way for long. The sharp-eyed crew at NK News has been especially diligent about spotting North Korean bulk carriers at Chinese coal terminals, but this time, I’ll credit VOA.
China imported 509,000 tons of coal from North Korea last month, raising doubts about its implementation of U.N. sanctions over Pyongyang’s nuclear and missile programs, Voice of America (VOA) reported Tuesday. VOA’s Korean Service said China bought US$44 million of coal from the North in September, citing data from the Korea International Trade Association. [Yonhap]
China is now saying that the coal landed in February but did not clear customs until September because Beijing implemented the ban so suddenly. But this does not resolve the question in China’s favor. First, under a strict reading, China should have returned any coal that wasn’t “imported” before the full ban. Second, by February, China had already exceeded the existing quota for 2017, under the most recent resolution then in effect, UNSCR 2321. Third, two of the three largest suppliers of North Korean coal are companies controlled by U.N.-designated entities — the Reconnaissance General Bureau and the Munitions Industry Department. If the RGB or the MID ultimately controlled the coal that was sold to China, China’s legal obligation under UNSCR 1718, paragraph 8(d), was to seize the coal and dispose of it. Hold that thought.
The resolution that finally imposed a total ban on coal exports, UNSCR 2371, does not have a grace period for coal exports. It’s a flat ban. Now, a friend with deep knowledge of the facts and law tells me it’s actually more complicated than that, for reasons that the person was unable to make clear to me. Still, I don’t see anything in the language of the resolution that permits the purchase of North Korean coal in September. I read this as a violation of the resolutions.
What can we do about that? For one, the President should be raising it with Xi Jinping. For another, if any of those coal transactions were denominated in dollars, paid to one of the blocked North Korean coal exporters, and cleared through the United States, he should unleash the Justice Department, whose aggressive prosecutors have begun to enforce the legal prohibitions against dealing with sanctioned North Korean entities strictly. The fact that Congress is keeping the pressure on and tightening the coal ban further will also help. It will take more of that strict enforcement to make the coal ban stick.
Last week, Secretary of State Rex Tillerson missed a statutory deadline to decide whether to re-list North Korea as a state sponsor of terrorism (SSOT). Asked about this, State said it told members of Congress that Tillerson “expects to conclude his review and announce a decision within the month.” The Washington Times claims that “[t]here were rumors this week in the back hallways of the State Department that the administration was weighing a state sponsor designation.” National Security Advisor H.R. McMaster hinted at the outcome when he said, “A regime who (sic) murders someone in a public airport using nerve agent — that’s clearly an act of terrorism.” It helps to watch his expressions and listen to his intonations as he answers.
If this isn’t quite conclusive, the President’s itinerary and personality also offer strong indications. As I write this, the President has just arrived in Japan to begin his grand tour of Asia. This blog shies from making predictions, but I’ll offer this one: before President Trump leaves Japan, he will leave little room for doubt that Pyongyang will go back on the SSOT list, and soon. I could be wrong, but if I am, it will mean that a man that even his harshest detractors call a master showman, political opportunist, and crowd pleaser isn’t really those things after all.
[Update: It looks like I was wrong. What a shame to waste such an opportunity.]
Reason 1: Congress
I can see why the administration would risk annoying Congress by missing its deadline if it’s only waiting a few days to notify foreign governments of its decision to re-list Pyongyang. Ed Royce, the Chairman of the House Foreign Affairs Committee and author of the bill that set the deadline, wasn’t happy that the administration missed it, but Congress will probably forgive the slight if the administration practices some good diplomacy and then promptly re-lists Pyongyang.
Congress will not forgive the administration if it misses the deadline and only then says that it will not put Pyongyang back on the list. Ted Poe, who chairs the Subcommittee on Terrorism, Nonproliferation, and Trade, fired off a stream of tweets on the day of the deadline calling for Pyongyang’s re-listing. He called on Congress to pass his bill, H.R. 479, which is pending in both Houses of Congress, and which would force the State Department to review its decision again 90 days after its passage. If Congress times it right, that deadline could come several months before State’s next annual report on terrorism is due in June.
If Poe’s bill doesn’t do the trick, I could suggest an escalatory strategy: Congress could force the State Department to report, item by item, on a long list of crimes for which Pyongyang is the prime suspect, whether it believes Pyongyang committed each of those crimes, and whether each crime was an act of international terrorism. Poe could also call State Department officials back to testify before his subcommittee. This could go on forever, but it shouldn’t. The evidence is too overwhelming to deny forever.
Reason 2: Diplomacy
It’s well known that Trump gets along famously with Japanese Prime Minister Shinzo Abe. What isn’t as well known is that Abe has a deep personal history with the issue of Japanese citizens abducted by North Korea. If you know this history, you’ll also know why Trump’s visit foreshadows his decision on re-listing North Korea as an SSOT.
In 2002, after years of rumors and suspicion, Pyongyang admitted that it had kidnapped a number of Japanese citizens from their home country to use as language instructors for its spies. It is also suspected in dozens of other disappearances that it has not owned up to. The abduction issue resonates powerfully with the Japanese people. Pyongyang’s failure to come clean on other suspected abductions, most notably that of Megumi Yokota, turned public opinion strongly against it. In time, it forced the government to sever most trade relations and dismantle Chongryeon, Pyongyang’s fifth column in Japan.
Japan also leaned on its American ally to pressure North Korea to return the abductees. Before 2008, the State Department said that the abductions were acts of terrorism* and that North Korea had to return the abductees to get off the SSOT list. But in 2008, in a grasp for a nuclear deal with Kim Jong-il, George W. Bush flip-flopped and took Pyongyang off the list without securing either an admission from Kim about the remaining abductees or a clear commitment to return them. Bush’s decision, for which we can thank Condoleezza Rice and Christopher Hill, shook the Japanese government, drew strong criticism from Abe, and damaged America’s image as Japan’s loyal ally. Bush even felt compelled to call two of Abe’s successors, Yasuo Fukuda and Taro Aso, to promise that the U.S. would “never forget the abduction of Japanese citizens by North Korea.”
Bush’s decision was a diplomatic face-plant. It betrayed one of our closest allies to appease our most mendacious enemy. It gained us nothing and cost us valuable time and the leverage of the sanctions we lifted. For what it’s worth, even Hill now thinks Pyongyang should go back on the list. He also offers this “expert” opinion: “I don’t know the legal justification for putting them back on.” I doubt he knew better in 2008.
Abe has been at the center of the abduction issue since 2002, when he was former Prime Minister Junichiro Koizumi’s chief negotiator and both men flew to Pyongyang, met with Kim Jong-il, and secured the return of five of the abductees. In 2007, during a previous term as Prime Minister, Abe strongly opposed rescinding Pyongyang’s SSOT designation until it released all of the abductees. Abe raised the abduction issue in 2012 when he was again elected Prime Minister. He got nowhere with the Obama administration, so in 2014, he tried his luck with Kim Jong-un, to the detriment of Japan’s fragile alliance with the U.S. and South Korea, but without result. This year, Abe asked Trump to meet with the abductees’ families.
“When I asked … he accepted on the spot,” Abe said this week. “He promised he would do his best to rescue the Japanese abduction victims.”
Trump mentioned Megumi during his speech to the UN general assembly. “We know it kidnapped a sweet 13-year-old Japanese girl from a beach in her own country to enslave her as a language tutor for North Korea’s spies,” he said.
Megumi’s mother welcomed the reference to her daughter. “I was really surprised, but it was great, and I’m thankful to [Trump] for bringing up the issue and putting it into words in front of representatives from around the world,” she said, according to Kyodo news agency. “Every word on the issue is a chance.” [The Guardian]
I’ve long thought that pundits make too much of personal relationships between world leaders who must base their policy decisions on cold calculations of national interests, but emotions and relationships seem to matter more to Trump than they do to ordinary world leaders. Trump and Abe have clearly hit it off, the abduction issue is clearly and understandably a big deal for Abe, and Abe is now in a strong position to ask Trump for favors (unlike Moon Jae-in, who isn’t).
Trump does not strike me as one who would leave Japan quietly without giving his friend the political boost of re-designating North Korea as a state sponsor of terrorism, or at least indicating an imminent intent to do so. If he’s the master of publicity that even his harshest detractors say he is, he’ll announce it at a press conference with Abe and the victims’ families. Then, he’ll watch with satisfaction as Abe’s approval rating soars, and as Abe uses that political capital to build up Japan’s defenses.
Here in the clubhouse the leaders sign hats reading “Donald and Shinzo Make Alliance Even Greater” pic.twitter.com/TLF6noAFtv
— Steve Herman (@W7VOA) November 5, 2017
If this opportunity hasn’t occurred to Trump, it has occurred to his advisors and his hosts. McMaster says that when Trump meets with the families, he will “bring a message of sympathy [and] empathy” and ask the world, “Do you want a regime like this to have nuclear weapons?” Former Abduction Minister Eriko Yamatani — yes, Japan created a cabinet ministry for this — raised it with Matt Pottinger, the National Security Council’s top Asia policy staffer, when they spoke recently. The administration has reportedly said it will consider the abductions when it decides on North Korea’s SSOT re-designation.
Another report, sourced to “an administration official,” says that the declaration would come after Trump’s meeting with Xi Jinping in Beijing. How foolish it would be, and how unlike Trump, to squander this opportunity to mobilize public opinion in Japan and globally. At the very least, I’d expect Trump to foreshadow his decision in a press availability or a tweet shortly before or after meeting with the families. Then, Trump can let Rex Tillerson make the formal designation later, under section 6(j) of the Export Administration Act.
Reason 3: Itinerary
No single case has personified the abduction tragedy for Japan like that of Megumi Yokota. North Korean agents kidnapped Megumi from the shores of her home village when she was just 13. The Japanese government says she scratched at the hold of the ship during her passage into slavery while weeping for her mother. Some reports say that the decades of loneliness and suffering in North Korea drove her to madness and suicide. To add to this outrage, in 2004, Pyongyang sent back what it claimed were Megumi’s ashes. These turned out to be the ashes of a completely different expendable human being. The callous cruelty of it all almost defies description.
In 2006, George W. Bush met with Megumi’s mother, Sakie Yokota. This week, Mrs. Yokota will also be among the family members who will meet with President Trump. The abductees’ families haven’t forgotten their sense of betrayal by President Bush. Just last month, Megumi’s brother called for North Korea’s re-listing as a state sponsor of terrorism. Perhaps Donald Trump scheduled a meeting with Sakie Yokota to offer her an anguished explanation of regret for the State Department’s pedantic, nuanced, but sadly unassailable legal reasoning that it was wrong before 2007 and, no, sorry, the kidnapping of your little girl on the way home from badminton practice wasn’t terrorism at all. No, I didn’t think that, either. And if not, why would Trump meet with Mrs. Yokota at all?
Reason 4: Personality
I’ve never met Donald Trump, but my impression of him is that he doesn’t have a dramatis personae, he is a dramatis personae. What he loves most — what he feeds his ego on — is the adoration of crowds, which he buys with the currency of crowd-pleasing declarations, some of them taxpayer-funded. The Japan Times, citing Pottinger, reports that Trump is familiar with Megumi’s case and instructed him “to study North Korea’s human rights violations.” That’s a lot of material for one of the busiest men in Washington to cover. Trump could employ a (ahem) full-time Special Envoy to cover that brief.
No sentient human being can know what happened to Megumi Yokota and fail to be outraged, but in Trump’s case, we have good reason to predict how outrage will influence his decision. Early in Trump’s presidency, we learned that he experiences bouts of righteous, impulsive, paternal outrage. This may have goaded him into bombing Syria. We saw this tendency again in his outrage at the death of Otto Warmbier. Trump’s critics can make a case that he’s a terrible person, but this quirk of Trump’s personality makes it harder for them to make a convincing case that he’s an entirely terrible person.
The news coverage of Pyongyang’s potential SSOT re-listing isn’t as terrible than it was, say, three years ago. These days, one seldom sees “experts” claim that North Korea hasn’t sponsored any acts of terrorism, which is progress, given that several federal court decisions (among others) have found that evidence to be sufficient. Both The Guardian and Fox News accurately review the history of Pyongyang’s listing and rescission. Fox’s report appears to have drawn heavily on well-researched letters from members of Congress calling for Pyongyang’s re-listing.
This doesn’t mean that the coverage has been good. Most of it fails to even summarize the overwhelming and credible evidence implicating Pyongyang in multiple international assassination attempts, terrorist threats, arms sales to terrorist groups or cyber-terrorist threats. The Voice of America is nearly alone in doing so, but Claudia Rosett offers the most detailed recitation. AP writes that “[s]anctions from a terror designation are unlikely to inflict significant, additional economic punishment,” which is not a true statement. Nor is it quite accurate to say that re-listing would be “largely symbolic,” although Congress has moved this falsehood closer to the truth over the last two years by re-imposing some (but not all) of the SSOT sanctions through legislation.
It is true that other recent actions by Congress, the Treasury Department, and the Justice Department will have far greater effects on Pyongyang’s finances than an SSOT re-listing. That includes another sanctions bill that I expect Congress to pass this year, and which will contain the toughest secondary financial sanctions we’ve seen yet. It is also true that Pyongyang’s re-listing, which seems increasingly likely to occur next week, will have powerful symbolic consequences, including by reinforcing a message to every bank, government, and tin-pot tyrant on this planet that this time, at last, we mean it.
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* Whether the abductions themselves were acts of terrorism is debatable, notwithstanding State’s pre-2007 position. North Korea’s original intent in abducting Japanese citizens was to use them as language instructors, which doesn’t meet the element that the act must be done with the intent to influence the conduct of a government or a civilian population. I could make a stronger argument, however, that the continued detention of the abductees — or their remains — became terrorism when, at least as early as 2002, Pyongyang tried to trade them for the normalization of relations with Japan, and most likely, a generous aid package. In 2014, Pyongyang again tried to use them (or their remains) as hostages to extract aid and the relaxation of bilateral sanctions.
If you haven’t read my last post on this week’s deadline for the Secretary of State to decide whether North Korea has repeatedly sponsored acts of international terrorism, you may want to start there. This post will be a combination of breaking news and supplement to that post. This morning, Bloomberg News, citing a report in the Joongang Ilbo, is reporting that yet again, North Korean agents have been caught while on their way to assassinate a dissident in exile. This time, the target was Kim Han-sol, the son of Kim Jong-nam, whom the North Korean government also assassinated.
Chinese police arrested several North Koreans dispatched to Beijing on suspicion of plotting to murder Mr Kim Jong Un’s 22-year-old nephew, South Korea’s JoongAng Ilbo newspaper reported.
Two of seven North Korean agents were arrested over the alleged plot to kill Mr Kim Han Sol, whose father Kim Jong Nam was assassinated in Malaysia earlier this year, the newspaper said, citing an unidentified person familiar with North Korean issues.
Some agents are being interrogated in special facilities on the outskirts of Beijing, the paper said, without elaborating on whether the other five were arrested. China’s Foreign Ministry did not immediately respond to a faxed request for comment. [Bloomberg, crediting the Straits Times]
Let’s review the elements of “international terrorism:” To qualify, the conduct must be —
1. an act of, an attempt at, or a threat of violence,
2. that is unlawful where it was or would have been committed,
3. involves the citizens or territory of more than one country,
4. is carried out by clandestine agents or subnational groups, and
5. is done with the apparent intent* to influence the conduct of a government or a civilian population.
Subject to confirmation of the original report, that would be check, check, check, check, and check. I recently wrote about Kim Han-sol’s rescue from the apparent fear of assassination by Pyongyang’s hit squads by Cheollima Civil Defense, which looks to be the first indigenous North Korean resistance organization, though it appears to operate only outside North Korea using non-violent methods, and does not yet appear to pose a serious threat to the regime’s internal control.
For a list of recent North Korean state-sponsored attempts to assassinate human rights activists and dissidents in exile, I’ll refer you to my report for HRNK. (You don’t have to read all 100 pages. The table of contents will direct you to the appropriate section.) This week, when Thae Yong-ho testifies — under extraordinarily tight security — before the House Foreign Affairs Committee, I hope the members will ask him about this latest report. I hope they’ll ask him how reports like this make him feel about his own safety and the safety of his family. I hope they’ll ask him just what message he thinks Kim Jong-un is trying to send by dispatching these terrorists, how he intends to respond, and whether he will remain silent. What message do you suppose Secretary Tillerson will send to Thae and other North Korean dissidents in exile if he, like his predecessors, refuses to call North Korea a state sponsor of terrorism?
So, to summarize, Secretary Tillerson should re-list North Korea because —
1. North Korea has repeatedly sponsored acts of international terrorism, and the American people have an interest in having a government that tells them the truth.
2. To begin restoring the State Department’s badly damaged credibility in Congress, which suffers every time State refuses to re-list Pyongyang. In last week’s post, I cited a number of op-eds and a letter from several members of the House of Representatives calling for Pyongyang’s re-listing. I neglected to link to this letter, signed by 12 U.S. senators of both parties.
3. To send a message of support to dissidents in exile like Kim Han-sol, Thae Yong-ho, Park Sang-hak, Lee Hyeon-seo, and others.
4. To send a message to Pyongyang that we are not afraid to attach, and are determined to attach, consequences to its crimes.
5. To further tighten existing sanctions. In addition to the potential civil liability and securities law consequences I wrote about last week, there’s another important point I forgot to mention. Re-designating Pyongyang would close a loophole in our sanctions by unlocking the stricter sanctions regulations in 31 C.F.R. Part 596. That regulation unambiguously requires an OFAC license for any dollar transactions or transactions by U.S. persons with a government that’s listed as a state sponsor of terrorism.
Why does that matter? Because the existing North Korea Sanctions Regulation (NKSR) at 31 C.F.R. 510, in my view, does not do that. It hasn’t been updated since 2011 — two statutes and three executive orders ago. Instead, the NKSR prohibits “[a]ll transactions prohibited pursuant to Executive Order 13466,” 13551 (which potentially applies to anyone involved in Pyongyang’s arms trafficking, proliferation, and money laundering, but in reality only applies to a few people who’ve been designated under this EO), 13570 (which requires a license for most imports from and exports to North Korea).
But to see how vague, circular, and Kafkaesque this regulation really is, you have to see what 13466 covers: any property that was already blocked until 2008, when President Bush took North Korea off the terror list and canceled Trading With the Enemy Act sanctions. That appears to include only property that was blocked in 2008. Maybe Treasury would disagree. Then again, maybe if it tried to sanction or prosecute anyone for violating the NKSR — and with a single exception, it never has — a competent defense attorney would argue that the regulation is ambiguous on its face, and that under the rule of lenity, the court should construe any ambiguity in favor of the accused. The courts will not give Chevron deference to an agency’s interpretation of a regulation for purposes of imposing a criminal punishment. Part 510 is so vague in its wording, circular in its reasoning, and outdated in its incorporation of authorities that not even I could tell you what it really means, and reporters and government officials routinely ask me what these laws and regulations mean. Why wouldn’t a banker or trading company official in Dandong be able to make the same argument?
If our government is serious about “maximum pressure,” some clarity would be useful.
The State Department worries about how Pyongyang would react to a re-listing. There will be tantrums, paroxysms, and provocations, of course. That’s de rigeur for Pyongyang, but provocations are inevitable, for one excuse or another, regardless of what Tillerson decides. What Tillerson can better control is whether he will also face a tantrum from Congress. Regardless of which convenient excuse it may seize on, Pyongyang engages in provocations to achieve political and diplomatic aims, and tests weapons to advance technical capabilities. Our objective should be to demonstrate to Pyongyang that attacks on our interests carry real consequences. An SSOT re-listing will carry both financial and symbolic consequences.
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* Previously said “attempt.” Since corrected.
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A reader’s question causes me to clarify a few points. First, Treasury’s FAQs say that financial transactions through the U.S. with North Korea require a license. Second, EO 13570, which is appended to the NKSR en toto, bans the export of “services” to North Korea, and the case law supports the position that clearing dollar transactions through the U.S. is an export of services. EO 13722, which is not appended to the most recent version of the NKSR published by the Government Printing Office online, also contains similar language.
But that’s far from intuitive or unambiguous enough for many of the persons who might consider dealing with North Korea. Even a brief review of what financial flows the Justice Department and the U.N. Panel of Experts have exposed in recent months shows that we haven’t made this nearly clear enough to the financial industry. Perceptions can become realities. EO 13810 made it much clearer, of course, but why not make the text of the regulation itself clear? Heck, we have four sets of sanctions regulations for Iran. You’d think having one set of clear sanctions regulations for North Korea isn’t too much to ask. The relative attraction of Part 596 is that at least it’s clear to everyone. Sorry for the wonky tangent.
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Update, Nov. 4: The original Joongang Ilbo report is now available in English. It cites an unnamed source. The South Korean National Intelligence service officially says that it has no knowledge of the plot. Separately, it told KBS that Kim Jong-nam is safe in a third country and questioned the veracity of the Joongang Ilbo’s report on the basis that Kim Han-sol isn’t in China. The NIS may have sound reasons to doubt this anonymous report. It may also be under political pressure from Moon Jae-in’s cabinet to avoid implicating Pyongyang in its latest attempted act of terrorism. But the fact that Kim Han-sol isn’t in China — assuming that’s true — is probative of nothing. Regardless of where Han-sol is living, one naturally would expect the North Korean agents to transit through China. After all, most flights out of Pyongyang transit through there, many of its agents reside there, and so does most of its cash.
Previously, I’ve written about the C4ADS investigation that exposed the Sun Sidong network, and that network’s role in money laundering and arms smuggling for North Korea, most notably the seizure of the Jie Shun arms shipment in Egypt. Shortly after the release of C4ADS’s report, Treasury froze the assets of one of Sun’s companies, Dandong Zhicheng Metallic Materials, and the Justice Department filed a civil forfeiture suit against $4 million of its assets. Now, the Wall Street Journal reports that Sun is under FBI investigation:
The FBI has been looking into Mr. Sun’s U.S. connections to potentially illegal transactions with North Korea, according to one person familiar with the investigation. Another person said the FBI has inquired about a personal U.S. real estate deal involving Mr. Sun, and a third person said Mr. Sun was on the FBI’s radar. Neither Mr. Sun nor his businesses are officially sanctioned by the U.S. [WSJ]
That last statement isn’t entirely true.
One of Mr. Sun’s companies and a company owned by his sister, Sun Sihong, have each been listed as owners of a cargo ship, the Jie Shun, that the United Nations said was seized off Egypt’s coast last year and found to be hiding 30,000 rocket-propelled grenades under piles of iron ore.
At the time of the seizure, the ship was owned by Ms. Sun’s Hong Kong-based company, Vast Win Shipping, and it had been previously owned by Mr. Sun’s Hong Kong-based company, Jie Shun Shipping Co., according to the Equasis shipping database and Hong Kong corporate records. Ms. Sun declined to comment. [WSJ]
In related news, Vietnam recently expelled the local Vast Win representative, describing it as a subsidiary of North Korean shipper Ocean Maritime Management, which was designated by the UN and the US over a 2013 arms shipment, also in violation of the UN embargo. Vietnam also denied visas to 20 North Korean “IT workers.”
Anyway, so much for the theory (or guess) advanced by “experts” that North Korea’s Chinese enablers were shadowy, isolated, inscrutable, and sanctions-proof.
Mr. Sun has had assets in the U.S. as well—he sold a four-bedroom house in Great Neck, N.Y., in August for $1.1. million, according to real-estate records and people involved in the transaction.
By C4ADS’s reckoning, Sun’s network may have been Pyongyang’s most important portal into the Chinese (and thus, the global) economy. I don’t expect most of these enablers to have physical assets in the U.S. like Sun had, but I do expect all of the major ones to require access to the dollar system.
Mr. Sun is linked in Chinese corporate records to several other firms registered in Hong Kong and mainland China. He also is listed in U.S. public records as the chief executive of Dongyuan Enterprise, a Flushing, N.Y.-based firm. That company successfully applied for a U.S. work visa last year for another Chinese national, its director, according to Labor Department records. Dongyuan Enterprise didn’t respond to repeated requests for comment.
Dongyuan Enterprise shipped 42,000 pounds of apples from South Korea to the U.S. in January, according to Descartes Datamyne, an international trade-data provider. It also shipped $35,000 worth of “used furniture” from one of Mr. Sun’s Chinese firms to the U.S., in March.
Mr. Sun’s U.S. business might allow him to do transactions around the world without any obvious ties to his China-based, North Korea-focused dealings, said C4ADS’s research chief, David Lynch. It could also provide him with the ability to register for business services within the U.S., including bank accounts to transfer funds internationally and overseas trade, Mr. Lynch said. [WSJ]
I don’t know anything more about this investigation against Sun than you do, but the conduct described here suggests an investigation for money laundering and violations of the International Emergency Economic Powers Act. I suppose we’ll also see a forfeiture action of some kind, listing the real property or proceeds of the sale as “proceeds” of criminal activity. If Sun Sidong runs back to China and the authorities there won’t extradite him, that may be the only way to impose any meaningful accountability on him.
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 partners “can’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.
Donald Trump hit Kim Jong-un with his first sanctions executive order today. (Update: Its official number is Executive Order 13810.) The new EO partially implements UNSCR 2371, UNSCR 2375, and the KIMS Act, which the President signed in August. As a strictly legal matter, this EO will not affect anyone’s interests immediately because Treasury didn’t announce any new designations. As a practical matter, however, we may already be seeing the effects of the clear seriousness of purpose that Trump has already shown. You can read the full text here and a White House fact sheet here.
The New Authorities: A Summary
The new provisions broaden the administration’s authority to designate (and thus, freeze any assets within U.S. jurisdiction of) entities that engage in the conduct described below:
Treasury previously authorized sectoral sanctions against anyone operating in North Korea’s the mining, energy, transportation, and financial services industries. The newly designated industries include those sanctioned under the new U.N. resolutions and the KIMS Act. Sanctions on the medical industry are a notable exception. This will draw gasps of horror from some, but remember, there’s still a humanitarian general license that exempts “medicine distribution” and “the provision of health services.” Section 7 of the EO exempts UN operations entirely. So why say “medical” at all? The feds may suspect Pyongyang of hiding behind “medical” uses to make biological weapons, but that’s only a guess.
Executive Order 13570 previously banned unlicensed imports and exports between the United States and North Korea. This provision, by contrast, bans any transactions through the U.S. financial system, or by U.S. persons, that facilitate imports to or exports from North Korea by anyone, to or from any country. In effect, if you trade with North Korea now, you have to use a non-dollar currency or get an OFAC license.
This effectively cuts the Gordian Knot around the spurious claims of China (or this one, by Tanzania) that the North Koreans they’re dealing with aren’t representatives of the North Korean government. Hopefully, Treasury will now start mining names out of the U.N. Panel of Experts reports and designating the members of Pyongyang’s overseas proliferation and money laundering networks, thus putting the banking industry on notice to freeze their accounts.
I’m glad Treasury exempted North Koreans (including refugees) who are legally in the United States. I would have preferred that Treasury had clarified that North Korean refugees in Europe and South Korea are also exempt. I realize that Treasury has no intention of enforcing sanctions against refugees in England or South Korea — and I hope the banks realize this, too. Some clarifying guidance from Treasury might be useful. Refugees in South Korea, in particular, often keep their family members alive by remitting money to them. As I’ve argued before, remittances might be a rare case of financial interaction with North Korea that actually does drive reform, by helping the poor start businesses and achieve financial independence from the state. Thankfully, a general license covers noncommercial, personal remittances.
Things start to get more interesting in Section 2, which provides for a secondary boycott on ships and aircraft. Under the EO, any ships or aircraft that have been in North Korea in the last 180 days can’t land in the United States. This both overlaps with and complements section 315 of the KIMS Act. It is also the same concept that Japan and South Korea had previously applied to North Korean ships, meaning that ships that visit North Korea will now incur a six-month ban from the waters of China’s three largest trading partners. Furthermore, any ship that has done a ship-to-ship transfer with a ship that has been in North Korea in the last 180 days also gets banned from U.S. ports for 180 days. Shipping trackers suggest that a fair number of these transfers are happening off the Chinese coast. A concern, however, is that the existing humanitarian general license may not cover shipments of commercial food imports (which we should want to encourage).
Section 3 contains some very tough secondary financial sanctions. Section 3(a) freezes any funds controlled by a “North Korean person,” or in which a North Korean person as an interest. This is very powerful — much like its ancestor, section 104(c) the NKSPEA, which blocks all property of the “Government of North Korea,” a term that the NKSPEA defines in roughly similar terms to this EO’s definition of “North Korean person.” The EO also extends the blocking to any person who finances, approves, facilitates, or guarantees a transaction that would be frozen under this paragraph.
Section 4 contains some additional penalties that are tailored to the financial industry. Any person who knowingly conducts or facilitates a transaction in property blocked under a North Korea-related executive order, or who knowingly conducts or facilitates a significant transaction in trade with North Korea, can lose access to the U.S. financial system. That potentially means no correspondent accounts, or the freezing of all of the bank’s assets in the United States. This amounts to a mini Patriot Act section 311 just for North Korea. And of course, banks that knowingly deal with Pyongyang could also face prosecution for money laundering, criminal or civil forfeitures, or the kind of civil penalties that were applied to BNP Paribas for violating Iran sanctions.
We sound like we really mean it this time.
The effects of previous, strong-on-paper EOs fell short of their potential because President Obama never showed the world that he was serious about enforcing them (or rather, until the very end of his administration, he showed the world that he wasn’t serious about enforcing them at all). Let no one accuse Donald Trump of indecision or paralysis.
“A new executive order will cut off sources of revenue that fund North Korea’s efforts to develop the deadliest weapons known to humankind,” Trump said at the start of a trilateral luncheon meeting with South Korean President Moon Jae-in and Japanese Prime Minister Shinzo Abe in New York….
Trump said China’s central bank had just told the country’s other banks to “immediately” stop doing business with North Korea, and thanked Chinese President Xi Jinping for that “unexpected” decision.
“For much too long North Korea has been allowed to abuse the international financial system to facilitate funding for its nuclear weapons and missile programs,” he said. [Yonhap]
Take note, humanity: Donald Trump just said the right thing in the right tone, and it all appears to be true, right down to “unexpectedly.” Then, Treasury Secretary Steven Mnuchin said this at the U.N., just to be sure the whole world heard him:
For far too long, North Korea has evaded sanctions and used the international financial system to facilitate funding for its weapons of mass destruction and ballistic missile programs. No bank – in any country – should be used to facilitate Kim Jong-un’s destructive behavior.
This new Executive Order will authorize Treasury to impose a range of sanctions, such as suspending U.S. correspondent account access to any foreign bank that knowingly conducts or facilitates significant transactions tied to trade with North Korea or certain designated persons.… Foreign financial institutions are now on notice that, going forward, they can choose to do business with the United States or with North Korea, but not both….
We call on countries around the world to join us by cutting all trade and financial ties with North Korea in order to achieve a denuclearized Korean peninsula. [link]
Finally, in a conference call this afternoon, a senior National Security Council official and a senior Treasury Department official (whom we weren’t allowed to name) emphasized the administration’s seriousness. Some key points:
Signs of impact on North Korean trade
So, you ask, will the Chinese banks finally listen? I’ve cited the evidence that they already are. Fuel prices in North Korea have spiked, North Korean workers are flooding back over the border to China, and trading companies in China are effectively out of business and unhappy about the freezing of their bank accounts. The coal industry, which has taken some hard hits from the Treasury and Justice Departments lately, is also showing the strain. These things could be consequences of the banks telling their customers to de-risk North Korea. We may soon find out just who’s right here.
North Korea was built to endure pain. Sanctions don’t work. Good luck!
— John Delury (@JohnDelury) September 21, 2017
Today, Reuters reports that the Chinese government has directed its banks to stop dealing with North Koreans entirely, to include winding down loans with existing customers. If that’s true — and if it lasts — that will be fatal. The timing is curious. One of the “senior administration officials” said that President Trump had only notified President Xi about this EO today, yet the reports of the alleged Central Bank order — the bankers say they received it Monday — come a week after multiple press reports of Chinese banks closing North Korean-controlled accounts. Could Beijing be making a virtue of necessity by ordering banks to do what they’re already doing for their own sake? As I’ve said before, there isn’t just one “China.” Various ministries and industries have diverse and conflicting interests.
This week, President Trump acted strongly, decisively, publicly, and with a deliberate seriousness of purpose. Banks and governments around the world will disregard his words at their peril (meaning, very few of them will). His misbegotten threats against North Korea (as opposed to its regime) shouldn’t distract us from what he did right, if only because his predecessors could not do it right. His words and actions, and in tandem with other governments’ actions to cut their trade and diplomatic ties to North Korea, should be difficult for Pyongyang to withstand for long. We may soon conclude the sanctions-never-work portion of our narrative and enter the sanctions-are-starving-North-Korean-babies portion of our narrative fairly soon. In fact, it looks like we already have.
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.
~ ~ ~
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.”
~ ~ ~
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.
Today, the U.N. Security Council adopted Resolution 2371 unanimously. The text is in black, my commentary is in blue italic.
PP1: Recalling its previous relevant resolutions, including resolution 825 (1993), resolution 1540 (2004), resolution 1695 (2006), resolution 1718 (2006), resolution 1874 (2009), resolution 1887 (2009), resolution 2087 (2013), resolution 2094 (2013), resolution 2270 (2016), resolution 2321 (2016), and resolution 2356 (2017), as well as the statements of its President of 6 October 2006 (S/PRST/2006/41), 13 April 2009 (S/PRST/2009/7) and 16 April 2012 (S/PRST/2012/13), (updated PP1 of UNSCR 2321)
PP2: Reaffirming that proliferation of nuclear, chemical and biological weapons, as well as their means of delivery, constitutes a threat to international peace and security, (PP2 of UNSCR 2321)
PP3: Expressing its gravest concern at the July 3 and July 28 of 2017 ballistic missile tests by the Democratic People’s Republic of Korea (“the DPRK”), which the DPRK has stated were tests of intercontinental ballistic missiles, in violation of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016) 2321 (2016), and 2356 (2017), and at the challenge such tests constitute to the Treaty on Non-Proliferation of Nuclear Weapons (“the NPT”) and to international efforts aimed at strengthening the global regime of non-proliferation of nuclear weapons, and the danger they pose to peace and stability in the region and beyond, (PP3 of UNSCR 2321)
PP4: Underlining once again the importance that the DPRK respond to other security and humanitarian concerns of the international community, (PP4 of UNSCR 2321)
PP5: Underlining also that measures imposed by this resolution are not intended to have adverse humanitarian consequences for the civilian population of the DPRK, (PP5 of UNSCR 2321)
PP6: Expressing serious concern that the DPRK has continued to violate relevant Security Council resolutions through repeated launches and attempted launches of ballistic missiles, and noting that all such ballistic missile activities contribute to the DPRK’s development of nuclear weapons delivery systems and increase tension in the region and beyond, (PP6 of UNSCR 2321)
PP7: Expressing continued concern that the DPRK is abusing the privileges and immunities accorded under the Vienna Conventions on Diplomatic and Consular Relations, (PP7 of UNSCR 2321)
PP8: Expressing great concern that the DPRK’s prohibited arms sales have generated revenues that are diverted to the pursuit of nuclear weapons and ballistic missiles while DPRK citizens have unmet needs, (PP8 of UNSCR 2321)
Are you listening, Singapore?
PP9: Expressing its gravest concern that the DPRK’s ongoing nuclear- and ballistic missile-related activities have further generated increased tension in the region and beyond, and determining that there continues to exist a clear threat to international peace and security, (PP9 of UNSCR 2321)
PP10: Acting under Chapter VII of the Charter of the United Nations, and taking measures under its Article 41,
1. Condemns in the strongest terms the ballistic missile launches conducted by the DPRK on 3 July and 28 July of 2017, which the DPRK has stated were launches of intercontinental ballistic missiles, and which used ballistic missile technology in violation and flagrant disregard of the Security Council’s resolutions; (Based on OP1 of UNSCR 2270)
Reading that language, it’s not hard to reverse engineer how the argument between the U.S. and Russian diplomats went.
2. Reaffirms its decisions that the DPRK shall not conduct any further launches that use ballistic missile technology, nuclear tests, or any other provocation; shall suspend all activities related to its ballistic missile program and in this context re-establish its pre-existing commitments to a moratorium on missile launches; shall abandon all nuclear weapons and existing nuclear programs in a complete, verifiable and irreversible manner, and immediately cease all related activities; and shall abandon any other existing weapons of mass destruction and ballistic missile programs in a complete, verifiable and irreversible manner; (OP 2-4 of UNSCR 2270, adapted and combined)
3. Designate individuals and entities for asset freeze/travel ban: Decides that the measures specified in paragraph 8(d) of resolution 1718 (2006) shall apply also to the individuals and entities listed in Annex I and II of this resolution and to any individuals or entities acting on their behalf or at their direction, and to entities owned or controlled by them, including through illicit means, and decides further that the measures specified in paragraph 8(e) of resolution 1718 (2006) shall also apply to the individuals listed in Annex I of this resolution and to individuals acting on their behalf or at their direction; (OP3 of UNSCR 2321)
4. Designation of additional WMD-related Items: Decides to adjust the measures imposed by paragraph 8 of resolution 1718 (2006) and this resolution through the designation of additional goods, directs the Committee to undertake its tasks to this effect and to report to the Security Council within fifteen days of adoption of this resolution, and further decides that, if the Committee has not acted, then the Security Council will complete action to adjust the measures within seven days of receiving that report; (OP25 of UNSCR 22270)
5. Designation of additional Conventional Arms-related Items: Decides to adjust the measures imposed by paragraph 7 of resolution 2321 (2016) through the designation of additional conventional arms-related items, materials, equipment, goods, and technology, directs the Committee to undertake its tasks to this effect and to report to the Security Council within thirty days of adoption of this resolution, further decides that, if the Committee has not acted, then the Security Council will complete action to adjust the measures within seven days of receiving that report, and directs the Committee to update this list every 12 months; (Based on OP7 of UNSCR 2321 and OP25 of 2270)
6. Prohibit port calls by designated vessels tied to illicit activities: Decides that the Committee may designate vessels for which it has information indicating they are, or have been, related to activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution and all Member States shall prohibit the entry into their ports of such designated vessels, unless entry is required in the case of emergency or in the case of return to its port of origination, or unless the Committee determines in advance that such entry is required for humanitarian purposes or any other purposes consistent with the objectives of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution; (New)
I’m not sure this adds much to existing sanctions that already require member states to seize designated North Korean ships that enter their harbors. It may be that member states were so reluctant to deal with the hassle of disposal that someone figured it would be easier to require them to keep the ships out of port entirely. I’m not so sure.
7. Prohibit chartering of vessels flagged by the DPRK: Clarifies that the measures set forth in paragraph 20 of resolution 2270 (2016) and paragraph 9 of resolution 2321 (2016), requiring States to prohibit their nationals, persons subject to their jurisdiction and entities incorporated in their territory or subject to their jurisdiction from owning, leasing, operating any vessel flagged by the DPRK, without exception, unless the Committee approves on a case-by-case basis in advance, apply to chartering vessels flagged by the DPRK;
The only country I’ve heard was doing this is a Middle Eastern country that starts with “i” and ends with “n” and is spelled “i-r-a-n.”
8. Full ban on coal, iron and iron ore: Decides that paragraph 26 of resolution 2321 (2016) shall be replaced by the following:
“Decides that the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, coal, iron, and iron ore, and that all States shall prohibit the procurement of such material from the DPRK by their nationals, or using their flag vessels or aircraft, and whether or not originating in the territory of the DPRK, decides that for sales and transactions of iron and iron ore for which written contracts have been finalized prior to the adoption of this resolution, all States may allow those shipments to be imported into their territories up to 30 days from the date of adoption of this resolution with notification provided to the Committee containing details on those imports by no later than 45 days after the date of adoption of this resolution, and decides further that this provision shall not apply with respect to coal that the exporting State confirms on the basis of credible information has originated outside the DPRK and was transported through the DPRK solely for export from the Port of Rajin (Rason), provided that the exporting State notifies the Committee in advance and such transactions involving coal originating outside of the DPRK are unrelated to generating revenue for the DPRK’s nuclear or ballistic missile programs or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution; (New)
The good news: there is no longer a coal cap for China to cheat on. The bad news: there is now a complete coal ban for China to cheat on. A little birdie tells me – and in the near future, that little birdie will also tell you — that the North Koreans are smuggling their coal to China via third countries. My guess is that even if this isn’t airtight in practice, it will still make it harder and more expensive for Pyongyang to sell its coal, meaning it will cut into Pyongyang’s export profits.
9. Prohibit seafood exports from the DPRK: Decides that the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, seafood (including fish, crustaceans, mollusks, and other aquatic invertebrates in all forms), and that all States shall prohibit the procurement of such items from the DPRK by their nationals, or using their flag vessels or aircraft, whether or not originating in the territory of the DPRK, and further decides that for sales and transactions of seafood (including fish, crustaceans, mollusks, and other aquatic invertebrates in all forms) for which written contracts have been finalized prior to the adoption of this resolution, all States may allow those shipments to be imported into their territories up to 30 days from the date of adoption of this resolution with notification provided to the Committee containing details on those imports by no later than 45 days after the date of adoption of this resolution;
Good on you, U.N., for using this nifty idea. I first suggested the same thing in this post, and section 311 of the KIMS Act now allows the President to designate anyone who buys fishing rights, food, or agricultural products from North Korea. I read the resolution’s language to cover the sale of fishing rights as well as seafood. For its next act, the U.N. should also ban food exports entirely. Pyongyang has no business exporting food for hard currency while the poor starve.
10. Prohibit lead exports from the DPRK: Decides that the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, lead and lead ore, and that all States shall prohibit the procurement of such items from the DPRK by their nationals, or using their flag vessels or aircraft, whether or not originating in the territory of the DPRK, and further decides that for sales and transactions of lead and lead ore for which written contracts have been finalized prior to the adoption of this resolution, all States may allow those shipments to be imported into their territories up to 30 days from the date of adoption of this resolution with notification provided to the Committee containing details on those imports by no later than 45 days after the date of adoption of this resolution;
I did not even realize North Korea exported lead, but evidently, it does.
11. Ban the hiring and paying of additional DPRK laborers used to generate foreign export earnings: Expresses concern that DPRK nationals frequently work in other States for the purpose of generating foreign export earnings that the DPRK uses to support its prohibited nuclear and ballistic missile programs, decides that all Member States shall not exceed on any date after the date of adoption of this resolution the total number of work authorizations for DPRK nationals provided in their jurisdictions at the time of the adoption of this resolution unless the Committee approves on a case-by-case basis in advance that employment of additional DPRK nationals beyond the number of work authorizations provided in a member state’s jurisdiction at the time of the adoption of this resolution is required for the delivery of humanitarian assistance, denuclearization or any other purpose consistent with the objectives of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution; (New)
Here is the first binding limit on North Korean labor exports, but it’s really a cap. On the bad side, because everyone involved in these contracts was already concealing or misrepresenting the number of North Korean laborers anyway, it will be hard to tell what “exceeds.” On the good side, this doesn’t prevent the U.S. from using section 321 of the KIMS Act to sanction employers of North Korean slave labor or their governments, and it will give the U.S. a stronger argument to convince host nations to send those workers home. This assumes we’re making that effort – and I keep hearing that we are, quietly. I also don’t interpret this to diminish the existing requirements of UNSCR 1718, paragraph 8 that purchasers of North Korean labor (a) “ensure” that the money doesn’t go to the nuke fund, and (b) abstain from dealing with designated persons.
12. Prohibiting new or expanded joint ventures and cooperative commercial entities with the DPRK: Decides that States shall prohibit, by their nationals or in their territories, the opening of new joint ventures or cooperative entities with DPRK entities or individuals, or the expansion of existing joint ventures through additional investments, whether or not acting for or on behalf of the government of the DPRK, unless such joint ventures or cooperative entities have been approved by the Committee in advance on a case-by-case basis; (New)
So, got your tickets yet for that big investment fair in Rason in two weeks? Are those tickets refundable? Yeah. Unfortunately, the word “existing” means that this isn’t necessarily the end for the MKP Group, although some parts of it (such as banking joint ventures) are banned by other resolutions. Ditto Orascom. It would be nice to get more definition on the words “new,” “existing,” and “expansion,” which seem like potential loopholes.
13. Clarifies that the prohibitions contained in paragraph 11 of resolution 2094 (2013) apply to clearing of funds through all Member States’ territories; (New)
This is useful. Although section 201 the NKSPEA effectively (if indirectly) banned direct and indirect dollar clearing services for North Korean banks, this extends that obligation to other issuers of convertible currencies – the EU, the UK, Canada, Australia, Switzerland, Hong Kong, Japan, etc. – and also closes a potential loophole for offshore dollar clearing. As always, detection and enforcement will be key.
14. Clarifies that companies performing financial services commensurate with those provided by banks are considered financial institutions for the purposes of implementing paragraph 11 of resolution 2094 (2013), paragraphs 33 and 34 of resolution 2270 (2016), and paragraph 33 of resolution 2321 (2016); (New)
In other words, shadow banks and money launderers (such as DCB Finance and Kim Chol-Sam) are banks for purposes of the resolutions. That matters, because North Korea increasingly relies on trading companies to perform the functions of banks.
15. Prohibiting use of chemical weapons and calling for accession to the CWC: Recalls paragraph 24 of resolution 2270 (2016), decides that the DPRK shall not deploy or use chemical weapons, and urgently calls upon the DPRK to accede to the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and Their Destruction, and then to immediately comply with its provisions; (Based on OP24 of UNSCR 2270)
For reasons that ought to be obvious ….
16. Abiding by the VCDR/VCCR: Demands that the DPRK fully comply with its obligations under the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations; (New)
In South Dakota English, this means stop renting out your embassies as eurotrash flophouses.
Impact on the People of the DPRK
17. Regrets the DPRK’s massive diversion of its scarce resources toward its development of nuclear weapons and a number of expensive ballistic missile programs, notes the findings of the United Nations Office for the Coordination of Humanitarian Assistance that well over half of the people in the DPRK suffer from major insecurities in food and medical care, including a very large number of pregnant and lactating women and under-five children who are at risk of malnutrition and nearly a quarter of its total population suffering from chronic malnutrition, and, in this context, expresses deep concern at the grave hardship to which the people in the DPRK are subjected; (New)
I can’t overstate how smart and important this language is. Pyongyang will always try to use its people as human shields against sanctions. It will always steal from the poor to give to the rich and the military. The world needs to remember exactly why so many North Koreans are poor and hungry, and it’s not because North Korea is a poor country, or because of weather, or sanctions. It’s because of choices – choices that are made in Pyongyang.
18. State implementation report: Decides that Member States shall report to the Security Council within ninety days of the adoption of this resolution, and thereafter upon request by the Committee, on concrete measures they have taken in order to implement effectively the provisions of this resolution, requests the Panel of Experts, in cooperation with other UN sanctions monitoring groups, to continue its efforts to assist Member States in preparing and submitting such reports in a timely manner; (based on OP36 of UNSCR 2321)
If they weren’t filing their reports before, it’s going to take more than a strongly worded appeal to make them file now. That’s where the BRINK Act becomes important. Take a gander at section 104 for some of the sanctions non-compliant states might face.
19. Redouble implementation efforts: Calls upon all Member States to redouble efforts to implement in full the measures in resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013) 2270 (2016), 2321 (2016), and 2356 (2017), and to cooperate with each other in doing so, particularly with respect to inspecting, detecting and seizing items the transfer of which is prohibited by these resolutions; (OP38 of UNSCR 2321)
20. Update Committee and POE mandate: Decides that the mandate of the Committee, as set out in paragraph 12 of resolution 1718 (2006), shall apply with respect to the measures imposed in this resolution and further decides that the mandate of the Panel of Experts, as specified in paragraph 26 of resolution 1874 (2009) and modified in paragraph 1 of resolution 2345 (2017), shall also apply with respect to the measures imposed in this resolution; (OP39 of UNSCR 2321)
21. Standard “seize and dispose” provision: Decides to authorize all Member States to, and that all Member States shall, seize and dispose (such as through destruction, rendering inoperable or unusable, storage, or transferring to a State other than the originating or destination States for disposal) of items the supply, sale, transfer, or export of which is prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution that are identified in inspections, in a manner that is not inconsistent with their obligations under applicable Security Council resolutions, including resolution 1540 (2004), as well as any obligations of parties to the NPT, the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Development of 29 April 1997, and the Convention on the Prohibition of the Development, Production and Stockpiling of Bacteriological (Biological) and Toxin Weapons and on Their Destruction of 10 April 1972; (OP40 of UNSCR 2321)
This provision addresses what I call the Mu Du Bong problem. Remember when Mexico seized the Mu Du Bong after it ran aground off the port of Tuxpan? For the longest time, the Mexicans didn’t know what to do with the ship. This question eventually came to me via an indirect route. I pointed out that paragraph 8 of UNSCR 2087 already authorized Mexico to seize, destroy, or dispose of the ship as it saw fit. Of course, 2087 isn’t a Chapter VII resolution, but the Mu Du Bong became an artificial reef shortly thereafter, so I’d like to think I played some small role in the lives of some red snapper and grouper.
22. Force majeure clause: Emphasizes the importance of all States, including the DPRK, taking the necessary measures to ensure that no claim shall lie at the instance of the DPRK, or of any person or entity in the DPRK, or of persons or entities designated for measures set forth in resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution, or any person claiming through or for the benefit of any such person or entity, in connection with any contract or other transaction where its performance was prevented by reason of the measures imposed by this resolution or previous resolutions; (OP41 of UNSCR 2321)
This keeps governments that freeze assets from getting tied up in litigation for enforcing the resolutions – theoretically. Of course, not all member state courts will recognize this, and it only applies to claims by North Korea or by designated persons. It will require good implementing legislation, which (let’s face it) very few countries have.
23. Request Interpol notices: Requests that Interpol issue Special Notices with respect to designated individuals, and directs the Committee to work with Interpol to develop the appropriate arrangements to do so; (New)
OK, I’ll admit that I’m mildly impressed by this. I’ll believe it when Kim Chol-Sam leaves China for good.
24. Expand POE capacity and resources: Requests the Secretary General to provide additional analytical resources needed to the Panel of Experts established pursuant to resolution 1874 (2009) to strengthen its ability to analyze the DPRK’s sanctions violation and evasion activities; (Based on OP42 of UNSCR 2321)
Hmm. Are they hiring lawyers, and what do they pay?
25. Reiterates its deep concern at the grave hardship that the people in the DPRK are subjected to, condemns the DPRK for pursuing nuclear weapons and ballistic missiles instead of the welfare of its people while people in the DPRK have great unmet needs, and emphasizes the necessity of the DPRK respecting and ensuring the welfare and inherent dignity of people in the DPRK; (OP45 of UNSCR 2321)
As stated above, this matters.
26. Reaffirms that the measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), and this resolution are not intended to have adverse humanitarian consequences for the civilian population of the DPRK or to affect negatively or restrict those activities, including economic activities and cooperation, food aid and humanitarian assistance, that are not prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017) and this resolution, and the work of international and non-governmental organizations carrying out assistance and relief activities in the DPRK for the benefit of the civilian population of the DPRK and decides that the Committee may, on a case-by-case basis, exempt any activity from the measures imposed by these resolutions if the committee determines that such an exemption is necessary to facilitate the work of such organizations in the DPRK or for any other purpose consistent with the objectives of these resolutions, and further decides that the measures specified in paragraph 8(d) of resolution 1718 (2006) shall not apply with respect to financial transactions with the DPRK Foreign Trade Bank or the Korea National Insurance Corporation if such transactions are solely for the operation of diplomatic missions in the DPRK or humanitarian assistance activities that are undertaken by, or in coordination with, the United Nations; (Based on OP46 of UNSCR 2321)
So, spoiler alert: the FTB, which Treasury designated in 2013, and which featured prominently in this recent civil forfeiture suit, is designated in one of the annexes below, which is good. When I say that Pyongyang uses its people as human shields, the Foreign Trade Bank is a perfect example of that strategy, and how some humanitarian aid NGOs have been willing accomplices of it. That exemption is probably a smart move, tactically.
27. Reaffirms its support for the Six Party Talks, calls for their resumption, and reiterates its support for the commitments set forth in the Joint Statement of 19 September 2005 issued by China, the DPRK, Japan, the Republic of Korea, the Russian Federation, and the United States, including that the goal of the Six-Party Talks is the verifiable denuclearization of the Korean Peninsula in a peaceful manner, that the United States and the DPRK undertook to respect each other’s sovereignty and exist peacefully together, that the Six Parties undertook to promote economic cooperation, and all other relevant commitments; (OP47 of UNSCR 2321)
Note the language “reaffirms its support.” I occasionally see claims, either from soft-liners here or from Beijing, that the resolutions require us to return to six-party talks — never mind that North Korea won’t return to them — and that some notion of reciprocity consequently releases China from its obligations to enforce the other provisions. But “reaffirms its support” is non-binding language, in contrast to the sanctions provisions that say “decides,” and which are binding. The obligations aren’t reciprocal, and the idea that this provision requires anyone to return to the talks (including Pyongyang) is baseless. The resolutions do, however, use “decides” when they require Pyongyang to completely, verifiably, and irreversibly dismantle its nuclear, chemical, biological, and ballistic missile programs.
28. Reiterates the importance of maintaining peace and stability on the Korean Peninsula and in north-east Asia at large, and expresses its commitment to a peaceful, diplomatic, and political solution to the situation and welcomes efforts by the council members as well as other States to facilitate a peaceful and comprehensive solution through dialogue and stresses the importance of working to reduce tensions in the Korean Peninsula and beyond; (OP48 of UNSCR 2321)
29. Affirms that it shall keep the DPRK’s actions under continuous review and is prepared to strengthen, modify, suspend or lift the measures as may be needed in light of the DPRK’s compliance, and, in this regard, expresses its determination to take further significant measures in the event of a further DPRK nuclear test or launch; (OP49 of UNSCR 2321)
30. Decides to remain seized of the matter. (OP50 of UNSCR 2321)
Now, the designations.
Travel Ban/Asset Freeze (Individuals)
1. CHOE CHUN YONG
a. Description: Representative for Ilsim International Bank, which is affiliated with the DPRK military and has a close relationship with the Korea Kwangson Banking Corporation. Ilsim International Bank has attempted to evade United Nations sanctions.
b. A.K.A.: Ch’oe Ch’un-yo’ng
c. Identifiers: Nationality: DPRK; Passport no.: 654410078; Gender: male
With respect to each of these guys, I can only ask: are their designated successors in Beijing yet?
2. HAN JANG SU
a. Description: Chief Representative of the Foreign Trade Bank.
b. A.K.A.: Chang-Su Han
c. Identifiers: DOB: November 08, 1969; POB: Pyongyang, DPRK; Nationality: DPRK; Passport no.: 745420176, expires on October 19, 2020; Gender: male
3. JANG SONG CHOL
a. Description: Jang Song Chol is a Korea Mining Development Corporation (KOMID) representative overseas.
b. AKA: n/a
c. Identifiers: DOB: 12 March 1967; Nationality: DPRK
4. JANG SUNG NAM
a. Description: Chief of an overseas Tangun Trading Corporation branch, which is primarily responsible for the procurement of commodities and technologies to support the DPRK’s defense research and development programs.
b. A.K.A.: n/a
c. Identifiers: DOB: July 14, 1970; Nationality: DPRK; Passport no.: 563120368, issued on March 22, 2013; Passport expiration date: March 22, 2018; Gender: male
5. JO CHOL SONG
a. Description: Deputy Representative for the Korea Kwangson Banking Corporation, which provides financial services in support to Tanchon Commercial Bank and Korea Hyoksin Trading, a subordinate entity of Korea Ryonbong General Corporation.
b. A.K.A.: Cho Ch’o’l-so’ng
c. Identifiers: DOB: September 25, 1984; Nationality: DPRK; Passport no.: 654320502, expires on September 16, 2019; Gender: male
6. KANG CHOL SU
a. Description: Official for Korea Ryonbong General Corporation, which specializes in acquisition for the DPRK’s defense industries and support for the DPRK’s military-related overseas sales. Its procurements also likely support the DPRK’s chemical weapons program.
b. A.K.A.: n/a
c. Identifiers: DOB: February 13, 1969; Nationality: DPRK; Passport no.: 472234895
7. KIM MUN CHOL
a. Description: Representative for Korea United Development Bank.
b. A.K.A.: Kim Mun-ch’o’l
c. Identifiers: DOB: March 25, 1957; Nationality: DPRK
8. KIM NAM UNG
a. Description: Representative for Ilsim International Bank, which is affiliated with the DPRK military and has a close relationship with the Korea Kwangson Banking Corporation. Ilsim International Bank has attempted to evade United Nations sanctions.
b. A.K.A.: n/a
c. Identifiers: Nationality: DPRK; Passport no.: 654110043
9. PAK IL KYU
a. Description: Official for Korea Ryonbong General Corporation, which specializes in acquisition for DPRK’s defense industries and support to Pyongyang’s military-related sales. Its procurements also likely support the DPRK’s chemical weapons program.
b. A.K.A.: Pak Il-Gyu
c. Identifiers: Nationality: DPRK; Passport no.: 563120235; Gender: male
List Update for Aliases:
• JANG BOM SU (KPi.016) – New AKA: Jang Hyon U with date of birth 22 February 1958 and diplomatic passport number 836110034, which expires on 1 January 2020.
• JON MYONG GUK (KPi.018) – New AKA: Jon Yong Sang with date of birth 25 August 1976 and diplomatic passport number 836110035, which expires on 1 January 2020.
Asset Freeze (Entities)
1. FOREIGN TRADE BANK (FTB)
a. Description: Foreign Trade Bank is a state-owned bank and acts as the DPRK’s primary foreign exchange bank and has provided key financial support to the Korea Kwangson Banking Corporation.
b. AKA: n/a
c. Location: FTB Building, Jungsong-dong, Central District, Pyongyang, DPRK
Now we’re talking.
2. KOREAN NATIONAL INSURANCE COMPANY (KNIC)
a. Description: The Korean National Insurance Company is a DPRK financial and insurance company and is affiliated with Office 39.
b. AKA: Korea Foreign Insurance Company
c. Location: Central District, Pyongyang, DPRK
Another good one, though the failure to designate the Korean Shipowners’ Protection and Indemnity Association, which insured the Chong Chon Gang, seems like an oversight.
3. KORYO CREDIT DEVELOPMENT BANK
a. Description: Koryo Credit Development Bank operates in the financial services industry in the DPRK’s economy.
b. AKA: Daesong Credit Development Bank; Koryo Global Credit Bank; Koryo Global Trust Bank
c. Location: Pyongyang, DPRK
4. MANSUDAE OVERSEAS PROJECT GROUP OF COMPANIES
a. Description: Mansudae Overseas Project Group of Companies engaged in, facilitated, or was responsible for the exportation of workers from the DPRK to other nations for construction-related activities including for statues and monuments to generate revenue for the Government of the DPRK or the Workers’ Party of Korea. The Mansudae Overseas Project Group of Companies has been reported to conduct business in countries in Africa and Southeast Asia including Algeria, Angola, Botswana, Benin, Cambodia, Chad, the Democratic Republic of the Congo, Equatorial Guinea, Malaysia, Mozambique, Madagascar, Namibia, Syria, Togo, and Zimbabwe.
b. AKA: Mansudae Art Studio
c. Location: Pyongyang, DPRK
In theory, African dictators will have to build their own big, ugly statues now. Recall that UNSCR 2321 banned the export of statues. But … no Air Koryo? Really? I guess we’ll have to wait for the nuke test for that one.
These sanctions could be damaging — if member states enforce them. The sanctions in UNSCR 2270 should have been more damaging than they were, but China violated them and, until very recently, got away with it. Getting other member states to enforce the sanctions will require the President to use the authorities Congress has given him in the NKSPEA and the KIMS Act. A truly effective policy will require a whole-of-government approach: the State Department will have to lobby foreign governments, the Treasury and Justice Departments must be prepared to sanction violators, and the Homeland Security Department must step up the screening of cargo from ports that don’t inspect North Korean cargo.
Finally, the administration must speak coherently about sanctions, diplomacy, human rights, the proper role of engagement, what happens if diplomacy fails, and how to reunify Korea peacefully (or, as peacefully as possible). So far, I’ve seen some encouraging steps on sanctions enforcement, but not the coherent whole-of-government effort we’ll need.
~ ~ ~
The question most people are asking now is, “Will things be any different this time?” There’s one reason to think that they just might be. No, this isn’t the first sanctions resolution that might have done serious harm to Pyongyang’s palace economy if it had been enforced, but as I’ve said before, U.N. sanctions don’t enforce themselves. All the U.N. can really do is pass new resolutions and issue the occasional Panel of Experts report. (The Panel, which had previously issued its reports annually, will now start issuing them bi-annually. Its first mid-term new report should be coming out in the new few days. Expect it to be bleak about enforcement and compliance efforts so far, but it will also call out more cheaters and concentrate the attention of the FBI, the Treasury Department, and the Justice Department on them.)
Persuading governments and companies that want to trade with Pyongyang to stop doing so sometimes requires either an inducement or a threat. Yun Byung-Se was skilled at the use of inducements, particularly in Africa, but with Moon Jae-In in office, the U.S. has probably lost Seoul as a valuable diplomatic ally against Pyongyang.
The Trump administration has recently become more willing to use threats. It hasn’t talked about it much yet, but the Treasury and Justice Departments have begun to seize and forfeit the funds of the trading companies that broker Pyongyang’s coal exports to China. It has also zapped one Chinese bank that was involved in laundering money for North Korea, and fired a shot across the bow of the correspondent banks that carelessly clear those transactions through our financial system. As the Justice Department noted last September, Pyongyang has tried to switch to non-dollar currencies, but without much success. Sellers prefer dollars. Now, for the first time, the U.S. has made a credible threat to banks and trading companies that facilitate Pyongyang’s coal exports.
As for those who might be tempted to accept China’s view that Pyongyang’s coal exports were for “humanitarian” purposes, a new story by the Washington Post’s Peter Whoriskey cites the Justice Department filings I refer to in the preceding paragraphs to debunk that cynical lie (as I characterize it in the article, which quotes me):
Documents from a recently unsealed U.S. court filing, combined with another federal case, suggest that much of the money China has paid to North Korea for coal over the years went toward the country’s weapons and military efforts.
The coal trade cited in the court documents, which has accounted for as much as a third of North Korean exports, helps explain how North Korea continued to develop its weapons programs despite being impoverished and under trade sanctions. The connections to the military also undermine Chinese claims that their imports were benefiting North Korean civilians.
“We considered that to be a very narrow [humanitarian] exception, but it soon became clear that not all others shared our view,” a State Department spokesperson said before the vote.
In the most recent court filing, unsealed last month, U.S. government attorneys were granted a seizure warrant against the largest Chinese importer of North Korean coal and four related front companies after presenting evidence that the Chinese company’s transactions with North Korea were “ultimately benefiting sanctioned North Korean end users, including North Korea military and North Korea weapons programs.”
The documents cite a defector, deemed “reliable,” who said that the vast majority of the revenue from the country’s coal exports go toward the military, nuclear missiles and weapons programs.
Those disclosures followed a court case filed in September in which federal attorneys cited a spreadsheet showing a major Chinese coal importer making purchases from various North Korean government agencies.
The Chinese importer was also purchasing from a North Korean company controlled by a secretive government branch believed to be conducting illicit activities and slush funds for political leaders. [WaPo, Peter Whoriskey]
It’s always refreshing to see journalists find, read, and cite primary sources rather than call up the same familiar “experts” who may not know anything about sanctions or even about North Korea, but who can be relied on to validate their own opinions. Read the whole thing.
Regular readers know by now how many keystrokes I’ve spent at this site and in print in various places citing the evidence that sanctions against North Korea were largely a sham until last year, and could work if we enforced them in earnest. Still, the editors of the Washington Post ask a question that even the most strident sanctions advocate must consider:
ONE SCHOOL of North Korea experts has been arguing for some time that sanctions will never induce the isolated regime of Kim Jong Un to give up its nuclear weapons nor its race to develop intercontinental ballistic missiles that could carry them to the United States. A good answer is that while they might be right, sanctions are still the best available option — and unlike others, such as negotiations with the regime, they have never been given a robust try. Fortunately, that may be about to change.
I’d go the editors one better. The actions the Justice and Treasury departments began taking earlier this month are the kind of actions what will be necessary to break the link between North Korea and the financial system. We have yet to see the administration begin to impose the kinds of heavy penalties against larger, more connected banks that the Obama administration applied to banks like BNP Paribas in the Iran context, but DOJ has followed the money trail to the correspondent banks, which must be nervous about their compliance by now. There are hints that more is to come.
After waiting in vain for China to apply serious pressure to the Pyongyang regime following President Trump’s first meeting with Xi Jinping, the administration is readying sanctions against a number of Chinese companies and banks that do business with North Korea, a senior administration official said this week. A sanctions bill on its way through Congress mandates additional steps against North Korean shipping, countries that evade U.N. sanctions and those that employ the slave laborers whom the regime exports to other countries. Still-tougher measures are in a pending Senate bill developed by Maryland Democrat Chris Van Hollen.
Clearly, sanctions would work far better with Chinese enforcement than without. There is much the U.S. can do without Beijing’s cooperation to shut down Pyongyang’s finance. The new tools in the KIMS Act could vastly raise the pressure on its shipping, on shipping registries, insurers, and ports that fail to inspect North Korean cargo as UNSCR 2270 and 2321 require. There is much less we can do about what crosses the land border, however, and all of the evidence suggests that China isn’t simply negligent in its non-enforcement of sanctions against Pyongyang, but willfully weaponizing it.
If the administration aggressively and consistently exploits the new authorities — an open question, given the endless chaos in the White House and gaping personnel holes at the State Department — it might be able, over time, to cut off a substantial part of the flows of hard currency that last year allowed North Korea to increase its trade by nearly 5 percent and that financed $1.7 billion in imports from China in the first half of 2017.
Internationally, there are some encouraging signs that the Trump administration has undertaken and prioritized a campaign of diplomacy to break Pyongyang’s economic lifelines from countries other than China (breaking these links would increasingly isolate Bejing as an enabler of Pyongyang). The problem is that all of this will take time, and here, I think, is where the news is bleak:
The problem is a lack of time. Even successful sanctions campaigns, including that which induced Iran to bargain over its nuclear program, can take years to produce results — and the time North Korea may need to acquire the ability to threaten a nuclear attack on the U.S. homeland appears to be rapidly shrinking. The Post reported Tuesday that U.S. intelligence agencies have concluded the Kim regime could produce a missile that could reach the U.S. homeland with an atomic warhead in a year, years faster than previously estimated. On Friday, the regime carried out a new test of what appeared to be a long-range ICBM, the second this month.
That is to say, sanctions typically take years to work, and President Trump’s predecessors wasted years that we no longer have. I think sanctions can work, and no evidence I’ve seen disturbs that belief yet, but there is no such thing as guaranteed success for any strategy, which means that every Plan A needs a Plan B, a Plan C, and a Plan D.
Not surprisingly, both the administration and outside experts are debating other options. CIA Director Mike Pompeo recently hinted at a strategy to “separate” the Kim regime from its weapons. If that means regime change, it would require far greater cooperation from a Chinese government that so far has been unwilling to seriously pressure its neighbor.
Here is the first point the Post makes with which I’ll express mild disagreement. But for all the reasons I explained here and here, there is no stable coexistence with a nuclear North Korea. The more Pyongyang perfects its nuclear arsenal, the more risks it will feel free to take, the more it will threaten our core interests, and the more likely war becomes. Brian Myers also argues what’s increasingly difficult to deny — Pyongyang says it seeks to reunify Korea under its control, it acts accordingly, and ultimately, it cannot survive as the poorer Korea. It means to use a nuclear arsenal to extort Seoul into disarmament and capitulation.
Some analysts suggest the United States should take up a Russian-Chinese proposal for a freeze on North Korean missile and nuclear tests in exchange for a halt to U.S.-South Korean military exercises. But history shows that any North Korean commitment to a freeze would be temporary and unreliable, while Washington’s agreement to the deal could introduce a permanent crack into its alliance with South Korea.
Here in America, some of us still fantasize about a deal Pyongyang says it doesn’t want and has no incentive to take. But the only talks Pyongyang is interested in now amount to a “peace process” to secure the lifting of sanctions, the unilateral disarmament of Seoul, the withdrawal of U.S. forces, and the assertion of de facto editorial and political control over South Korean society.
One helpful proposal comes from the State Department’s former human rights chief, Tom Malinowski, who wrote in a Politico essay that the United States should ramp up efforts to provide the North Korean people with information, including about the far freer and more prosperous lives of South Koreans. Political change in North Korea forced by its own citizens, he says, is more likely than denuclearization by the current regime. That clear-eyed but ultimately hopeful forecast strikes us as sensible.
As I discussed here. What the editors are effectively saying is that if Pyongyang won’t disarm diplomatically, our next-best option may be to induce the overthrow of the North Korean government. That’s right, and furthermore, it’s a threat to bring the one thing to China’s borders that Beijing fears more than anything else — instability. The advantage of this is that if the U.S. demonstrates a capacity to induce instability in North Korea, China will realize that its choices come down to a controlled demolition of the Kim Dynasty, an outbreak of violence and anarchy along its border, or wading into a messy counterinsurgency that will sap domestic political support for Xi Jinping’s rule. Beijing has been perfectly willing to support Pyongyang in threatening core American security interests. Why must we restrain ourselves from threatening Beijing’s interests in that case? Isn’t threatening the interests of hostile powers what deterrence is ultimately about?
We’ve now wasted decades on the fool’s errand of appeasing Pyongyang, and our chances of disarming it voluntarily, which are already low, diminish with each missile or nuclear test. The best outcome we can hope for now is that a coup d’etat removes His Porcine Majesty from the picture and devolves power to men who are willing to negotiate a grand bargain with us. For that bargain to achieve a real and lasting peace, it involves not only nuclear disarmament, the dismantlement of other WMD programs, and the removal of North Korean artillery from within 50 miles of the DMZ, but also fundamental humanitarian reforms without which verification of disarmament will never be possible. And, although there may be a brief transitional period for Pyongyang to remain a distinct political entity as it reforms gradually, in the end, the Korean crisis will only end when the Korean people themselves decide the time and manner for becoming a nation once again.