18 results found.
18 results found.
Because I’ve already given too many minutes of my life to the moveable farce named Dennis Rodman, I’m devoting today’s post to something more consequential: the Center for Advanced Defense Studies’s new report exposing more North Korean financial networks in China, and dispelling the misinformation that North Korea is isolated from the financial system and thus sanctions-proof. (Full disclosure: I advised C4ADS on the drafting of the report, without compensation of course.) Money quote:
The continuing misperceptions of North Korea as the “Hermit Kingdom” or “the most sanctioned country in the world,” are fueling the narrative behind the narrowing of non-military options on the Korean peninsula. In truth, the North Korean regime, far from being isolated, is globally active throsugh its overseas networks. The impact of these misperceptions is considerable, most notably in the false belief that sanctions cannot succeed on a “closed” country like North Korea.
Following on last September’s exposé on Dandong Hongxiang, C4ADS sifted through public databases, shipping registries, and business records to widen its focus and try to find the extent of North Korea’s financial network in China. From this, C4ADS found, contrary to a lot of widely disseminated misinformation, that North Korea’s network is centralized, limited, and vulnerable to detection and sanctions:
Centralized. For example, C4ADS dug further into the role of Dandong Hongxiang and found it to be highly centralized around key nodes. It also exposed two more networks that were similarly centralized. In one case, C4ADS started with the seizure of the M/V Jie Shun at the southern entrance to the Suez Canal with a record haul of North Korean weapons (mostly PG-7 anti-tank rockets) aboard, which I figure were probably bound for Syria. Starting from the findings of the UN Panel of Experts (see paragraphs 61 through 71), C4ADS worked backward through shipping registries and corporate records and identified the holder of the Jie Shun’s compliance document as a Chinese national named Fan Mintian. Fan runs a company called V-Star Ships.
Fan and V-Star have been operating openly in China, helping North Korea evade shipping sanctions for at least four years. V-Ships did (much? all?) of its business through the dollar system, clearing its payments through the United States. Sadly, C4ADS doesn’t identify the author of the “please do not send us any instructions” email, which sounds like the kind of thing the FBI and the Justice Department may find worthy of further investigation, to say the least.
In another case, Wells Fargo was the correspondent bank, and its compliance officers were alert and on the job, and refused to process V-Star’s transactions. People may praise bankers even less than they praise lawyers, but here’s to Wells Fargo, for taking its compliance obligations seriously and refusing to launder money for North Korea.
Yet another major Chinese network, Dandong Zhicheng Metallic Material Inc. (DZMM) may be an even more important node for Pyongyang than Dandong Hongxiang. DZMM buys coal from North Korea.
Three North Korean companies are currently designated by the Treasury Department: Daewon Industries (a part of Pyongyang’s military-industrial complex, designated in December), Kangbong Trading Company (same), and Paeksol Trading Corporation (controlled by the Reconnaissance General Bureau, designated in March). If DZMM willfully engaged in dollar transactions with any of those companies after their respective designations — and I stress that I don’t see proof of all of these elements from C4ADS’s report alone — that could constitute any of several federal felonies: violation of the International Emergency Economic Powers Act, money laundering under 18 U.S.C. 1956(a)(2), or conspiracy to commit either of the aforementioned under 18 U.S.C. 371. Even if you don’t arrest a single suspect, the Justice Department can bankrupt those networks by blocking their funds as they move through the financial system and forfeiting them.
Limited. C4ADS found that just 5,233 companies are involved in bilateral trade between China and North Korea, with the top ten companies controlling about 30 percent of it. If 5,233 sounds like a lot, last year, there were 67,163 Chinese companies exporting to South Korea. The concentration of wealth in the hands of a few state-controlled companies is consistent with Pyongyang’s centralized and controlling ways of running everything else. Even then, further research revealed that many of these companies were interconnected:
That means knocking over a few major networks could collapse much of the system that sustains His Porcine Majesty’s rule. C4ADS’s report even lays those connections out in charts.
And yet again, as with Ma Xiaohong, the person running a North Korean trade network turns out to be a member of the Chinese Communist Party. Arguably, our third attribute should be “inculpatory,” but it isn’t.
Vulnerable. Regular readers of the U.N. Panel’s reports will find North Korea’s methods of concealing its network aren’t qualitatively different than those used by terrorists, narco-traffickers, or other rogue regimes to launder money and evade sanctions; hence, the limiting reagents in U.S. sanctions enforcement are primarily political will and resources (cops, intelligence analysts, and lawyers). Contrary to widely-held assumptions, the networks are detectable.
The report goes on to note that because of “these networks’ reliance on the licit systems of finance, trade, and transportation … they leave behind a digital trail within public records, and other data sources, and are acutely vulnerable to targeted sanctions.” They also leave money trails. C4ADS’s conclusions reinforce what the U.N. Panel of Experts and the Justice Department have already established — that North Korea’s networks continue to launder their money through the dollar system. That’s a critical vulnerability that no U.S. president has yet had the political will to exploit.
The last time C4ADS published a report, Treasury designations, an indictment, and a civil forfeiture complaint soon followed. Which doesn’t sound imminent this time, judging by this Wall Street Journal report covering the C4ADS report. It suggests that the Trump administration is still in the bargaining stage with Beijing, asking it to curtail the activities of Chinese companies, run by party members, that are knowingly violating U.N. sanctions.
The Trump administration has asked Beijing to take action against nearly 10 Chinese companies and individuals to curb their trading with North Korea, according to senior U.S. officials, as part of a strategy to decapitate the key networks that support Pyongyang’s nuclear-weapons program.
Although there is no firm deadline, the U.S. has indicated the Treasury Department could impose unilateral sanctions on some of these entities before the end of the summer if Beijing doesn’t act, the U.S. officials said. [WSJ, Jay Solomon]
While you’re at it, don’t miss Solomon’s other recent report on another North Korean network in China, which I didn’t have time to blog about when it came out.
So as with the Obama administration, we’re back to asking Bejing to enforce sanctions it has spent the last ten years willfully violating. That similarity must owe a great deal to the fact that Trump can’t get key appointees in place to execute a policy that resembles his tough talk. For all the talk of sabotage by the “deep state,” the effect of slow appointments is that the administration ends up abdicating a lot of policy decisions to holdovers and similarly disposed career civil servants. In any event, let no one say that sanctions against North Korea can’t work, if we ever muster the will to use them.
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Update: At the Washington Post, Anna Fifield adds:
Targeting just a few pivotal Chinese companies could severely disrupt North Korea’s ability to circumvent international sanctions and buy illicit goods — and could even cause its entire overseas network to collapse, according to a report out Tuesday.
The new report, by Washington-based research group C4ADS, lays out multiple ways for Beijing to cut off North Korea’s trading routes to the outside world, if it wanted to. It also found a Chinese citizen who was conducting large amounts of trade with North Korea while serving as president of a company in the United States — a status that would allow him to open bank accounts and send or receive shipments.
“By being centralized, limited and ultimately vulnerable North Korean overseas networks are, by their nature, ripe for disruption,” C4ADS researchers wrote in the report, titled “Risky Business.”
There is still plenty more to be done, C4ADS writes. “Although to date economic coercion has been ineffective in persuading North Korea to abandon its pursuit of nuclear weapons, this does not mean it cannot work,” the researchers say.
On the contrary, targeting key companies could cripple multiple networks across multiple countries simultaneously, they write, because so many of these firms are intertwined.
The C4ADS researchers said focusing on these kinds of logistical “chokepoints” could cut off North Korea’s centralized, global system of illicit finance.
For example, the Dandong Hongxiang Industrial Development Co., which was sanctioned by the U.S. Treasury Department last year — sending a sudden chill through the border city that acts as North Korea’s main commercial gateway to the outside world — is one of 18 companies that make up the Liaoning Hongxiang Group. This suggests the potential for an indirect effect if one company is stopped from helping North Korea, perhaps disrupting numerous other linked companies.
“Based on what we’re seeing in the data in terms of the reach and scope of these networks and the limited nature of the system that they live in, and the contamination with illicit activity, there is inherent value to enforcement actions,” said David Thompson, a senior analyst at C4ADS. [WaPo, Anna Fifield]
See also this Washington Post editorial, citing the C4ADS report.
Several news sources are reporting that Chinese banks, particularly in China’s northeast, have started to freeze or close accounts held by North Korean individuals and businesses. The Daily NK, citing unnamed local sources, was the first to report this potentially important development. It says both large state-owned banks (such as the China Construction Bank) and regional banks (such as Pudong Bank) recently banned all North Koreans from opening new accounts and ordered the closure of existing accounts. It also quotes a March 2017 report by Radio Free Asia that “[p]rivate Chinese banks are beginning to close bank accounts held by North Korean nationals” and that “North Korean laborers earning foreign currency in China have been issued an emergency alert.”
Kyodo News, citing “sources familiar with the situation,” says that the new measures have made it “nearly impossible to do business between the two countries.” It reports that the Bank of China, the China Construction Bank, and the Agricultural Bank of China branches in Yanji, have all banned North Koreans from opening accounts. The banks have not yet frozen the accounts, meaning that the North Koreans can still withdraw cash, but they can’t make deposits or remittances. According to an unnamed employee of one of the banks, “This is being influenced by international sanctions against North Korea.”
Kyodo speculates that either “China may have become more serious about curbing its nuclear ambitions,” or that the measures were “intended to help major Chinese banks avoid being hit by sanctions imposed by the United States and other countries,” like the Bank of Dandong was. Interestingly, it also attributes a 75 percent decline in North Korea’s imports of refined petroleum products over three months, and a corresponding rise in fuel prices inside North Korea, to the fact that “North Koreans were having difficulty paying for petroleum product imports because of the banking restrictions.”
Reuters, citing a bank teller in Liaoning, reports that the China Construction Bank “completely prohibited business with North Korea” starting on August 28th. A customer service representative for the Industrial and Commercial Bank of China also told Reuters that the bank “had stopped opening accounts for North Koreans” and (for good measure) Iranians on July 16th, but didn’t explain further. Those dates closely follow a series of forfeiture complaints, seizures, and designations by the Justice and Treasury Departments, most of them targeting financial flows through Chinese banks, involving North Korean front companies, which turn out to be less well hidden than many “experts” had assumed.
The Bank of China, which became a bête noire for Congress much earlier than other Chinese banks over revelations that its Singapore branch willfully helped Chinpo Shipping facilitate money laundering (and indirectly, arms smuggling) for His Porcine Majesty, stopped allowing North Koreans to open accounts at the end of last year. Or so says an unnamed teller at the BoC’s Dandong branch, who adds that the BoC also froze existing North Korean accounts. A teller at the Agricultural Bank of China branch in Dandong also said that BoC was refusing to open new accounts for North Koreans.
The Financial Times also reports that “multiple bank branches,” including those of China’s big five banks, “had imposed a freeze on new accounts” for North Korean individuals and companies, and that some of the banks were also “cleaning out” existing North Korean accounts and banning North Koreans from making new deposits. Officials at all of the banks refused to comment.
Both the FT and the Daily NK note that the banks’ new measures exceed what new U.N. sanctions require, but all of the reports fail to note that these actions would be completely consistent with stricter U.S. financial regulation on North Korean money laundering, along with the aforementioned recent actions by the Treasury and Justice departments, showing that the feds can trace North Korean transactions through specific Chinese banks — including those named in these reports — and are willing to take legal action against them. Some sources told the FT that corporate told them to freeze North Korean accounts in August; others said they were told in January.
Unfortunately, the Daily NK reports that North Koreans affected include not only “consular officials” and state trading companies, but also “laborers,” who may be either illegal (and increasingly scarce) migrant workers or state-contracted slave laborers (the report didn’t specify). Either way, that’s an unfortunate and unavoidable consequence of what would be an extremely important development — if it lasts. The FT quotes a Chinese professor of North Korea studies, who puts a brave face on the actions, saying that the actions benefit China, and that “China takes sanctions very seriously.” Stop laughing, dammit — this is a serious, adult conversation about banking regulation.
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The FT calls this “unprecedented,” but it really isn’t (of the five news sources I cite here, only the Daily NK gets this). There is, of course, the example of Banco Delta Asia and what we too easily forget — the Bush administration’s global campaign of financial diplomacy that persuaded banks around the world to close North Korean accounts. We now know that that strategy put Kim Jong-Il’s regime under severe financial strain, until Bush lost his nerve, lifted the pressure, and exchanged invaluable sanctions relief for a handful of worthless North Korean promises.
Then, in 2013, after Pyongyang’s third nuclear test, after Treasury sanctioned the DPRK Foreign Trade Bank, and after Ed Royce first introduced the bill that would later become the NKSPEA, which mandates secondary sanctions, big Chinese banks began to freeze and close North Korean accounts. It didn’t last, because the banks soon saw that Xi Jinping wanted those accounts open more than Barack Obama wanted them closed. The same pattern repeated itself in early 2016, and again (as Justice Department filings later showed) it was right back to business as usual a few month later, again because the Obama administration wasn’t willing to back its sanctions with enforcement actions.
Is this time any different? The answer depends on why the banks are doing this. As noted, what the banks are doing here doesn’t exactly align with what the U.N. resolutions require, but it aligns perfectly with what I’d expect inexperienced Chinese compliance officers to do to protect their banks from rising legal risks under U.S. banking and sanctions laws. In this post, I explained the importance of distinguishing the interests and actions of the Chinese government from those of individual Chinese banks, which are actually global corporations with global exposure. In other words, “Chinese” banks may be bending to Treasury’s will for the same basic reason that U.S. tech companies have collaborated with Chinese censors. My belief that the Chinese security establishment is fundamentally hostile to U.S. interests and thus willfully weaponizing North Korea remains unmoved. On balance, it seems more likely that the banks are doing this to protect their own reputations, credit ratings, and share prices — just as the Chinese Finance Ministry wants them to, and just as the Defense and Foreign ministries don’t.
Also, when is the last time an American Secretary of the Treasury said anything like this?
“If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system — and that’s quite meaningful,” Mnuchin said during an event at CNBC’s Delivering Alpha conference in New York on Tuesday. [….]
“North Korea economic warfare works,” Mnuchin said. “We sent a message that anybody that wanted to trade with North Korea — we would consider them not trading with us.” [Bloomberg]
Next, read this excerpt from the written testimony of Assistant Secretary of the Treasury Marshall Billingslea before the House Foreign Affairs Committee yesterday. Billingslea first explains that Treasury works closely with U.S. allies, the intelligence community, and the State Department to “conduct detailed forensic investigation and analysis” to “deny North Korea its current, principal source of funds.” He goes on to say that while we prefer to have Beijing’s voluntary cooperation, we’re also perfectly willing to hit Chinese targets we don’t get it.
For instance, on August 22, we struck at the heart of North Korea’s illegal coal trade with China. Treasury designated 16 individuals and entities, including three Chinese companies that are among the largest importers of North Korean coal. We estimate that collectively these companies were responsible for importing nearly half a billion dollars’ worth of North Korean coal between 2013 and 2016. These funds are used to support the Government of North Korea and the Workers’ Party of Korea, including its nuclear and ballistic missile programs. On top of that, we know that some of these companies were also buying luxury items and sending an array of products back to the North Korean regime. On August 22 we sent two clear messages. The first was to North Korea: we intend to deny the regime its last remaining sources of revenue, unless and until it reverses course and denuclearizes. The second message was to China. We are capable of tracking North Korea’s trade in banned goods, such as coal, despite elaborate evasion schemes, and we will act even if the Chinese government will not. [….]
China is even more central to a successful resolution of the crisis caused by Kim Jong-Un. China accounts for at least 90 percent of North Korea’s exports. North Korea is overwhelmingly dependent upon China for both trade and access to the international financial system. China’s full and effective enforcement of UN sanctions is therefore essential. Unfortunately, I cannot assure the Committee today that we have seen sufficient evidence of China’s willingness to truly shut down North Korean revenue flows, expunge the North Korean illicit actors from its banking system, and expel the North Korean middlemen and brokers who are establishing webs of front companies. We will continue to work with the Chinese to maximize economic pressure on North Korea, but we will not hesitate to act unilaterally. If China wishes to avoid future measures, such as those imposed on Bank of Dandong or the various companies sanctioned for illegal trade practices, then it urgently needs to take demonstrable public steps to eliminate North Korea’s trade and financial access. [Treasury Dep’t]
Then, watch his testimony on video.
Mr. Billingslea shows great promise. Let’s hope we have the next Stuart Levey or Juan Zarate on our hands, because we’ve never needed one more than we do now.
Of course, it’s The Boss, House Foreign Affairs Committee Chairman Ed Royce, who has been pushing for this strategy for years. Two laws, one presidential election, and three nuclear tests later, Royce looks to have finally gotten his way. Speaking at a hearing of his Committee yesterday, Royce called on the feds to “target major Chinese banks, including Agricultural Bank of China Ltd. and China Merchants Bank Co., for aiding Kim’s regime.” Royce was referring to a letter he sent to Mnuchin listing some of the banks that keep showing up in Justice Department indictments, forfeiture complaints, and seizure warrants as having effectively provided sanctioned North Korean banks with indirect correspondent account services in violation of this Treasury Department regulation, and asked the Treasury Department to sanction them.
Personally, I don’t expect Treasury to do anything as blunt or binary as a total asset freeze or a 311 action to most of those banks (on that point, Billingslea told the Committee that the 311 action on the Bank of Dandong had “a very clear effect” on its operations, but didn’t elaborate). Instead, I expect Treasury to start auditing the big banks and their correspondents for compliance with its new North Korea-specific regulation, with an eye toward civil penalties and fines like those imposed against European banks that skimped or cheated on anti-money laundering compliance on behalf of Iran and other sanctioned countries. Those fines often amounted to hundreds of millions of dollars (or, in the case of BNP Paribas, $9 billion). There may be such a thing as “too big to fail,” but there is no such thing as “too big to fine.”
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The Daily NK reports that small traders are already adapting to the new measures by going to a cash-based business model. Reporters are fond of saying that Pyongyang can easily evade financial sanctions by carrying around briefcases full of cash, but that’s mistaken on several levels. First, a typical briefcase only holds just over $2 million, which is enough to fuel the sort of cross-border trade in food and consumers goods that we shouldn’t want to stop, but hardly an efficient way for a Syrian arms client or Burmese middleman to pay a KOMID dealer for a shipment of machine tools or vacuum dryers. Needless to say, it’s not nearly enough to feed a million-man army or sustain an entire government. After all, China may not really care about policing bulk cash smuggling — notwithstanding its occasional, short-lived pretenses to the contrary — but countries like Bangladesh and Sri Lanka do.
That is to say, one potential outcome of these restrictions could be to break up larger, regime-controlled trading blocs in favor of smaller traders whose wares are more likely to end up in the homes and bellies of the poor. That would be a largely positive development. Our goal should not be a complete embargo of North Korea, which is why I was actually relieved that the U.N. didn’t impose a total fuel ban in its latest sanctions resolution. Our goals ought to be to expose and destroy Pyongyang’s state-controlled overseas trading networks, to freeze its cash reserves (which sit in Chinese banks, and which Pyongyang may be depleting rapidly), to de-fund its military and security forces to give the North Korean people a little breathing space and freedom from fear, and to create the “death spiral” that will cause money launderers who can’t make their kick-up payments to defect and bring us yet more valuable financial intelligence, which will help us find and freeze yet more assets.
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.
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Update: C4ADS writes in to say that the update was delayed, and will be released in a few days.
All of those provisions mirror U.N. sanctions from UNSCRs 2270 and 2321. This is implementing legislation of the kind that our diplomats are currently asking their counterparts in dozens of other countries to enact and enforce. Section 311 also authorizes discretionary sanctions against anyone who —
Some of those provisions (the coal cap) mirror U.N. sanctions, while others (food and textile exports) go beyond them. Other key provisions:
Most of the media attention is now on whether the President will veto the bill because of the Russia sanctions, but given the veto-proof margins by which it passed, it will probably become law sooner or later.
Before the Senate voted, there was also briefly a threat by Senator Corker to strip the North Korea sanctions out of the bill. Other than my own speculation, which I’ll keep to myself, I really don’t understand how the most popular part of this bill ended up becoming its most controversial part. I can’t credit the notion that “[n]ot a word of the North Korea bill” that the House passed by an overwhelming margin on May 4th “has been looked at” on the Senate side. It was also suggested that the Senate wanted a stronger bill, with resolution-of-disapproval language limiting the President’s authority to lift sanctions without Congress’s consent. But Congress previously wrote strict presidential certification conditions into the NKSPEA, and resolution-of-disapproval language may also be an unconstitutional legislative veto that would not be enforceable, and consequently, not worth fighting about. The only winners of an intra-partisan, inter-cameral fight are America’s enemies.
To the extent that the Senate would also like the House to vote on more of its legislation, that’s a perfectly reasonable request. For example, I hope (and believe) that the House will offer its strong support when Senator Van Hollen and Senator Toomey’s bipartisan BRINK Act comes up for a vote. The BRINK Act is easily the equal of either the NKSPEA or the KIMS Act in its toughness and sophistication, and I’m surprised that it hasn’t attracted the media attention it merits.
But it’s in the areas of human rights and freedom of information where the leadership of the Senate Foreign Relations Committee is now needed most. It will have another opportunity to set the agenda when the North Korea Human Rights Reauthorization Act comes up for a vote this year. A House version of that reauthorization finally made it through committee markup yesterday and now heads for the full House floor. If the Senate amends the House’s bill to add language similar to former Congressman Salmon’s DPRK Act, calling for the administration to step up its information operations in North Korea, I’m absolutely confident that the House would support it.
So, despite this near miss, there is good news in yesterday’s vote. Just as Congress built the legislative framework for Iran sanctions in several layers, it has now added a second layer to its North Korea sanctions, identifying and closing off Pyongyang’s sources of hard currency, loophole by loophole. The third layer, the BRINK Act, is ready when Congress is. So for all the talk of North Korean money launderers’ indefatigable cunning, swiftness, and flexibility, Congress has (however improbably) shown that it can act in a bipartisan way with even greater speed, sophistication, and adaptability than Pyongyang. The greater shock to Pyongyang may be that small knots of sophisticated amateurs and investigative journalists have exposed much of its money laundering network. It is now up to the administration to destroy it.
* For those wondering why new Iran sanctions don’t violate the Joint Comprehensive Plan of Action, take a look at the Treasury Department’s F.A.Q. on this subject. The JCPOA does not affect sanctions on Iran for, among other things, its sponsorship of terrorism, its proliferation, or its support for the Assad regime or the Houthis in Yemen.
As the Trump administration looks to sanctions, including secondary sanctions, to gain the leverage to disarm North Korea, it is natural that North Korea watchers would try to gauge the potential for sanctions to impact Pyongyang’s finances. In a place where predictions of glasnost go to die, it is natural that they would measure what the regime puts on display, like the development of Pyongyang’s skyline. And regrettably, it is natural that any analysis whose research begins and ends with news clippings that are half-wrong or half-read, and that betrays little understanding of the sanctions authorities or how their enforcement has evolved, will be of nearly no predictive value whatsoever.
So it is with this contribution by Henri Féron for 38 North, which suggests that sanctions can’t work in 2017 based on the failure of sanctions that either didn’t exist or weren’t enforced between 2014 and 2016. (An online bio for Féron describes him as a post-doctoral research scholar specializing in Korean language who has previously studied law in China — hardly the best place to gain a useful understanding of what the U.N. resolutions require — but hey, I went to law school in Nebraska and I do this as a hobby, so there’s that.) 38 North summarizes Féron’s argument thusly:
The construction boom in Pyongyang, along with other indicators of improved economic performance such as food production and foreign trade, provide further evidence of the ineffectiveness of current economic sanctions. The North Korean economy appears to be beating sanctions thanks to Chinese aid and trade, as well as the reallocation of conventional defense spending to the civilian economy.
There are several problems with this argument, starting with the fact that there is no general blockade of trade with North Korea and never has been. Féron argues that stable food prices (which have risen sharply recently, but that’s the subject of another post) suggest that sanctions have failed, despite the fact that all U.N. and U.S. sanctions exempt food imports. Féron writes, “[c]omparatively speaking, our most reliable indicators are food production and trade statistics.” I’ll just pause and give you a chance to stop laughing now.
Worse, citing U.N. World Food Program data, he writes, “North Korea is now more or less back to the nutritional self-sufficiency of the 1980s.” But earlier this year, UN aid agencies said that 70 percent of North Koreans were undernourished, and in 2015, they said that 80 percent of North Korean households had “poor” or “borderline” food consumption. The U.N. World Food Program, Food and Agriculture Organization, UNICEF, and the U.N. Development Programme all continue to assist North Korea. Self-sufficiency indeed!
Féron cites the recent decline in defections to imply that Kim Jong-Un’s regime is more popular, but the article he cites correctly notes that this is really a function of increased border security. Féron knocks down a straw-man “narrative of destitution” about Pyongyang, but there is general agreement that Kim Jong-Un has improved material standards of living for Pyongyang’s one percent (though elite defections continue to rise for other reasons). In North Korea, the destitution has always fallen on the victims of a unilateral class war Pyongyang wages against the “expendable” ones in the countryside and the provinces.
~ ~ ~
But Féron’s Exhibit A is Pyongyang’s recent construction boom. At the outset, construction is a dubious metric for the effectiveness of sanctions. There are no U.N. or U.S. sanctions on construction materials or equipment and never have been. As Féron notes, North Korea has plenty of cement (he might have added that it has plenty of sand, gravel and building stone, too). As a Rimjing-gang guerrilla journalist documented in 2015, Pyongyang builds its buildings using army construction laborers working on starvation rations, without modern equipment, and under grossly unsafe working conditions. Pyongyang probably had to import lighting and plumbing fixtures, tiles, and floor coverings, but it probably didn’t need as much foreign capital for its new construction as appearances alone would suggest.
On the outside, the new construction looks great — the sort of “progress” that would look impressive from the window of a train passing a second-rate Chinese factory town. Indeed, the main purpose of this facelift appears to have been to show North Korean elites, potential investors, foreign journalists, and gullible op-ed writers that sanctions can’t stop Kim Jong-Un:
The project is intended to show “the spirit of the DPRK standing up and keeping up with the world, despite all sorts of sanctions and pressure by the U.S. imperialists and their followers,” and “the truth that the DPRK is able to be well-off in its own way and nothing is impossible for it to do,” state-media quoted Kim as saying when he ordered the beginning of construction in March. [CBS]
Still, images can be deceiving — especially in Pyongyang. In December 2015, the “completed” apartments on Mirae Scientists’ Street had no power, no running water, no heat, unfinished interiors, unsafe construction, and broken elevators that made the upper floors of the high-rise apartment buildings uninhabitable (imagine hauling your own water up 30 stories, to think nothing of what you might have to haul back down if the sewage system fails). It’s a similar story at another showpiece, Ryomyong Street (see also).
~ ~ ~
Could other sanctions provisions have applied to showpiece construction projects like Mirae Scientists’ Street and Ryomyong Street? Potentially. For example, there is evidence that other construction projects in Pyongyang, KKG Street and those revealed by this extraordinary new work of investigative journalism by Justin Rohrlich for NK News, had links to Bureau 39. Any dealings with Bureau 39 would be a clear sanctions violation today. Unfortunately, the world has been slow to designate Bureau 39, and even slower to enforce that designation. The U.N. didn’t designate Bureau 39 until March 2016, presumably because China blocked the designation until then. And even then, Treasury (to say nothing of the U.N., or China) would have hesitated to freeze any assets without a clear link between a particular construction project and a designated entity. A competent investigator with access to the right intelligence might find some link between a particular construction project and a sanctioned North Korean entity, but I don’t have that evidence, and Féron certainly doesn’t cite any.
Although much of the money for these building projects probably flowed through correspondent banks in New York, until very recently, U.S. sanctions were a case of trying to dam a river with a tennis net: in 2014, when Ri Jong-Ho was working for Bureau 39 in Dandong, there were just 43 North Korean entities designated (compared to 50 in Belarus and 161 in Zimbabwe) and (critically) no secondary sanctions — again, as I’ve been saying for years. The U.S. Treasury Department first designated Bureau 39 in 2010, five years after Treasury’s final rule about Banco Delta Asia detailed Bureau 39’s laundering of counterfeit currency. Treasury imposed some potentially broad sanctions under Executive Order 13687 in January of 2015, but has hardly used that authority to designate anyone. President Obama (reluctantly) signed the North Korea Sanctions and Policy Enhancement Act in February 2016. A ban on new investment in North Korea only came into effect in March 2016. Before any of the significant sanctions that might have halted it existed, tenants were already moving into Mirae Scientists’ Street. Dozens had probably moved out again.
The same is not true of Ryomong Street, which was only completed in the spring of this year. But as with Mirae Scientists’ Street, it isn’t clear what sanctions this would have violated without further investigation — investigation that no one was doing. I don’t see evidence of a clear link to Bureau 39 or another sanctioned entity in the open sources, and given how badly President Obama under-resourced the investigation of North Korea sanctions violations, he probably didn’t, either.
Simply designating “Bureau 39” by itself is meaningless. Bureau 39 doesn’t hold its bank accounts under “Bureau 39;” it hides them behind the names of front companies, shell companies, and various Chinese trading companies, co-conspirators, and patsies. With sufficient resources and talent, we could expose these companies and agents and freeze their assets. The work of the U.N. Panel of Experts, investigative journalists like Rohrlich and Mailey, and NGOs like C4ADS and Sayari Analytics has shown us how. But ask yourself: doesn’t it seem at all strange to you that the U.N., NGOs, and journalists keep exposing networks that our own government didn’t? If you’re a journalist or a congressional staffer, here’s a question you should ask the Treasury Department: how many full-time investigators and intel analysts are dedicated full-time to investigating North Korea?
If the necessary financing for Ryomyong Street wasn’t already done by 2016, President Obama might have tried to block those transactions as they flowed between Chinese commercial banks and U.S. correspondent banks, but as I’ve discussed ad infinitum here, Obama wasn’t willing to do that, except in one isolated case, well into the eleventh hour of his presidency. I could refer you to all of the pieces I’ve published documenting this policy of passive non-enforcement. I could do even better by citing Anthony Ruggiero’s exhaustively researched testimony for the House Financial Services Committee this week, or Dan De Luce’s real-time coverage of Obama throwing away his last chance to show some spine, or this, by Bill Powell for Newsweek, showing us how China abetted Pyongyang while Obama watched and did nothing:
A one-off case against a big Dandong-based holding company such as DHID is one thing. Beijing apparently didn’t protest too much when the Treasury issued its sanctions, apparently believing that it needs to show at least some willingness to pressure Pyongyang, even at the expense of one of China’s own firms. But several Trump appointees in the national security community are increasingly scathing about the efforts of both the Obama administration and Beijing to hobble Kim’s nukes. “As the North continued to make progress [toward an intercontinental ballistic missile capable of delivering a nuke], the U.S. and the U.N. tightened sanctions, it’s true,” says one Trump official. “But those were sanctions with a big caveat: They didn’t much apply to China, at least when China wanted to ignore them.” Another Trump official says the Obama team was focused on climate change as the key issue in bilateral relations with Beijing—not North Korea. “At no point was the sanctions regime against North Korea as effective as the sanctions were against Iran before they came to the [nuclear negotiating table],” says one senior Trump official, “and that’s almost entirely because of China.” [Newsweek]
President Trump took the Oath of Office in January. Then, he ordered a policy review that took four months, met with Xi Jinping in April, and gave him two more months before tweeting that China wasn’t helping. Around that time, the tenants of Ryomyong Street were first climbing the stairs to their new 50th-story lofts. In July, the Trump administration finally started targeting Pyongyang’s finances in earnest, including its use of Chinese banks to evade U.N. and U.S. sanctions. Even this is only a beginning of what will be necessary to how visible effects on the palace economy, which will likely take at least a year to show.
The lessons being: first, even the best 2017 sanctions can’t stop 2016 construction; second, one cannot measure the effect of sanctions through non-sanctioned commerce; and third, when offering expert analysis on any topic, there’s no substitute for some careful research. Féron is right that sanctions failed to prevent Kim Jong-Un from slapping up a lot of spiffy-looking buildings in Pyongyang, most of which did not immediately fall down. But in the end, that may not tell us much about the potential for aggressively enforced, well-targeted sanctions to present Pyongyang with some very hard choices.
Last fall, as America was consumed by (depending on your state of residence) post-election trauma or celebratory gunplay, China blew past the North Korean coal import caps it had just agreed to at the U.N., and the Obama administration issued what would be some of its final North Korea sanctions designations — of Daewon Industries (a coal exporter subordinate to the North Korean military) and Kangbong Trading Corporation (a coal exporter subordinate to the Munitions Industry Department and involved in the development of North Korea’s ballistic missiles).
At the time, I suggested that the administration might have shown a belated willingness to enforce the coal cap that China would not. A few months later, the Trump administration designated Paeksol Trading Company, a third coal exporter that answers to the Reconnaissance General Bureau, the agency that carries out Pyongyang’s foreign intelligence operations, terrorism, and cyberattacks, and some of its arms smuggling.
The real significance of these three coal designations was not the amount of money that Kangbong, Daewon, and Paeksol might have been laundering through the United States, although Americans tend to underestimate such things. Their real significance is that by designating these three entities, the Justice and Treasury departments were laying down a marker for anyone who was knowingly dealing with them, for violations of the International Emergency Economic Powers Act, money laundering, or conspiracy. What’s that, you say? It doesn’t matter if there’s no one here to arrest? Not to worry. The smarter strategy need not burden the taxpayers with feeding and housing crooked Chinese traders and bankers; it can be even more effective to seize their ill-gotten gains, bankrupt them, terrify other bankers into meeting their due diligence obligations, and depositing said gains into either of two U.S. government forfeiture funds that pay for the cost of other law enforcement operations.
That is to say, I don’t know how Donald Trump will make Mexico pay for the wall, but I do know how he can make the Chinese banks pay for bankrupting Kim Jong-Un.
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By now, it is now clear that Treasury’s designations of the North Korean coal exporters were only the first steps, and that there is substance, strategy, and policy behind the Trump administration’s talk of “maximum pressure.” The first clear sign came last month, when the Justice Department sued to forfeit almost $2 million Mingzheng International Trading Limited laundered for the Foreign Trade Bank of North Korea (FTB). A few weeks later, it cut the Bank of Dandong off from the financial system for laundering money for North Korean arms dealer KOMID and Korea Kwangson Banking Corporation, an FTB subsidiary. (Treasury blocked KKBC and FTB in 2009 and 2013, respectively, making it illegal to do business with them inside the United States, though corrupt trading companies stepped up to help them access the dollar system indirectly, for commissions of up to 25 percent per transaction). We can now see the feds’ emerging strategy taking shape — to bankrupt the Chinese trading companies that fill His Porcine Majesty’s coffers and make them toxic to the entire financial industry.
North Korea’s latest missile test changes the administration’s calculus, said Nicholas Eberstadt, a North Korea security expert at the American Enterprise Institute. He expects the White House to accelerate its sanctions against Chinese firms.
A central aim of the strategy of freezing out a Chinese bank from the U.S. financial system is to chill transactions by other Chinese institutions. Access to U.S. financial markets and the dollar are critical for trade and finance around the globe. But for that effort to be perceived as a credible, said Mr. Eberstadt, the administration will have to list other Chinese banks to instill broader fear.
“If I wanted to send a message, I’d probably send several postcards,” Mr. Eberstadt said.
Analysts and senior officials from two previous administrations say the existing sanctions regime against North Korea have so far been elementary compared with the thicket of actions applied against Iran at the height of the Obama administration’s punitive actions against Tehran. That effort pushed the country into recession and persuaded the country to negotiate, although many foreign-policy experts question the effectiveness of the subsequent deal the U.S. reached with Iran. [WSJ, Ian Talley]
Then, last week, the U.S. District Court for the District of Columbia unsealed this seizure warrant for funds of Dandong Zhicheng Metallic Materials Company that entered eight U.S.-based correspondent banks. According to the warrant, Dandong Zhicheng processed $700 million in prohibited North Korea-linked transactions through those eight correspondents since 2009, including $52 million in the last seven months alone. Yes, that’s right — Pyongyang was laundering its money through our banks and right under our noses all along, just like I’ve been saying.
Tantalizingly, the warrant cites a cites a grand jury subpoena that isn’t published on PACER, most likely because it’s still sealed under Rule 6(e) of the Federal Rules of Criminal Procedure, which protects the secrecy of grand jury material. This particular warrant is a “damming warrant,” a tool prosecutors use when they have probable cause to seize evidence or contraband that regularly transits through a specified place, even if it isn’t there at the moment (such as drugs through a dealer’s P.O. box, or funds through a money launderer’s account). It means that money goes into, but not out, of the account subject to the warrant. In this case, the damming warrant lasted 14 days, which may be as long as a depositor would continue to dump money into a bank account before wondering why his checks weren’t clearing.
I found the names of the correspondent banks on PACER so that wouldn’t have to: Bank of America, Deutsche Bank Trust Company Americas, Citibank, Bank of New York Mellon, HSBC, JP Morgan Chase, Standard Chartered Bank, and Wells Fargo. So far, the feds aren’t directly targeting those banks for legal action, and neither the banks nor the feds are saying anything else about that, but read on. You’ll also see in footnote 5 of the court’s order that the feds have now begun to make good use of the NKSPEA; evidently, the prosecutors cited section 104(a)(8) it in their warrant application.
In 2016, a single company, Dandong Zhicheng Metallic Material Co. Ltd. 丹东至诚金属材料有限公司, reportedly accounted for 9.19% of total North Korean exports to China. Established in July 2005, just as North Korean coal exports began to increase as a percentage of total exports, Dandong Zhicheng Metallic Material Co. Ltd. is a commodity company based in Dandong, China. The company’s archived website states that, as of April 6, 2016, it was recording annual sales of US$250 million, mainly of North Korean coal. This fact is recorded in trade data: 97% of the company’s imports were of North Korean coal. The company’s rapid growth and subsequent market position today is best described by a 2013 statement by one of the company’s traders, “The golden time for high profit has ended. It is now difficult to expand the market share further, and small players are out of the game.” Since 2014, Dandong Zhicheng Metallic Material Co. Ltd. has reportedly been the top overall importer from North Korea in China. [C4ADS]
If C4ADS is right that North Korea’s financial networks are centralized, limited, and vulnerable, the Justice and Treasury departments can damage or destroy the Chinese conglomerates that link Pyongyang to the financial system. To hear C4ADS tell it, DZMM is the single biggest Chinese importer of coal and other products from North Korea. Reuters backs that up by citing a 2013 online profile for DZMM, which claims that it imported $250 million worth of North Korean coal that year. By contrast, UNSCR 2321 capped North Korea’s total annual coal exports at $400 million. Thus, DZMM is almost certainly Pyongyang’s single largest coal customer and one of its key links to the global economy (no matter how many “experts” say that Pyongyang is already too isolated to sanction or that those links are too well hidden to find).
Nothing in the damming warrant mentions Kangbong, Daewon, or Paeksol, but it’s almost a sure bet that at least one of them is having some cash flow problems today, if not all three. The fact that the warrant reveals that a grand jury has been empaneled is also telling. Reuters got someone at DZMM to answer the phone, but they wisely refused to comment. If the cliché is correct that you can indict a ham sandwich, we should expect to see an indictment unsealed in the coming weeks or months, and we’ll learn the names of DZMM’s banks.
Asked about the issue, Chinese Foreign Ministry spokesman Geng Shuang reiterated that any infringements of U.N. resolutions on North Korea would be dealt with according to Chinese law, and that China opposed “long-armed jurisdiction”. [Reuters]
That is to say, China is opposed to unilateral sanctions, except when it isn’t. I can’t recall when I’ve ever heard China sound so upset and concerned about the prospect of paying a penalty for Pyongyang’s behavior.
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When the feds indicted Dandong Hongxiang last September, they hastened to add that the banks were not suspected of any wrongdoing. How much legal jeopardy are the banks in this time? Potentially, plenty. The court issued the DZMM warrant in May, so presumably, the affected transactions would have come after Treasury’s Financial Crimes Enforcement Network (FINCEN) issued this new regulation, based on its finding that North Korea is a jurisdiction of primary money laundering concern. The FINCEN regulation requires banks to cut North Korean financial institutions off from both direct and indirect access to the financial system, and requires due diligence of banks processing transactions to that end. Clearly, the banks should not have processed transactions for designated North Korean entities — including the FTB, KKBC, Daewon, Paeksol, or Kangbong. This time, DZMM’s Chinese banks and their U.S.-based correspondents both face higher legal burdens due to the new FINCEN regulation. The amount of jeopardy depends on how apparent DZMM’s links to North Korea were, or alternatively, how many hard questions they asked DZMM and each other about their customers.
What’s clear, regardless of the outcome, is that the banking industry has to step up its compliance game. And judging by the clarity of the message the feds are finally sending, I expect it already is.
Have all the shoes dropped? By no means. A grand jury is (or was) in session, indictments are thus more likely than not, the feds have plenty of other options short of that, and according to the Wall Street Journal, their strategy has backing at the highest levels of the administration. Our government is now promising — and taking steps to implement — a secondary boycott of North Korea’s enablers around the world, Nikki Haley is telling countries that they cannot trade with both the U.S. and North Korea, and the U.S. is moving to combine its economic power with that of South Korea and Japan (collectively, China’s three largest trading partners). Yes, China and Russia are stalling approval of a new U.N. sanctions resolution, but I’ve long felt that we’ve reached the point of diminishing returns from new U.N. sanctions anyway. What’s needed now is strict enforcement of the existing sanctions and anti-money laundering authorities, and that’s what I’ve just been talking about here.
Last year was a bad year for North Korean banks. Although the effects of that still aren’t clear, this year promises to be much worse for them. And we haven’t even gotten to the tools the Senate is about to give the feds.
The supreme art of war is to subdue the enemy without fighting. – Sun Tzu
On the Fourth of July, I had a long talk with a Famous Person who would probably prefer that I not mention his name here. He’s famous (or infamous — your mileage may vary) for his association with a foreign policy philosophy described as “neoconservative,” whatever that means. Like many Famous Persons, this person’s public image is an injustice to his actual views, which sounded classically liberal to my ears. He had an easy and unpretentious manner, and great depth in both experience and intellect. He recalled, at length, his support for Kim Dae-Jung’s life and freedom during South Korea’s right-wing dictatorship and other events I watched in rapt attention years ago. Because I’m not naming him, he probably won’t mind me quoting a wise thing he said: “This talk of bombing North Korea is scaring our friends more than it scares our enemies.” I couldn’t agree more. The word I keep returning to is “madness.” Not that it should matter, but there are people in Seoul I love.
It will probably also scare some of our friends that I made the case to this Famous Person that we must match Pyongyang’s escalation and deter the next one by helping the people of North Korea to resist the regime, but at least that suggestion has the advantage of terrifying our enemies and merely dividing our friends. Already, some of you are thinking that I’m scaring the Chinese and the Russians away from cooperating with us, as if all of the State Department’s supplications of the last 20 years have achieved anything. Or, that I’m scaring Pyongyang away from the negotiating table, as if Pyongyang would come back to the negotiating table otherwise, and as if Pyongyang doesn’t already believe we’re trying to overthrow it. Or that I’m ignoring the danger of loose nukes — as if the danger of WMD proliferation isn’t just as great or greater with this regime intact.
If we’re really honest, we’re all praying for some kind of regime change in North Korea. Prayer, of course, is not a strategy. The Sunshine Policy didn’t work, but it was a strategy for regime change by other means. Former South Korean President Kim Dae-Jung, the architect of that policy, was extraordinarily cautious about suggesting an intent to catalyze political change in the North, but a careful reader could see that it necessarily had political objectives: “Through open interaction with the global economy, North Korea will emerge as a responsible member of the international community, contribute to the stability of the peninsula, and develop its economy efficiently.” As Professor Lee, Bruce Klingner and I explained in the pages of Foreign Affairs, that is also why Pyongyang couldn’t let the Sunshine Policy succeed. I also doubt that Kim Dae-Jung was only speaking of South Korea’s former right-wing dictators when he quoted Confucious in his Nobel acceptance speech: “The king is son of heaven. Heaven sent him to serve the people with just rule. If he fails and oppresses the people, the people have the right, on behalf of heaven, to dispose of him.” (This is a point I’ll return to later in this post.)
The same is true of Americans who believe (or believed) in the Sunshine Policy. As the unreconstructed arch-engager David Kang once wrote, “I am totally for regime change, or a regime that modifies its ways and introduces economic and social reforms that improve the lives of its people.” At the height of talks over the 1994 Agreed Framework, Wendy Sherman pined for something more kinetic: “We just thought all that would bring about the collapse of the North Korean government within two or three years.”
We’ve all wished for a change of regime in North Korea, if only on an emotional level, notwithstanding how expensive, chaotic, and dangerous we know Kim Jong-Un’s Götterdämmerung could be. For years, we desperately hoped there might be some path to easy, evolutionary change. The unstated part of this hope was that with sufficient time and engagement, that evolutionary process might terminate as it did in Eastern Europe. But as events have proven beyond a reasonable doubt, there is no path to easy, evolutionary change in North Korea. There is profiteering and outright theft, and Pyongyang’s rich are getting richer. Call that capitalism if you want, but it’s the capitalism of a predatory military-industrial complex that’s no more a harbinger of peace or political reform than Krupp, Messerschmitt, or I.G. Farben were.
Contrary to Wendy Sherman’s expectations, the North Korean government did not collapse, because the North Korean people were too afraid, too hungry, too exhausted, and (above all) too isolated from each other to challenge the state. That is why, though there have been a thousand small and not-small acts of armed and unarmed resistance by the North Korean people against the state in recent years, those acts could not threaten the state’s control or disrupt its oppressive strategy. The people of North Korea had no means to communicate, organize, or resist. For those things, they will need our help. We should give them that help, in ways that would be public knowledge, and in other ways that would necessarily remain covert or clandestine. I don’t see another way. If you do, the comments are open.
In this week’s posts, I’ve explained why every other option ends in either a nuclear war, a surrender of South Korea, the collapse of nonproliferation, or grave threats to our own security and freedom. The hard realities are, in no particular order, that we cannot live with a nuclear North Korea, and that neither talks, nor surrender, nor China, nor the Swiss-educated reformer who never was will solve this crisis for us. War would, but it would also be a catastrophe of incalculable proportions. All options that remain — including the option of doing nothing, or seeking an accommodation with the regime — come with a significant or unacceptable risk of ending catastrophically. There is no safe option left to us; there are only less-dangerous ones. Dramatically improved enforcement of sanctions is the only nonviolent one left, and while I continue to believe that vigorously enforced sanctions could bring the regime to an existential crisis that could dethrone His Porcine Majesty, only the removal of Kim Jong-Un from power (and consequently, from this Earth) can disarm Pyongyang now.
It is increasingly hard to avoid the conclusion that Kim Jong-Un must die so that Korea may live, and that the coup de grâce must come from within, and not from us. It may be that the only way to prevent a larger war is to catalyze a smaller one. But that smaller war — or even the credible threat of one — may stand the best chance of ending with a peace agreement worthy of its name, from which Korea would emerge intact, liberated, unoccupied by foreign powers, and on a manageable timetable for reunification.
~ ~ ~
Let’s stop tiptoeing around what most of us have quietly wished for, but which we’ve done nothing — at least nothing I can see — to instigate: North Korea needs a revolution. It is in our interest to be rid of Kim Jong-Un, but above all, it’s in the interests of the North Korean people to be rid of him. The merchants who have waged an unarmed war of resistance against the state’s uniformed shake-down artists and press-gangs want to be rid of him. The nameless victims of torture who wanted nothing more than the right to live and move freely want to be rid of him. The people of North Hamgyeong, who are still waiting for an uncaring government to help them more than a year after floods devastated their homes and farms, want to be rid of him. The dirt-poor private farmers whose land is being confiscated, even as food prices rise, want to be rid of him. The collective farmers whose hopes for agricultural reform were dashed into the reality of exploitative sharecropping want to be rid of him. The poor in North Korea’s cities and towns, who scrape through life inside the confines of a state-imposed class system, want to be rid of him. The soldiers who are killing their abusive officers or walking through minefields to freedom want to be rid of him. The desperately hungry border guards who carry their guns into China and desert want to be rid of him. The elites in Pyongyang, who have begun defecting in greater numbers than ever — to include diplomats, money launderers, security officials, and (most recently) one of Kim Jong-Un’s bodyguards — want to be rid of him. The men, women, and children in the gulags must surely pray that they may live long enough to be rid of him. The 30,000 North Koreans who risked everything to flee to South Korea — and the countless others who died along the way, or in prison camps after they were recaptured — wanted to be rid of him.
Our real military option isn’t bombing, but a combination of overt, covert, and clandestine operations to catalyze the formation of a resistance movement by North Korea’s rural poor, historically its most exploited and discontented class, particularly in the northern and eastern provinces. The tried-and-tested argument for that uprising is the timeless appeal of class warfare. North Korea’s is a society of artificial, politically assigned, hereditary classes that mark every citizen for life and decide her access to education, a decent job or place to live, and even food.
As for the organizational foundations of such a movement, I’ve already discussed them at length, but they aren’t so different from the model used by Hamas or the Muslim Brotherhood. That model begins with a guerrilla banking system that seeds a multitude of unaffiliated, clandestine social welfare organizations and evolves into a shadow government, providing for the needs of the people that the state does not, and that resists the state’s violation of the fundamental human rights of the people in whatever ways it can. The essential and missing element is a means of communication, but even that isn’t far off. I’ll keep the discussion of logistics to myself or leave that to Dave Maxwell — he’s the retired Special Forces colonel, not me. I’ll only say that North Korea has two long coastlines, one long and partially porous border, robust smuggling networks, and a population that has learned to be extraordinarily resourceful to survive. The markets in North Korea seem to provide anything for which there is a demand.
I think — and there is a basis for my speculation — that Kim Jong-Un’s nightmare scenario is to wake up one day to hear that after an MPS officer beat a merchant who refused him a bribe, that the merchants rioted and killed the officer with a pistol bought from a deserting soldier, that riots spread throughout the province once people began texting the news on smuggled phones, and that people had set up roadblocks all over Hoeryong, within sight of journalists just across the border in China.
There would be no question, of course, of a peasant army marching on Pyongyang. That would be impossible, undesirable, and unnecessary. It would present Pyongyang with the sudden, use-it-or-lose-it choice that we must carefully avoid. The state’s loss of control would instead be gradual. If North Korea’s vast, almost roadless interior dissolved into anarchy as Syria and Libya did so unexpectedly, Pyongyang could lose its land access to the fisheries of the east, the coal mines and power plants in the interior, and all the remote places where it hides his missiles. Broadcasts directed at his elites, who are already defecting in growing numbers, would show them how the countryside was slipping into anarchy. If the security forces were already sanctioned to the verge of bankruptcy, they would be hard-pressed to pay, fuel, and maintain an army to patrol the borders, and the villages and fields near the most critical roads, railroads, and power lines. It is the economic and political blows, not the military one, that would be fatal, and that would force Pyongyang’s elites to demand peace talks on terms that would lead to a genuine peace.
As border control broke down, information would flow in and people would flow out. Trade links to China would become untenable, adding more financial pressure to the effects of sanctions. As Pyongyang functionally became a city-state surrounded by an ungovernable countryside and a patchwork of liberated zones, the elites might decide that the world was closing in on them and hedge their bets about the future. In exchange for our covert support, a thousand unseen eyes in the mountains could report the location of every missile truck, slip messages to unit commanders, or send out videos of gulags or abuses by soldiers. In the towns and villages of Ryanggang and North Hamgyeong, the State Security Department’s officers would become prisoners of the people, too afraid to patrol the markets and reduced to taking bribes from those they no longer dared to extort, in exchange for looking the other way at more open acts of subversion. No foreign power, including China, would dare wade into this mess. As for the generals, all that would be asked of them to save themselves and their families would be to make sure that at the critical hour, their troops don’t move and don’t shoot.
~ ~ ~
What can America give to the people of North Korea? First, a means to communicate and organize among themselves; second, a message to galvanize and focus their discontent; third, a concerted legal attack on the finances of the security forces to give the people breathing space; and perhaps, as a deterrent to further acts of aggression and oppression, a covert supply of arms, or a way to manufacture them in small guerrilla workshops.
We already have specialized aircraft designed for hijacking the airwaves of hostile states. The message we broadcast must be tailored to different audiences — the elites, the military, and the rural poor. For the elites in Pyongyang, the message must be that there is a better future without Kim Jong-Un than with him. That for those who resist the state and refuse to take part in its crimes against humanity, there will be clemency, freedom, and a better life in the future. If the regime persists, they can expect to meet the same fate as Jang Song-Thaek and his family.
For the soldiers, it must be a message of rice, peace, and freedom. In the event of war, they must refrain from killing their brothers and sisters in the South. They must be told that the targets assigned to them are civilian targets, and that their duty as Koreans is to disable their weapons, refuse to fire, or intentionally miss those targets.
For the rural poor, it must be that they are poor and hungry because of the state’s choices — to build weapons and ski resorts, and to import yachts and missile trucks, instead of feeding them. That the state keeps them hungry to control them. That it divides them against each other by making them inform on one another. The message must be rich with actual, credible stories about people like them who have suffered from the regime’s abuse, corruption, and oppression. They must awaken to the fact that they alone can change that, because no one else is coming to save them.
For all North Koreans, we should help them begin a conversation about the difficulties that sudden change will mean to a society that isn’t prepared for them. Should they stay in place or move? Who will own the soil, and who will till it? Will they be allowed to sell the land, and for what price? Will rich South Koreans flood in and make them second-class citizens in their own country? Will they acquire legal ownership of their own homes? Will industries in the hands of the state, the donju, or foreign investors be nationalized and sold off? Will the communes be broken up or consolidated? How can they prevent foreign occupation? What is the right balance between free speech and social stability? Who will be held responsible for crimes against the North Korean people, and who will be forgiven in the name of ending them? They must feel that they will have a say in how those questions are answered.
~ ~ ~
Our sanctions-targeting strategy must also evolve with the recognition of these same hard realities. During this event on Capitol Hill several weeks ago, former Treasury Undersecretary and former CIA Deputy Director David Cohen made a profoundly important statement that would have been easy to miss. Cohen said that the strategy for sanctions enforcement depends on the objective of sanctions. Until now, it has been to pressure Kim Jong-Un to negotiate away his nukes, based on the flawed premise that he cares about the welfare of his people and the development of his country (in fact, those things would pose serious threats to his internal control by breaking the peoples’ material and ideological dependence on the state).
If we agree that Kim Jong-Un will never disarm voluntarily, then our sanctions should instead target the regime’s security forces and their capacity to suppress the population. How? We know, for example, that two sanctioned North Korean coal export companies support the military and that a third supports the Reconnaissance General Bureau. The security forces fund themselves with certain trading companies. If so, our sanctions should preferentially target the regime’s immune system to disrupt its capacity to oppress, to compel its security forces to rely on corruption, and to break down barriers to the smuggling of goods, people, and information across North Korea’s borders.
Part of this strategy could take several years to prepare, unfortunately. The critical communications technology to allow North Koreans to organize still isn’t in place. Once resistance begins, it’s difficult to know whether it would spread or how quickly. If we controlled its funding, we could exercise some control over its conduct, but only to an extent. We can expect Pyongyang to hit back (though in limited, non-suicidal ways) if it knows or assumes that we’re supporting internal resistance. In the meantime, we’ll need an interim containment strategy, including aggressive sanctions enforcement, the accelerated deployment of missile defenses and deterrence, and perhaps a blockade. The President may have to use force to deter the next Yeonpyeong-do incident or slow North Korea’s missile development, and hope that a limited conflict stays limited. At the same time, we must never close the door to an agreement in which Pyongyang would disarm and begin a graduated process of humanitarian reform in exchange for the suspension of sanctions. But in the end, containment alone is not a permanent solution to this problem, and deterrence has been failing since 2010.
For years, the experts who have held the tiller of our policy for so much of the last three decades have offered Pyongyang “security guarantees” for a disarmament deal. Pyongyang either didn’t take them or took them and reneged. It’s time to turn this formula on its head and offer Pyongyang insecurity guarantees as long as it refuses to disarm. Once we pose a credible threat of destabilizing the countryside between Pyongyang and Dandong, our chances of a diplomatic solution rise from zero to something more than zero. How much more depends on the credibility of the threat and how much we have to offer in terms of trading stability for a lasting peace.
~ ~ ~
When Kim Dae Jung quoted Confucious in his Nobel speech, he reminded his audience that Confucious spoke those words 2,000 years before John Locke wrote of his version of the social contract theory, which incorporated a right of revolution. Against Locke, Thomas Hobbes argued, based on his bitter experiences during England’s civil war, that the subject’s duty was to obey the sovereign for better or for worse lest he reduce his kingdom to a state of anarchy where life would be “nasty, brutish, and short.” But North Korea, where the regime has imposed its social contract on the people, is as Hobbesian a place as you will find — it is a living (if one can call it that) exhibit to Locke’s brief for the right to revolution. In another hundred years, Thomas Jefferson would write that when a government becomes destructive of the ends of the life, liberty, and happiness of the people, “it is the right of the people to alter, or to abolish it.” I do not reserve that right to Americans alone. That would make me an American exceptionalist.
In our long war of skirmishes against the Kim Dynasty, it has always been the people of North Korea who have been our most important — and most overlooked — potential allies. Kim Jong-Il now presents a grave threat to our freedom, our security, our prosperity, and our way of life. We are justified in threatening the integrity of his political system in return. The perpetuation of that system represents a grave threat to us, to our allies, and to the people of North Korea most of all. We also compelled to do this in a way that reduces the risk of catastrophe as much as that is still possible, and that minimizes unnecessary suffering by the North Korean people. Our support for any resistance group must be strictly conditioned on its adherence to the Law of Armed Conflict. It must tolerate no attacks against noncombatants, no banditry, and no theft. The choice to resist, of course, is a choice that belongs to the people of North Korea. But if they are willing to make it, they should find no better friend than us.
The U.S. Attorney for the District of Columbia issued a press release this afternoon announcing that it has filed a complaint under the civil forfeiture statute at 18 USC 981, to forfeit $1,902,976 from Mingzheng International Trading Limited of Shenyang, China. According to the complaint, Mingzheng conspired to evade sanctions and launder money through the United States on behalf of the Foreign Trade Bank of North Korea (FTB). Treasury designated the FTB under Executive Order 13382 in March 2013, for proliferation financing. Under the International Emergency Economic Powers Act, a designation blocks the target out of the dollar system. Knowingly dealing with a designated person using the dollar system is a violation of the IEEPA. According to DOJ:
The action represents one of the largest seizures of North Korean funds by the Department of Justice.
“This complaint alleges that parties in China established and used a front company to surreptitiously move North Korean money through the United States and violated the sanctions imposed by our government on North Korea,” said U.S. Attorney Phillips. “Sanctions laws are critical to our national security and foreign policy interests, and this case demonstrates that we will seek significant remedies for those companies that violate them.”
According to the complaint, Mingzheng is owned by a Chinese national and is based in Shenyang, China. Mingzheng allegedly operated as a front company for a foreign-based branch of the North Korea-based Foreign Trade Bank (FTB). In March 2013, the U.S. Treasury Department designated the Foreign Trade Bank as a sanctioned entity pursuant to the Weapons of Mass Destruction Proliferators Sanctions Regulations. The designation noted that the Foreign Trade Bank is a state-owned bank, and “acts as North Korea’s primary foreign exchange bank.” The designation further noted that North Korea uses the Foreign Trade Bank to facilitate millions of dollars in transactions on behalf of actors linked to its proliferation network.
Under 18 USC 981, the feds can forfeit property that constitutes proceeds of, or that is “involved in,” a specified unlawful activity (as defined in 18 USC 1956(c)(7)), the money laundering statute. The specified unlawful activities alleged here are conspiracy and violations of the IEEPA.
An FBI investigation revealed that Mingzheng’s alleged activities mirror this money laundering paradigm. Specifically, Mingzheng acts a front company for a covert Chinese branch of the Foreign Trade Bank. This branch is operated by a Chinese national who has historically been tied to the Foreign Trade Bank.
According to the complaint, Mingzheng used its accounts at China Merchants Bank, Bank of Communications, and Shanghai Pudong Development Bank to launder money on behalf of the FTB. All three banks were also involved in the Dandong Hongxiang money laundering case. In that case, the Justice Department said at the time that the Chinese banks were not suspected of wrongdoing. This time, DOJ’s press release doesn’t say one way or the other; however, the transactions alleged here all predate the new Treasury regulation establishing heightened due diligence obligations for North Korea.
The government is seeking to forfeit $1,902,976 that was transacted in October and November of 2015 by Mingzheng, via wire transfers, using their Chinese bank accounts. These U.S. dollar payments, which cleared through the United States, are alleged to violate U.S. law, because Mingzheng was surreptitiously making them on behalf of the Foreign Trade Bank, whose designation precluded such U.S. dollar transactions.
Interestingly, this complaint doesn’t have anything to do with the conduct unmasked in C4ADS’s latest report this week. Rather, this is more of a sequel to the Dandong Hongxiang case filed in the District of New Jersey last September, which arose from the first C4ADS report on North Korea. The new complaint makes the link:
48. The criminal complaint identified Luo Chuanxu as one of the Dandong Hongxiang co-conspirators. The complaint indicates that Luo is a Chinese National who established multiple front companies in Hong Kong, Anguilla, and the British Virgin Islands to facilitate payments on behalf of KKBC, a sanctioned North Korean bank. Luo handled these payments as an employee of Dandong Hongxiang, and was working to assist KKBC in violation of U.S. laws. The criminal complaint noted that Deep Wealth was owned or controlled by Dandong Hongxiang, at least as of June 10, 2015.
49. Additionally, Luo facilitated numerous payments to Mingzheng using Deep Wealth Ltd. (“Deep Wealth”), a Dandong Hongxiang front company established in Anguilla, in the months prior to the transactions related to the Defendant Funds.
50. Specifically, Luo received confirmation of two large payments to Mingzheng from Deep Wealth in 2015. On July 31, 2015, Luo received confirmation from China Merchants bank showing that Deep Wealth remitted $660,000 to Mingzheng’s account ending in 6150. On August 04, 2015, Luo received another confirmation from China Merchants Bank showing that Deep Wealth remitted $900,000 to the same Mingzheng account. These payments are consistent with the North Korean money laundering activities observed between sanctioned North Korean banks via related front companies.
The complaint is available on the federal public docket system (PACER), under United States v. $1,071,251.44 of Funds Associated with Mingzheng International Trading, Ltd., No. 17-cv-01166-KBJ. Unfortunately, WordPress doesn’t like to post pdfs, but you can pull it yourself if you have a PACER account. Civil forfeiture cases have odd case names because they’re in rem actions, which means the property is the defendant. In this case, the case name is based on the first of several listed bank accounts “associated with” Mingzheng. Claimants to the defendant property then have an opportunity to file claims for the defendant property (such as innocent ownership, or contesting the connection between the property and the specified unlawful activity).
I confess that I’ve always hated Facebook, but every now and then, I see something there that interests me. One such example is the Facebook page of a group called Delegations for Dialogue, which led me to this slickly produced website. As it turns out, Delegations is run by a cast of improbably young characters promoting investment in North Korea through a “fact-finding” trip to Rason this August.
Now, I suppose there are two kinds of people in this world by now — those who’ve concluded that throwing money into North Korea has only made it more repressive and dangerous, and those who are (for whatever reason) simply incapable of drawing that conclusion. The same goes for understanding the moral hazard of investing in (and thus perpetuating) a system whose crimes against humanity, according to a U.N. Commission, are “without parallel in the contemporary world.” The same goes for those who believe anyone but Pyongyang will ever get rich from foreign investment in North Korea. Just ask Jim Rogers, Naguib Sawaris, James Passin, or a long list of other fools who have parted with their money there.
Rather, anyone who would seriously consider investing in North Korea by now can only be responsive to legal risk. As I’ve said before, I’m a lawyer but not your lawyer, so take what follows as advice to hire a lawyer of your own if you’re giving serious thought to taking part in this trip. For one thing, I found nothing on Delegations’ site about compliance with either national or U.N. sanctions — not even the standard, we-never-violate-sanctions disclaimer one sometimes sees with such programs. It quickly becomes clear that Delegations either has no idea of the legal framework it’s getting itself and its clients into or doesn’t care.
From the very first sentence, for example, Delegations shows the limits of its legal knowledge of the sanctions regime against North Korea by calling the North “the world’s most sanctioned nation,” something that still isn’t remotely accurate, either de jure or de facto, despite the significant escalation of sanctions over the last year. And while it’s usually a harmless error for an investor to overestimate a sanctions regime, the same can’t be said for underestimating one.
On examining the program materials for the August trip, things go downhill fast. For example, Delegations promises participants a tour of a local bank, but several of the banks located in Rason (and, as near as I can figure, all of them) are joint ventures, which are prohibited under UNSCR 2270, paragraph 33. Delegations promises its clients a meeting with North Korean trade officials; yet UNSCR 2321, paragraph 32, bans all public and private support for trade with North Korea, except when specifically approved by a U.N. committee. Delegations even promises participants an opportunity to open a bank account in a North Korean bank, directly contrary to UNSCR 2321, paragraph 31, which required U.N. members states to close any bank accounts in North Korea 90 days after the resolution passed (more than 90 days ago).
Then, on the banner of Delegations’ website is an image of the Pyongyang International Trade Fair, where one of the companies making an appearance this year was Green Pine, an entity designated by both the U.N. and the U.S. Treasury Department for its involvement in proliferation.
Fine, you say, who’s going to enforce a U.N. resolution anyway? But given the extensive evidence that North Korea continues to depend on the U.S. dollar system for trade and finance (note well: Delegations allows participants to pay their fees in euro or dollars), any favorable response to Delegations risks running smack into a very significant legal obstacle, namely Executive Order 13772, section 3 of which prohibits new investment in North Korea:
(a) The following are prohibited:
(i) the exportation or reexportation, direct or indirect, from the United States, or by a United States person, wherever located, of any goods, services, or technology to North Korea;
Here, the term “services” is key, and courts have generally interpreted this to include financial services. It would likely be interpreted to include promotional and marketing services on behalf of North Korean state-controlled enterprises, too.
(ii) new investment in North Korea by a United States person, wherever located; and
This is the provision that stumped Jim Rogers, Naguib Sawaris, et al.
(iii) any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if performed by a United States person or within the United States.
This covers the provision of correspondent services by U.S. financial institutions and their subsidiaries, effectively blocking transactions related to investment in North Korea out of the dollar system.
(b) The prohibitions in subsection (a) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order or pursuant to the export control authorities implemented by the Department of Commerce, and notwithstanding any contract entered into or any license or permit granted prior to the effective date of this order.
This incorporates Commerce Department licensing requirements, which cover almost any transfer of U.S.-origin goods, services, and technology to North Korea, except the most innocuous consumer goods and food items classified as “EAR 99.” For more information on what all of that means, consult a more expensive lawyer than me, because violations of this executive order are punishable under section 206 of the International Emergency Economic Powers Act (20 years in prison, a $1 million fine, and a $250,000 civil penalty). And just in case you think the euro system is an easy escape valve from these prohibitions, not so much, given the new EU restrictions on financial services to North Korea, new anti-money laundering regulations, and new beneficial ownership disclosure rules.
To summarize: lawyer up, caveat emptor, or (better yet) find a safer place to put your money.
Due to a convergence of other commitments, it took me longer than I’d hoped to digest the U.N. Panel of Experts‘s latest findings about North Korea and financial sanctions. If you only read the bottom line and stop there, you’ll either be discouraged or find support for an argument that sanctions are futile.
210. Despite expanded financial sanctions adopted by the Security Council in resolutions 2270 (2016) and 2321 (2016), the Democratic People’s Republic of Korea has continued to access the international financial system to support its activities. Financial networks of the Democratic People’s Republic of Korea have adapted to these sanctions, using evasive methods to maintain access to formal banking channels and bulk cash transfers to facilitate prohibited activities. At the time of writing, Democratic People’s Republic of Korea circumvention techniques and inadequate compliance by Member States are combining to significantly negate the impact of the resolutions.
But you shouldn’t just stop there. If you read the entire report, you’ll find ample evidence that with sufficient resources and political backing, competent investigators can find, expose, and destroy Pyongyang’s financial networks. The Panel has shown us how it’s done. But even if financial sanctions can work, they are not yet working. Pyongyang’s money launderers are experienced and sophisticated, and they’re still accessing the financial system. Member states (read: China, and to lesser degrees, Russia, Malaysia, Singapore, Namibia, Zambia, and the Seychelles — and by default, the U.S.) aren’t complying with, are ignoring, or aren’t enforcing the resolutions.
In many cases, Pyongyang’s money launderers are the same people who’ve plied their trades from the same Chinese cities for years with impunity. Increasingly, they work through local agents, from offices in storefronts or hotel rooms. They may have formalized links to North Korean banks, or they may conceal those links and work through trading companies to move funds and conduct transactions on their behalf. These techniques aren’t new; they’re the same ones terrorists, drug lords, and other rogue states have used since the passage of the Bank Secrecy Act years ago. What else isn’t new? Pyongyang’s reliance on the dollar system:
Most of the financial activity investigated by the Panel was denominated in United States dollars, euros and renminbi. (Para. 213.)
To help you understand the meaning of the Panel’s findings, I’ve organized this post around a few simplified rules I synthesized from seven different U.N. Security Council resolutions. I’ve also blended in information from last year’s report and from other relevant posts I’ve written about North Korea’s finances.
Some caveats are also appropriate here. First, two of these resolutions (2270 and 2321) are fairly recent. Some member states whose names don’t start with “ch” and end in “ina” may still have been in the process of complying when the Panel’s reporting period closed.
Second, in this post, I use “money laundering” to mean the deceptive financial practices that Pyongyang uses to conceal the ownership, origin, and use of its funds to help it violate U.N. sanctions. In most cases, those practices will also meet the U.S. (or domestic) legal definition, but not always. In U.S. law, “money laundering” is defined in two fairly complex statutes, but can be simplified to mean moving money that’s “involved in” certain categories of unlawful activity, either because the funds are proceeds of a crime (say, spending the take from a bank fraud scam), are the corpus of a crime (such as a payment by a blocked person through a U.S. correspondent), or are being used to conceal a crime (for example, Pyongyang Restaurant profits that are commingled with drug money to obscure the illicit origins of the latter).
Rule 1: Member states must freeze the assets of designated entities.
States must freeze the assets of designated persons and “ensure that any funds, financial assets or economic resources are prevented from being made available to or for the benefit of” them. That includes denying them financial services, closing their representative offices, preventing their agents from participating in joint ventures or business arrangements, and expelling those agents. UNSCR 1718, para. 8(d); UNSCR 2094, paras. 8 & 11; UNSCR 2270, paras. 15 & 32; & UNSCR, 2321, para. 3.
Who’s Breaking it: China, mainly. The Panel suspects that at least four U.N.-designated North Korean banks or their aliases continue to operate from Chinese territory:
Rule 2: Banks must cut off correspondent relationships with North Korean banks.
Member states must “prohibit financial institutions within their territories or subject to their jurisdiction from . . . establishing or maintaining correspondent relationships with DPRK banks,” except with the Committee’s advance approval, and requires member states “to terminate such . . . correspondent banking relationships with DPRK banks within ninety days from the adoption of this resolution.” UNSCR 2270, para. 33.
Who’s Breaking it:
Rule 3: States must close foreign branches of, and joint ventures with, North Korean banks.
Member States shall “prohibit in their territories the opening and operation of new branches, subsidiaries, and representative offices of DPRK banks,” to “prohibit financial institutions within their territories or subject to their jurisdiction from establishing new joint ventures,” except with the Committee’s advance approval, and requires member states “to close such existing branches, subsidiaries and representative offices, and also to terminate such joint ventures [and] ownership interests . . . within ninety days from the adoption of this resolution.” UNSCR 2270, para. 33.
Who’s Breaking it: China, Russia, Malaysia, Zambia, Egypt, and others.
It’s important to note that the ban on joint ventures with North Korean banks is only as recent as last March, and much of the information below is from the Panel’s previous reports that predate those resolutions. Having said that, I saw nothing in the 2017 report indicating that any of the banks listed below were closed. All of these are North Korean banks with foreign branches, North Korean joint ventures with foreign banks or companies, or both:
To the extent these banks still operate, they’re all violating U.N. sanctions. If the new administration is looking to show seriousness of purpose about cutting off North Korea’s finances, it could start by designating all of them under section 104 of the North Korea Sanctions and Policy Enhancement Act or its implementing order, Executive Order 13722. That would reinforce the message that Chinese banks should not continue to do business with them.
Rule 4: Member states must expel persons working for North Korean banks.
Persons working on behalf of North Korean financial institutions or U.N.-designated entities must be expelled for purposes of repatriation to North Korea, and are ineligible for any immigrant, non-immigrant, or transit visa, unless their presence is required for a legal, medical, or humanitarian reason. UNSCR 2270, para. 15; UNSCR 2321, para. 33.
Who’s Breaking it: China and Malaysia, mostly. See, e.g., Kim Chol-sam and his entire network, the Glocom network, and all of the foreign branches of North Korean banks I mentioned above. The branches are supposed to be closed, and their North Korean employees expelled.
Rule 5: Member states must restrict bulk cash transfers to and from North Korea.
The Security Council “[e]xpresses concern that transfers to the DPRK of bulk cash may be used to evade” the sanctions resolutions, “and clarifies that all States shall apply” the “enhanced monitoring” measures set forth in paragraph 11 of UNSCR 2094 to bulk cash transfers to and from North Korea. Although the language “expresses concern” appears non-binding at first glance, it refers back to mandatory provisions. UNSCR 2094, para. 14.
Who’s Breaking it:
[to raise money to buy infant formula and TB medicine, naturally.]
Could that have something to do with North Korean hackers picking the Bangladesh Bank as a victim? Could be, but then how do you explain the killing of Kim Jong-nam in Malaysia? Either way, Bangladesh’s good-faith enforcement has earned it a supportive response to that crime.
Rule 6: Member states must limit extensions of credit to North Korea.
States should not enter into new commitments for grants, financial assistance, or concessional loans to the DPRK, except for humanitarian and developmental purposes directly addressing the needs of the civilian population, or the promotion of denuclearization, and should exercise enhanced vigilance with a view to reducing current commitments. Strictly speaking, this is non-binding language. UNSCR 1874, para. 19.
Who’s Breaking it:
Rule 7: Member states must close bank branches and accounts in North Korea.
Member States must take the necessary measures to close existing representative offices, subsidiaries or banking accounts in North Korea within 90 days, unless the Committee determines on a case-by-case basis that such offices, subsidiaries or accounts are required for the delivery of humanitarian assistance or the activities of diplomatic missions in the DPRK or the activities of the United Nations or its specialized agencies or related organizations or any other purpose consistent with the objectives of this resolution. UNSCR 2321, para. 31.
Who’s Breaking it: China mostly, as noted above.
Concern: Member states should “exercise vigilance” over North Korea’s slave labor exports.
This isn’t a binding rule, but the Security Council expressed “concern that DPRK nationals are sent to work in other States for the purpose of earning hard currency that the DPRK uses for its nuclear and ballistic missile programmes, and calls upon States to exercise vigilance over this practice.” UNSCR 2321, para. 34.
The is provision isn’t, strictly speaking, so much about the exploitation of the workers as it is about the fact that their “wages” are stolen, laundered, and used for prohibited purposes.
Who’s Ignoring it:
Conclusion: What we learned about North Korean money laundering from the Panel’s report
First, North Korea increasingly relies on non-bank front companies that essentially operate as banks, and would thus qualify as financial institutions under the U.S. legal definition in 31 U.S.C. 5312.
Second, North Korea still prefers dollars (see, e.g., paras. 114, 224, 226 n.206, 227, 234, 238 & 244). Many of those dollar transactions continue to be run through U.S. correspondents (see, e.g., paras. 217 n.194, 226 & 235), who need to step up their game.
239. Stronger sanctions have led networks of the Democratic People’s Republic of Korea to employ greater ingenuity in using formal banking channels and bulk cash transfers to facilitate their illicit endeavours. At the same time, Member States that host nationals of the Democratic People’s Republic of Korea, that control the movement of persons across their borders, that regulate banks and that regulate correspondent banks have not made a commensurate investment in their own capacity to enforce the strengthened sanctions. Consequently, agents of the Democratic People’s Republic of Korea have been able to mask both their illicit activities and their links to the country.
A new Treasury Department regulation at 31 C.F.R. 1010.569, implementing the ban on correspondent accounts and imposing new due diligence requirements, may give them an incentive to do just that. The fact that Pyongyang still relies on the dollar system gives us more options to intercept those dollars.
While some of that cash is eventually smuggled into North Korea, most of it is probably commingled with illicit (or as the case may be, licit) funds and deposited into Chinese banks by small-time operatives (who do what’s known as “structuring”). From there, it’s transferred into other accounts (“layering”) and spent on stuff the elites in Pyongyang like. Then, the goods are shipped in by boat or Air Koryo (the final stage of money laundering: “integration”).
None of these methods are more sophisticated than those of Al Qaeda (with its use of hawalas), Colombian drug lords (with their clever use of trade-based money laundering), or Iran (with its talent for using gold as a sanctions dodge). The Panel’s report proves that these networks can be uncovered by skilled and determined investigators. So, for that matter, did C4ADS, and the Treasury and Justice Departments. It’s by no means impossible to find and destroy these networks with enough of the right people. The Panel has identified dozens of potential North Korean targets that should be expelled and have their assets frozen. Maybe now we have to political will to make that effort, but do we have enough cops, lawyers, and diplomats to get the job done?
For two other good analyses of the report and how to respond to its findings, read this one, by George Lopez and this one, by Richard Nephew. Lopez, in particular, dispels the myth that North Korea is already isolated and therefore financially impregnable. Instead, the Panel’s report proves that Pyongyang remains dependent on offshore finance.
In an effort to hide their sanctions violations from the prying eyes of the U.N. Panel of Experts — and from Leo Byrne and the sharp-eyed investigators at C4ADS — North Korean ships have taken to turning off the transponders and navigational devices that allow others to know where they are. Now that I’ve explained the advantages of that, let’s talk about one big possible disadvantage: other ships might crash into you and sink you.
That’s the best explanation I can piece together from what Leo Byrne could piece together from the what Chinese Maritime Ministry is saying about the sinking of the M/V Kum San off the Chinese port of Lianyungang, where it had been “hovering,” in standard North Korean fashion, until a Chinese oil tanker came along. Although the report says the Kum San struck the tanker, the report also says that the tanker was undamaged and went along its way, while the Kum San (apparently fully loaded) went to the bottom.
As with the January sinking of the M/V Chong Gen off Japan, all the crew were rescued. The Chong Gen was another North Korean general cargo vessel that sank in the Tsushima Strait with a cargo of rice, for reasons that were never fully explained, but might also have been due to a navigational failure given its proximity to the rocky Japanese coastline.
The Kum San had been flying the flag of Sierra Leone until recently, when it reflagged as North Korean. Its IMO does not appear in the Treasury Department’s SDN List, so it was not directly linked to smuggling. Typical of a North Korean ship, however, its owner is a company with just one ship, which is a tactic North Korea uses to obscure the true ownership of its vessels.
According to Byrne, North Korea recently began to consolidate the ownership of its shipping, and specifically its tanker fleet, as a result of the difficulty it is facing in registering its ships abroad under flags of convenience. A mass re-registration to Tanzania had become an embarrassment for the Tanzanian government. Byrne later discovered a similar North Korean effort to re-register ships under the Fijian flag, but the Fijian police soon began to investigate the practice.
The U.N. also recently banned other states from insuring North Korean vessels, so in theory, Pyongyang’s state insurance company (which was recently designated by the U.S. Treasury Department) will eat the entire cost of the loss.
More posts on North Korean shipping here.
The 2017 report of the U.N. Panel of Experts isn’t due to be published for another month, but a Kyodo News reporter has already obtained and published leaked excerpts. The focus of Kyodo’s story is the now-familiar (and unquestionably accurate) castigation of member state governments for not putting enough will or resources into the enforcement of North Korea sanctions, but I’d like to start with this revelation:
“An interdiction of the vessel Jie Shun was the largest seizure of ammunition in DPRK sanctions history,” according to the document. A source informed Kyodo News the Egyptian port was not the general cargo ship’s final destination, despite its strategic location near a number of regional conflict hot spots. However, the report said that seizures like it demonstrate “the country’s use of concealment techniques as well as an emerging nexus between DPRK entities trading in arms and minerals.” [Kyodo News, Seana K. Magee]
As recently as 2014, it was up for sale. Its current owner is Liaoning Foreign Trade Foodstuffs Co., Ltd. of 72 Luxun Lu, Zhongshan Qu, Dalian, China. That’s right next to the address listed in the Panel’s 2014 report for Dalian Sea Glory Shipping Company, which managed the suspected smuggling ship M/V Light. This is not a reputable neighborhood.
Shipping trackers last spotted the Jie Shun at “Skohna” (probably Sokhna), an Egyptian port on the Red Sea near the southern terminus of the Suez Canal.
Despite what the trackers say, the Panel’s report says the ship wasn’t headed for any port in Egypt. Egypt has been a buyer of North Korean missiles and missile parts, but not of large quantities of North Korean munitions, at least to my knowledge. Nope, this time, my top three guesses are Syria, Syria, and Syria:
[What do I win?]
Liaoning Foreign Trade also operates one other ship, the Chinese-flagged M/V Fu Yun 228, IMO 8888654. The small bit of good news is that if trackers still show the Jie Shun as stuck in Egypt, Egyptian authorities must have seized the ship as the resolutions require it to. Inshallah, Red Sea divers will soon have a nice new artificial reef, or the Somali Coast Guard will soon have a new Q-Ship for stalking pirates.
It’s unquestionably true that up to this point, Pyongyang has invested more effort in hiding its dollars and ships behind front companies and shell companies than we have in finding them. That’s why Anthony Ruggiero, who spent years at the Treasury and State Departments administering sanctions, asked Congress this week to give the feds more resources for these investigations.
Mandate additional resources to address North Korea’s activities. The North Korea Sanctions and Policy Enhancement Act of 2016 is a comprehensive law that provides a myriad of tools for the Trump administration to address the North Korean threat. It is important that Congress continue to address additional areas through legislation in the same overwhelmingly bipartisan nature, signaling to North Korea and China that focus on this issue will continue. Throughout my testimony, I have detailed the challenge we face with an adversary that seems to be one step ahead of us. Our entire approach to the North Korea issue needs to change. One area Congress can address immediately is providing additional resources to the Treasury Department, Justice Department, Intelligence Community, and other government agencies to investigate violations of the NKSPEA. [Anthony Ruggiero, Testimony before the House Foreign Affairs Committee, Feb. 7, 2017]
There are other, more immediate steps we can take, beyond those I recommended here. First, we should add the Jie Shun, Liaoning Foreign Trade Foodstuffs Co., Ltd., and (for good measure) the Fu Yun 228 to the U.N. designation list and the Treasury Department’s list of Specially Designated Nationals. Second, we should also demand that China expel any North Koreans involved in this transaction, freeze any accounts associated with the transactions or the parties to it, and prosecute any Chinese nationals involved.
[As Anthony explains, just after the 5-minute mark.]
For now, however, this is just the latest example of how China continues to be a part of the problem rather than a part of the solution. Almost weekly, we see fresh evidence that China’s cost-benefit calculation hasn’t changed. It’s time to use more forceful methods to shift that calculation:
The Treasury and Justice Departments’ actions in late September 2016 showed a troubling pattern of Chinese persons assisting North Korean-designated persons, including through the U.S. financial system. These transactions lasted six years, up to September 2015, making it hard to believe the Chinese government regulators were unaware of this conduct. It is important that Congress and the American people understand the extent of China’s efforts, or lack thereof, to combat money laundering, sanctions violations, and proliferation financing. I recommend that new legislation include specific sections on North Korea’s network within China. It should also address the broader issue of Chinese support for, and harboring of, North Korean nationals involved in prohibited conduct. In particular, the report could also focus on whether the financial institutions involved should have been designated or subjected to secondary sanctions. [Ruggiero testimony]
My next recommendation depends on whether the Cambodian government has retaken control of its shipping registry, as it promised to do last August, and whether it has de-registered the forty-plus North Korean ships it had reflagged, but is required by U.N. Security Council resolutions to de-register. For years, Cambodia’s shipping registry has been notorious for reflagging North Korean ships. What few of us knew until C4ADS informed us last year was that the International Ship Registry of Cambodia was “a joint venture between the Cambodian government and a South Korean company, the Cosmos Group.”
The seizure of the Jie Shun would have been around the same time as Cambodia promised to de-register rogue ships, and two months after South Korea very politely asked Cambodian dictator Hun Sen to enforce U.N. sanctions against Pyongyang. Good diplomacy always starts with a polite request, and also, it’s always backed by the prospect of ghastly and unspeakable consequences. That dual approach worked superbly the last time we tried it, in 2005, when Treasury officials Stuart Levey and Daniel Glaser went on their world Kim Jong-il Unplugged tour. If Cambodia didn’t act, it would make a damn good example for the likes of Tanzania, Sierra Leone, and other states that haven’t gotten the message about reflagging North Korean ships. And in the case of Cambodia, the Cosmos Group’s role gives us a willing South Korean partner with jurisdiction and a shared interest in shutting this dirty business down ppali-ppali.
The U.S. has an obligation to investigate how the financial transactions behind the shipment were denominated and processed — specifically, whether they were processed through the U.S. financial system. (Unfortunately, the seizure came before UNSCR 2321 banned the insurance of North Korean ships.) If the evidence shows that either the North Koreans or their Chinese partners misused our financial system to break the law, we should freeze and forfeit assets, issue indictments, and consider civil penalties or other appropriate enforcement actions against the banks involved.
Lastly, let’s not forget that under UNSCR 2270, China is supposed to be inspecting all of this North Korean cargo. The NKSPEA also provides a new legal tool for cracking down on ports that shirk that responsibility.
SEC. 205. ENHANCED INSPECTION AUTHORITIES.
(a) Report Required.—Not later than 180 days after the date of the enactment of this Act, and annually thereafter, the President shall submit to the appropriate congressional committees a report that identifies foreign ports and airports at which inspections of ships, aircraft, and conveyances originating in North Korea, carrying North Korean property, or operated by the Government of North Korea are not sufficient to effectively prevent the facilitation of any of the activities described in section 104(a).
(b) Enhanced Customs Inspection Requirements.—The Secretary of Homeland Security may require enhanced inspections of any goods entering the United States that have been transported through a port or airport identified by the President under subsection (a).
That means that if Dalian doesn’t comply with its requirements to inspect North Korean cargo, U.S. Customs and Border Protection might require more intrusive inspections of cargo coming from Dalian. Think of it as the shipping equivalent of a 311 action.
~ ~ ~
Update: A reader writes that it’s just as possible that the weapons were headed for Hamas or Hezbollah. Yes, I suppose those are both plausible possibilities. North Korea is suspected of having sold arms to both groups in the past. Now that Hezbollah has a large contingent fighting in Syria, the easiest way to supply it would be by landing the ship at the Syrian ports of Tartous or Latakia. Supplying Hamas is a bit trickier, but would probably work something like this.
~ ~ ~
Update 2: I want to take on the argument, suggested in the Kyodo report, that North Korea’s money laundering and smuggling networks are so well-hidden inside China that we couldn’t possibly uncover them. Yeah, how can we do that? We put resources on the problem, for once. We use the same methods we used to expose the equally sophisticated money launderers who worked for Iran, Al Qaeda, and the Cali Cartel. We do what C4ADS did, when two smart researchers with no classified access whatsoever exposed a sophisticated, well-hidden network of North Korean money launderers and smugglers operating from China. Just like the Justice and Treasury departments did when they added their law enforcement authorities to the mix and came up with an indictment and a civil forfeiture count that reached 5 individuals, dozens of front and shell companies, and 12 different Chinese banks. We do it like the U.N. Panel of Experts has done, year after year after year after year after year after year. If we’d simply investigate and/or designate the dozens of Chinese and other third-country entities exposed by the Panel’s open-source reports and their confidential annexes, we’d tear huge holes in that network. We do it by trying, for once, and by not being afraid to break some china along the way.
Finally, let’s not forget the role of human intelligence, which shows us why we don’t have to expose the entire network at once to damage the integrity of the whole thing. The number of North diplomats and money launderers who defected last year probably exceeded the numbers seen in any previous year. Every time a fund manager brings his laptop or some bank account numbers to U.S. or South Korean intelligence, we gain another invaluable clue about the dimensions of that network and who operates it. Apparently, we’ve done some damage, too.
“As sanctions against North Korea have strengthened, trading companies are turning to products that are not included in the sanctions list. The recent activity comes from a decision by the Ministry of Foreign Trade demanding that trading companies double their contributions,” a source in Pyongyang told Daily NK on February 1.
The North Korean authorities are increasing the amount of loyalty contributions to compensate for dwindling exports of weaponry, which had previously been a significant source of revenue. As a result, the companies have no choice but to explore alternative items for export. [Daily NK]
Every time we freeze or seize money in one part of the network, we make other parts of the network fearful that they’ll miss their kick-up quotas. There are some encouraging signs that sanctions can trigger defections, which in turn raise the burden on remaining parts of the network and provide intelligence to help us freeze even more money. Eventually, it all becomes a death spiral:
The undercurrents of desperation amongst the trading companies is largely due to Kim Jong Un’s use of fearpolitik. Some officials returning from abroad for the end-of-the-year review, he said, were dismissed for not completing their assignments, sparking fierce competition to complete the trade assignments set at the beginning of each new year.
“Some traders are complaining, ‘If you pull a rubber band too much, it will snap. This is why there are growing number of defections among dispatched workers,'” he added.
The executives in charge of North Korea’s international trading companies are expected to come under intense pressure. It remains to be seen whether this will spark an increase in high-level defections to South Korea or other countries this year. [Daily NK]
This also has ripple effects on the banks, who are our most valuable sources of financial intelligence, via the Know-Your-Customer rules, and the Suspicious Activity Reports and Currency Transaction reports they’re supposed to file. If Treasury puts out the word that we’re going to enforce those requirements strictly against North Korea — which is a 311 jurisdiction, after all — banks may step up their compliance out of fear of being exposed by defectors, and of paying the massive fines like those we imposed on banks that violated other sanctions regimes.
Years from today, North Korean bankers will remember 2016 as their annus horribilis. In February, a month after the North’s fourth nuclear test, Congress passed, and the President signed, the North Korea Sanctions and Policy Enhancement Act. Section 201 of the new law all but compelled the Treasury Department to designate North Korea a Primary Money Laundering Concern under section 311 of the Patriot Act. Section 311 allows for a menu of special measures to protect the financial system against offenders, but in March, the U.N. Security Council approved Resolution 2270, requiring member states to cut their correspondent relations with North Korean banks. That set the stage for Treasury to invoke the fifth and toughest of those measures, denying North Korean banks direct and indirect correspondent account services and isolating them from the international financial system. By then, the Financial Action Task Force had also called on banks and finance ministries around the world to apply “countermeasures” against North Korean money laundering.
As of January 2016, just eight North Korean banks’ assets had been blocked by the Treasury Department, including the Foreign Trade Bank and Korea Kwangsong Banking Corporation, or KKBC. Over the course of 2016, eight more North Korean banks would be blocked, six of them last Friday alone: North East Asia Bank, Koryo Credit Development Bank, Rason International Commercial Bank, Kumgang Bank, and Koryo Bank. That’s as close as financial regulation gets to this:
For banks that were already designated and had been slipping their payments through the net, events have also taken a darker turn. For years, Korea Kwangsong Bank accessed the financial system illegally through a Chinese conglomerate, Dandong Hongxiang Industrial Development. They would have gotten away with it, too, if not for those meddling (and also, brilliant) kids at the Center for Advanced Defense Studies, who used a shoestring budget and open-source intelligence to expose their international money-laundering operation. Shortly after C4ADS released its report, Treasury froze DHID’s assets, and the Justice Department indicted DHID and filed a complaint to forfeit its accounts in a dozen Chinese banks.
If the Chinese banking industry is North Korea’s financial Abbottabad, the SEALs have begun to break down the doors of its safe haven. Treasury has not yet cavity searched the (metaphorical) harem by fining the Chinese bankers who’ve flunked their know-your-customer obligations, but by now, those bankers have surely seen the video of Senators Menendez, Rubio, and Gardner calling for their heads.
Is that all? No, that is still not all. Last week, it was a matter of intense speculation when NK News noticed that the CEO of Egyptian conglomerate Orascom Telecom, Naguib Sawaris, had landed in Pyongyang on his private jet. Sawaris had made himself scarce in Pyongyang since last year, when North Korea effectively confiscated Orascom’s profits from a cell phone network joint venture called Koryolink and caused Orascom share prices to plunge like Thanksgiving turkeys from a helicopter. It wasn’t long before we learned the reason for Sawaris’s visit — later that week, Orascom announced that Orabank, its joint banking venture with the DPRK Foreign Trade Bank, would shut down. Scratch seven banks in two weeks (but it’s still only Wednesday).
Orascom shares fell more than five percent the day it announced the failure of Orabank. It blamed sanctions, but its North Korea joint ventures were already write-offs due to Pyongyang’s own confiscatory restrictions before sanctions were strengthened in 2016. The exact cause of Orabank’s death wasn’t the 2013 designation of the DPRK Foreign Trade Bank for proliferation financing. The impending termination of Orabank’s correspondent relationships probably played a role, but I suspect that the investigative reporter George Turner inflicted the fatal wound when he exposed the links between Orabank and the FTB (more meddling kids). Even without the 311 action, knowledge of Orabank’s links to the FTB put Orascom’s corporate officers at risk of prosecution.
This week, Sawaris announced his resignation as CEO. No kidding. If I were an Orascom shareholder, I’d have wanted him defenestrated. Sawaris is one of those larger-than-life corporate caudillos who tend to be susceptible to hubris and delusions of omnipotence. He should have known better. North Korea has a long and near-perfect record of bankrupting its investors and ruining their reputations. As they say, fools and their money are soon parted. The Pulitzer Prize-winning novelist, Adam Johnson, probably put it best when he said, “[E]veryone who deals with them eventually gets burned.”
North Korea may soon enter uncharted territory. Within a few months, it may be the only industrialized state in modern history to have no banking industry to speak of. That will have the immediate benefit of forcing it to rely on third-country banks, which will have more dollar exposure and more incentive to avoid handling transactions for illicit cargo and designated entities. As of today, however, a few North Korean banks still live on. In 2014, the U.N. Panel of Experts published a table with a partial list of them. I copied that table and shaded the columns gray for banks that are designated by Treasury, and a trendy shade of tan for banks that appear to be defunct.
For comparison, here is a list of North Korean banks that have been designated by the Treasury Department’s Office of Foreign Assets Control (it looks longer than it really is because many of these names are aliases and alternative spellings).
Not all of the banks designated by Treasury are on the U.N. list. If some of them are really the same banks using different names, there should be more gray on the first chart. Still, some of the 13 undesignated survivors are significant, including the DPRK Central Bank and the Korea Commerce Bank. Hana Banking Corporation may become especially important to Kim Jong-un’s sanctions survival strategy, as it deals in Renminbi. I’d expect to see a ruble bank arise in the near future, too, but as the Justice Department recently revealed, the North Koreans have already tried that strategy and found its limits. Other banks on the list appear to be small, fly-by-night operations. They may have less global exposure and be more likely to survive a loss of their interbank access; after all, even Banco Delta Asia still survives (in much-diminished form) by dealing in Renminbi and Macanese patacas. Will a few small, non-dollar banks and couriers carrying briefcases full of cash be sufficient to sustain the government of a nation of 23 million people? Not for long, but that will depend on how aggressive we are, and how much time they have.
You will soon read much haughty analysis from aspiring Nobel Peace Prize laureates that sanctions against North Korea will not be airtight. That is true. No sanctions regime has ever been airtight, and no sanctions regime ever needed to be. The effectiveness of sanctions isn’t measured in absolute terms; it’s measured in relative terms. Sanctions work when they force despots to make difficult choices, catalyze corruption and indiscipline, instigate inter-factional knife fights over dwindling resources, and convince the tyrants that they’re losing control. How many brigades can they afford to feed? Will they have to cut back on pay and rations, and will that mean more border guards frag their officers, or carry their guns over the border and rob Chinese villagers? How many diplomats and slush fund managers will defect when they realize they can’t make their kick-up payments, and how many more bank accounts will they finger when they do? Can Bureau 39 buy enough big-screen TVs for the boys in both the SSD and the MPS, and how will the ones who get stuck with crappy Samjiyon tablets feel about that? Will keeping all the goon squads happy only come at the cost of fixing flood-damaged bridges and railways? Will the consequence of not fixing them be that the affected regions drift out of Pyongyang’s orbit? How long will Xi Jinping have their back if secondary sanctions start to cause pain in China’s precarious banking sector, or in its rust belt? Will Xi’s paternal benevolence end if Kim starts a regional arms race, or causes a breakdown in relations with the United States?
Those are the difficult choices that sanctions can drive, and in the not-too-distant future, those choices will become matters of regime survival. I hasten to add that sanctions aren’t the only strategy that can threaten the regime’s stability. We don’t just have to pick one; in fact, they can complement each other well. Pyongyang’s goal will be to relieve itself of those difficult choices without making the two most difficult decisions of all: first, the decision to disarm completely, verifiably, and irreversibly; and second, the decision to accept enough transparency that anyone possessed of common sense would believe that it really made the first decision. Our discipline must be to multiply and intensify those difficulties until Kim Jong-un — or more likely, someone more reasonable who deposes him — makes those two most difficult decisions.
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.
It took a few weeks for the Senate Foreign Relations Committee’s Asia Subcommittee to put a hearing together after North Korea’s fifth nuclear test, but when that hearing finally happened on Wednesday, I actually found myself feeling sorry for the State Department witnesses, Danny Russel, the Assistant Secretary Of State at the Bureau Of East Asian And Pacific Affairs, and Daniel Fried, the State Department’s Coordinator for Sanctions Policy. A few years ago, they might have gotten away with showing up unprepared, with index cards filled with stock phrases. For example, after Chris Hill’s confirmation hearing, I wrote, “The degree to which the ‘august’ senators on the Committee have paid no attention to the conduct of policies they are charged with overseeing is depressing and stupefying, and yet it all somehow still makes for dreadfully dull viewing.” Thankfully, this Senate — or rather, this part of it — is a very different and much better body.
Under the leadership of Cory Gardner, at least one part of the Senate is doing policy oversight right. You can watch the whole thing here, and although it’s two hours long, it will hold the interest of anyone interested enough in North Korea policy to read this site. Do what I did and watch it in increments as time permits.
The main headline from the hearing is that the State Department officials said that they are investigating more Chinese companies for sanctions violations, but it’s clear from the questions that the senators will not be placated by the sacrifice of mere goats anymore. Their mood is of equal parts alarm and fury — both in front of and behind the scenes, and among both Republicans and Democrats — that Chinese banks are breaking our laws, and that this administration is letting them get away with it. As they did before the hearing, they want the administration to sanction the Chinese banks that launder Kim Jong-un’s money.
By now, everyone should have expected Republicans like Gardner and Rubio to question State about that. State should have known by now that both men would be well-prepared and unsparing in their criticism. The intellects of both men, and good behind-the-scenes work by the staff — including arms control experts and one with extensive sanctions administration experience at the Treasury Department — ensured that they would quickly sift away talking points and cut directly to the issues. Gardner mentioned at one point that the senators were given a common set of briefing materials. It showed in both the insightfulness and focus of the questions, and in the bipartisan unity of their questions’ thrust. I’ve never worked in the Senate, so I wouldn’t know if that’s standard procedure there, but past hearings I’ve watched didn’t run this well. Gardner himself was in complete command of both the material and the room, and gave every appearance of being a man with limitless potential. Indeed, all of the senators were well-prepared. All, regardless of their party or tribal affiliations, asked good or excellent questions.
In the end, however, no one can hurt you more than the people who love you. At 58:17, Senator Menendez began questioning Fried by arguing for secondary sanctions against Chinese banks. He then embarked on a well-prepared, determined, and lawyerly cross-examination of Fried about this. Pressured by Menendez’s questioning and clearly unsure of his material, Fried told Menendez that Dandong Hongxiang was a bank (not true). I don’t think Fried was lying, but he didn’t have command of the facts, and when he got out of his depth, he swam into a rip current. Menendez pinned Fried down on his answer. Then, when his time expired, he went back and pulled Treasury’s announcement, probably talked to his staff, and confirmed that this wasn’t true. At 1:35:30, Menendez returned, rearmed. This, ladies and gentlemen, is what it’s like to have a bad day in the United States Senate.
SEN. MENENDEZ: Mr. Fried, I pride myself on my preparation for these hearings, so I went back to your office after your answer, and I looked at OFAC’s statement of Monday. You said in response to my question we’d sanctioned a bank on Monday. Well, I read from OFAC’s statement that they imposed sanctions on Dan-ong Yonhwang (sic) Industrial Development Company and four individuals. Now, is that company a bank?
A/S FRIED: Sir, it is a financial — it is not a bank — it is the financial company that worked with a sanctioned North Korean bank.
SEN. MENENDEZ: All right, that’s different than saying you’d sanctioned a bank.
A/S FRIED: Yes, sir.
SEN. MENENDEZ: You did not sanction a bank on Monday.
A/S FRIED: Uh, we sanctioned a fi — a Chinese, uh, financial corporation.
SEN. MENENDEZ: All right, well, that’s different than a bank. Let me ask you this. How many banks — banks — has the administration sanctioned as it relates to North Korea?
A/S FRIED: Uh, a nu — do you mean banks in general or Chinese banks?
SEN. MENENDEZ: Chinese — let’s talk about Chinese banks.
A/S FRIED: A number — no Chinese banks.
SEN. MENENDEZ: No Chinese banks.
A/S FRIED: Not in China. We have umm —
SEN. MENENDEZ: That’s my point. That’s the point I was trying to drive at earlier. You have sanctioned no Chinese banks at the end of the day, and they are probably the major financial institutions for North Korea. What this company, as I understand, did was make purchases of sugar and fertilizer on behalf of a designated Korean bank. It’s a trading company, not a financial company. So, when I take testimony as a member of this Committee, I need to make sure that testimony is accurate, because I make decisions based upon it. And I must say that the information you gave me is not accurate. It was not a bank. This was a trading company. And finally, I got the answer that I wanted to hear, which is what I knew, that you’ve sanctioned no Chinese banks that relates (sic) to North Korea. And it is our hesitancy to do so that that takes away one of the major instruments possible to change Chinese thinking. I’m all for persuasion if you can achieve it. But when you can’t, and North Korea continues to advance its nuclear program in a way that becomes more menacing — and its miniaturization and its missile technology — I don’t know at what point we are going to continue to think we can stop them when in fact they’re pretty well on their way. And we allow them to continue to do so. And we don’t use some of the most significant tools that we have. So I’m disappointed that you didn’t give me the right information.
I hold no ill will toward Mr. Fried, but I literally cheered as Menendez calmly bored right to the truth of the matter. Yet on another level, watching this was deeply depressing. Menendez, for all his troubles — and I hope he’ll soon put those behind him — clearly showed us how valuable he is to his state and his country. If the Democrats retake the Senate, I hope he’ll be Committee Chairman again. Markey — watch for him to emerge as a liberal advocate for human rights in North Korea — wisely counseled restraint on South Korea’s military threats. Rubio, who had personally read and commented intelligently on an earlier version of the NKSPEA, had also read and understood C4ADS’s report and its implications. Any one of these senators would have been a better choice as President than the choices before us now. What I can’t help asking myself today is how we elect such good senators, yet such awful presidents.
In the years after the passage of the North Korean Human Rights Act, those who had worked hard to pass that law watched the State Department slow-walk it to a full stop, with Congress seemingly powerless to make it follow the law. That may have been to State’s short-term advantage, but its long-term cost was to plant in many of us a deep distrust of the State Department. We learned that passing a law is only the first step — that laws need robust enforcement mechanisms and a permanent, bipartisan constituency to make sure the executive enforces them. Hence, section 103 briefings, the first installment of which came due just as Kim Jong-un tested his fifth nuke. This Subcommittee is taking full advantage of those oversight provisions. Pray that continues to be the case in the next congress.
I’ll give The Wall Street Journal the final word, if only to make the point that this issue isn’t going away, and that the next POTUS will come under withering pressure to do what this one has not done — enforce our laws.
An invaluable report published last week by South Korea’s Asan Institute and the U.S.-based Center for Advanced Defense Studies found that Hongxiang Industrial and its parent company conducted some $532 million in North Korea business from 2011 to 2015. To put that into perspective, South Korean officials have estimated that the North’s main nuclear facility at Yongbyon cost less than $700 million to construct. [….]
In addition to neutralizing Hongxiang, these sanctions are aimed at persuading other Chinese companies to cut off Pyongyang lest they suffer the same fate, as when the U.S. sanctioned Macau-based Banco Delta Asia for about a year starting in 2005. This is the best hope for squeezing Kim hard enough that he might halt his nuclear drive. But China opposes such measures because it fears that squeezing too hard might cause the collapse of its client state.
Chinese trading firms and especially banks are likelier to cut off Pyongyang if the U.S. follows up promptly with further sanctions. One good sign is that the State Department’s Daniel Fried suggested Wednesday to Congress that more penalties are coming for Chinese firms.
Less promising is that in unsealing its indictment Monday the Justice Department said “there are no allegations of wrongdoing” against the banks involved in Hongxiang’s sanctions-busting. So despite imposing billions of dollars in penalties on a range of European banks for violating sanctions on Iran and others in recent years, the Obama Administration is signaling that Chinese banks aiding North Korea are untouchable.
In an open letter this month to President Obama, 19 Senators led by Colorado’s Cory Gardner quoted our Aug. 19 editorial (“North Korea’s Sanctions Luck”) on the evidence, compiled by United Nations experts, that the Bank of China “allegedly helped a North Korea-linked client get $40 million in deceptive wire transfers through U.S. banks.” That’s one of many examples. [WSJ]
If the House and Senate staff believe the administration has held back on specific targets, such as the Bank of China or any of the 12 banks named in the DHID forfeiture complaint, their next step should be to send the President a section 102(a) letter, which triggers a mandatory investigation, and possible designation.
Yesterday’s indictments of the Dandong Hongxiang defendants, who are charged with willfully violating North Korea sanctions by laundering money for sanctioned Korea Kwangsong Banking Corporation, might have been good enough for 2009. They broke the illusion that China’s well-connected bag-men and bag-women were immune from sanctions. To borrow John Park and Jim Walsh’s expression, they meant that we’d finally begun to go after North Korea, Inc.
Unfortunately, this isn’t 2009. We’re now in a desperate race to disarm Kim Jong-un, one way or another, before the coming Korea Missile Crisis, before he can extort us into retreat and South Korea into one-country-two-systems submission. Those who think we can coexist with a nuclear North Korea are blinding themselves to what is flagrantly, repeatedly, and recently obvious — that he will not and cannot coexist with us. In Washington, serious men now speak of preemptive strikes. The appeasers will call for more deals, but we have tried them all. If there is still a chance to avoid war, that chance is regime-crippling sanctions that force the generals in Pyongyang to “stare into the abyss.” For those sanctions to cripple the regime, they will have to cause a liquidity crisis in Pyongyang by freezing solid the slush funds that pay Kim Jong-un’s army, secret police, elites, and civil service.
Just as they were in 2005, banks are the key pressure points. It’s the banks, not shadowy Chinese trading companies, that are most easily influenced to run away from the legal risks associated with North Korea, and that hold the bulk of Kim Jong-un’s assets.
Yet increasingly, the smartest experts on North Korea’s economy are speculating that China and its banks are being even more unhelpful than most North Korea watchers had imagined. Both Steph Haggard and Nick Eberstadt have raised suspicions that someone — most likely, someone in China — is subsidizing Pyongyang and actively undermining financial sanctions, as shown by the surprising resilience of its currency, even after the closure of Kaesong, and in spite of the fact that North Korea is nominally running a substantial trade deficit. The subsequent exposure of DHID’s role does much to validate suspicions that that support is coming through Chinese financial institutions, in dollars.
But this hidden source of resiliency is also a vulnerability. To Bill Brown, dollarization of the palace economy has helped Pyongyang stabilize that economy in the short term, but also contains longer-term dangers (I’ll let you read about them at his post rather than try to explain them here). The key point is that Pyongyang may be more dependent on the dollar than at any point in its history. Can Pyongyang adapt by further limiting its exposure to the dollar system? If that was a real option for Pyongyang, it would have exercised it either after the Banco Delta Asia episode or since then. As the Justice Department said, Pyongyang needs dollars because sellers take them.
Which is to say, China’s banks are helping Kim Jong-un win his race to nuclear breakout, and by doing so, they’re making a nuclear war on China’s doorstep more likely.
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Now that I have your attention, I must bore you with some banking law. If you just can’t stand it, skip ahead to the next section. I’m about to set the table for why the 12 Chinese banks named in yesterday’s civil forfeiture complaint — and the Bank of China, which was implicated in a criminal case in Singapore last year — skated, and shouldn’t have.
Under U.S. anti-money laundering (AML) law, banks are expected to know the law, the sanctions regulations, and enough about their customers to know who’s legit and who’s using them to launder money or break sanctions. They’re supposed to have compliance programs in place, including trained compliance officers to identify and report suspicious activity, and special software to identify blocked persons who appear on Treasury’s list of Specially Designated Nationals (“the SDN List”). A key part of this compliance program is called “Know Your Customer,” which is self-explanatory in principle but can be complicated in its application.
If you’re interested — and let’s face it, you probably aren’t — the Treasury Department’s Office of Foreign Assets Control, or OFAC, has published enforcement guidelines in 31 CFR Part 501, Appendix A, laying out a schedule of fines based on the number and amount of transactions that broke the sanctions regulations, and the willfulness and egregiousness of the violations. What’s slightly more interesting is that OFAC publishes its settlements against banks that violate sanctions laws. A comparison to how similarly situated European banks have been treated puts the Chinese banks (and Treasury) in a very unfavorable light.
OFAC has often imposed steep fines against banks that didn’t even violate the sanctions regulations intentionally. For example, in March 2015, Paypal settled a penalty case with OFAC for $7.6M after violating multiple sanctions regulations through “reckless disregard” in its sanctions compliance before self-reporting its violations. In August 2015, UBS AG paid OFAC a $1.7M settlement for 222 payments to persons blocked for terrorist connections. UBS AG self-reported, but only after learning that OFAC was investigating the payments. UBS had a sufficient compliance program in place; it just interpreted the law incorrectly, concluding that certain investment-related transactions on behalf of a designated client weren’t blocked (wrong). In February, Barclays Bank paid OFAC a $2.5M settlement for processing 159 transactions, totaling just over $3M, for a person blocked under the Zimbabwe Sanctions Regulations, masked behind entities that did not appear on the SDN list. The violation was the inadvertent result of faulty compliance verification software. The bank did not self-disclose. Either way, OFAC expects banks to have effective compliance programs. As excuses, bad software and bad lawyers won’t cut it. Self-disclosure mitigates the penalty, but it’s not a defense.
Willful violations, on the other hand, can be extremely costly. In March 2015, Commerzbank paid OFAC a $258M settlement for processing 1600 transactions in violation of the Iran, Sudan, Burma, Cuba sanctions regulations. The bank stripped transaction data out of the wire transfers to conceal their nexus to sanctioned persons from their correspondents. In October 2015, Crédit Agricole Corporate and Investment Bank paid OFAC a $330M settlement for processing over 4,000 transactions in violation of Sudan, Burma, Cuba, and Iran sanctions regulations. Once again, OFAC found that Crédit Agricole and its predecessor banks stripped data out of the wire transfers.
The mother of all fines, however, was a record $8.9 billion (with a “b”) paid by BNP Paribas for years of willful data-stripping in violation of multiple sanctions regulations. OFAC’s penalty was so gargantuan that Congress passed special legislation (see Division O, Title IV, Section 404) to place $1 billion of that amount into a special fund to compensate the victims of terrorism, including the 9/11 attacks and some of the lawsuits against North Korea. A special master was recently appointed to administer the fund. (Thanks to the reader and lawyer who told me about this recently. I wish him a great bounty of contingency fees. Also, I’m in the wrong business. I do this for free, you know. You’re welcome, humanity.)
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In the case of the 12 Chinese banks named in yesterday’s forfeiture complaint, their AML compliance procedures were, at best, inexcusably sloppy. They serviced international transactions for shell companies that were registered in the British Virgin Islands or the Seychelles, and that listed fictitious addresses in Hong Kong office towers. Yeah, but who among us hasn’t done that as a youthful indiscretion? For those of you in the banking industry, the obvious answer is any banks whose Know-Your-Customer compliance programs do their due diligence and have kept up with strict new beneficial ownership rules in the EU and the U.S., especially since that whole Panama Papers thing, and especially for jurisdictions subject to U.N. sanctions and section 311.
And it’s not like much due diligence should have been necessary, given that Ma boasted openly that her customers were from “the DPRK elite group” and was an outspoken proponent of the trade that propped Pyongyang up.
To add further to the banks’ culpability here, some of the shell companies used the same Tortola, B.V.I. address as DCB Finance Limited, which was exposed for its role in sanctions violations when the Panama Papers went public (surely compliance software should have caught this!). According to the forfeiture complaint, “[a]s recently as June, July and August of 2016, nearly $8 million has transited through U.S. correspondent bank accounts related to three DHID front companies,” so some of this conduct is very recent. If nothing else, it adds more fuel to what Bill Newcomb and I have said about invoking additional beneficial ownership disclosure and record-keeping rules for North Korea.
In the case of the Bank of China, however, it got away with the AML equivalent of murder. Like Commerzbank and BNP Paribas, its employees stripped data out of wire transfers and willfully deceived their U.S. correspondents. There’s simply no defending Treasury’s failure to take enforcement action, given that BoC’s conduct was willful and egregious, unlike the other banks that simply got sloppy.
For OFAC’s penalties to be consistent, all 13 of these banks’ compliance officers ought to be collecting documents and reviewing affidavits with their lawyers right now. Instead, by saying that “[t]here are no allegations of wrongdoing by the U.S. correspondent banks or foreign banks that maintain these accounts,” the Justice Department sent a very different message to the Chinese banking industry.
That’s why tomorrow’s hearing in the Senate Foreign Relations Committee should not let up on what Senator Gardner and Senator Corker have demanded. They should not accept China’s reported arrest and investigation of Ma Xiaohong, its reported (and belated) investigation of KKBC executives, or its actions to stop North Korean trade representatives from leaving the country as signs that China is serious about enforcement at last. The DHID ships that have been impounded will be released in due course. A reported bribery investigation into the Dandong customs office that passed Ma’s wares into North Korea is self-serving from China’s perspective; China would rather package this as an anti-corruption investigation than admit that it bowed to U.S. pressure. China is not sharing information with DOJ and Treasury about its investigation, and U.S. officials don’t believe China’s actions are coordinated with theirs. More recently, China has lashed out at the U.S. for enforcing its laws:
China’s Foreign Ministry on Tuesday voiced its disapproval of U.S. actions against the businesswoman, Ma Xiaohong, and her Hongxiang Industrial Development Co. a day after Washington announced criminal charges and sanctions against her and the trading company for allegedly acting as financial fronts for North Korean companies on U.S. blacklists. “We oppose efforts by any country to use their domestic laws to impose ‘long-arm jurisdiction’ over Chinese entities or individuals,” ministry spokesman Geng Shuang told a news briefing, in response to a query on the U.S. actions against Hongxiang Industrial. [WSJ]
That’s some chutzpah, coming from a government that just unilaterally claimed the whole South China Sea and lost an international arbitration testing the merits of its claims, or that bullies Seoul with unilateral sanctions when the latter tries to defend itself from Beijing’s rabid dog. The real unilateralism is yielding to global consensus, voting for U.N. resolutions, and failing to enforce them. Unilateralism is claiming a sovereign right to misuse a distant nation’s financial system to break its laws and threaten its security. Maybe next time, U.S. authorities shouldn’t fly to Beijing to share their investigative findings, and all the sources and methods that approach may have compromised. Maybe they should just file indictments, freeze assets, and let Xi Jinping read about them in The Global Times. U.S.-China relations may have to get worse before they can get better. They may have to get worse to prevent them from becoming catastrophic. Predators need limits.
Extraordinary claims require extraordinary evidence, and given the long and sordid history of China violating North Korea sanctions, any claim that China has made a principled decision to enforce in good faith the sanctions it voted for at the U.N. should be counted as extraordinary.
Instead, we should take China’s actions as signs that Beijing will do as little as it can get away with doing, but will acquiesce to its enforcement obligations if we attach a high enough cost to its tolerance of North Korea’s violations. We should seek to divide the self-interest of the banks in avoiding penalties and maintaining their dollar access from the interests of the Chinese government, which is to make mischief, drive the Americans out of Asia, and end up dominating both Koreas by default. We should take note of reports that North Korean trading company executives fear repercussions for getting caught. The administration should exploit those fears and divisions, turn as many of those executives as it can, and find out what they know. Above all, it should heed the conclusion of C4ADS, the plucky little NGO that showed it how good investigation works:
With the right resources and political will, it can be possible to significantly disrupt the DPRK’s illicit overseas earnings, and in the process raise the cost of its brazen proliferation activity. As the DPRK grows increasingly dependent on its overseas networks, it creates an opportunity for the international community to leverage their financial intelligence tools to squeeze the regime’s illicit activity. While actors inside North Korea can operate with impunity, abroad they are subject to international norms. A single shipment can require significant documentation and effort, including maintaining corporate entities, processing cross-border payments, or acquiring insurance or bank letters of credit, all of which necessarily leave paper trails that can be followed. By exposing these risk points and peeling away the infrastructure of DPRK illicit overseas networks, the cost and difficulty of operating abroad could rise dramatically.
Following the money is likely to be the most effective means for the international community to coerce the Kim regime toward concessions and a cessation of their nuclear program. Getting there, however, will require significantly expanded efforts to continually investigate, monitor, and act against DPRK entities as they further evolve to evade sanctions. This report aims to build a foundation for this effort. [C4ADS]
A surprising finding? North Korea’s network isn’t really all that big.
A key finding from the UN Panel of Experts was the observation that “While [DPRK] networks appear complex, their key nodes consist of a limited number of individuals and intermediaries…. Although shell companies can be swiftly changed, the individuals responsible for establishing and managing them have remained, often for years.” [C4ADS]
I’ll give Stephan Haggard the penultimate word.
What these reports show clearly is that the “sanctions don’t work” litany is deeply misleading. This trope assumes a hardy North Korean regime ready to resist any pressure no matter how intense. That is simply not the story; rather, the story is that North Korea has not been forced to make any adjustments because it has been able to conduct business largely if not wholly as usual. How does that show that sanctions don’t work? [WTT]
Yes, some Chinese trading companies may indeed run away from North Korea because of the DHID indictments. Those that don’t will probably jack up their commissions from 20 percent to 30 percent, which is itself a sanctions cost for Kim Jong-un. But any casual reader of U.N. Panel of Experts knows that North Korea’s network of enablers in China, though it is finite, is also much more extensive than this. If this indictment is just a beginning, it’s a good one. I have no objection to starting with smaller targets to scare bigger ones. But if this is all we do, North Korea’s network will recover quickly. One way or another, if we mean to prevent war, we must send a clear message to the Chinese banking industry that there will be no more business as usual with Kim Jong-un.
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(Edited after publication to include China’s reaction to the indictments.)
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.
In February and March, respectively, the U.S. Congress and the U.N. Security Council responded to North Korea’s fourth nuclear test with sanctions that were, in theory, an order of magnitude stronger than any sanctions imposed on North Korea until then. Sanctions, of course, are only as good as their enforcement, and in enforcing sanctions against North Korea, the most important rule has always been “follow the money.” Money — along with the contradictions of its political system — has always been one of Pyongyang’s main vulnerabilities. Much of that money sits in banks in China, Europe, and Russia. A sudden cutoff of those funds could shake the increasingly fragile cohesion and discipline of the security forces. It could also shake the wavering confidence of North Korean elites in Kim Jong-un’s capacity to preserve their status, position, and survival. After an inevitable period of backlash, tension, and provocations, an insolvent dictatorship in Pyongyang would confront an existential choice to reform and disarm or perish.
Of course, confronting Kim Jong-un with that choice depends on getting Kim Jong-un’s bankers in China, Russia, and European states to comply with the new U.N. sanctions. Because China and Russia have voted for and subsequently violated U.N. sanctions resolutions for years, Congress concluded that a credible threat of secondary sanctions was necessary to make them enforce the resolutions. Section 104 of the North Korea Sanctions and Policy Enhancement Act requires the administration to block the slush funds that facilitate Kim Jong-un’s proliferation, arms trafficking, luxury goods imports, and human rights abuses, wherever those funds are found. The purpose of the law is to force the administration to cut off the funds that maintain Kim Jong-un’s regime, and to send a clear message to Chinese and Russian banks that the days of business as usual are over. Either they can do business with Pyongyang or New York, but not both.
Congress made those sanctions mandatory — barring the invocation of a presidential waiver in section 208(c), which must be reported to Congress — because had it lost patience with China, and because it had lost confidence in the Obama administration’s will to enforce U.S. law or U.N. sanctions against North Korea. The Obama administration has too a long history of letting Kim Jong-un off the hook for his most egregious conduct to be trusted. It did functionally nothing to sanction Pyongyang after its second and third nuclear tests, multiple missile tests, and two attacks against South Korea. It failed to list North Korea as a state sponsor of terrorism despite multiple attempts to assassinate dissidents and human rights activists, multiple arms shipments to Iranian-backed terrorists, and the Sony cyber terrorist attack against the U.S. homeland. It did nothing to the Chinese and China-based entities that hosted and enabled the North Korean hackers. Yet for years, despite the extensive evidence of China’s bad faith, the White House effectively outsourced its North Korea policy to China.
More recently, the Obama administration has taken a back seat to South Korea, whose diplomats have conducted a skillful and effective campaign to terminate North Korea’s lucrative arms dealing and labor exports, and to shore up international support for sanctions enforcement. Meanwhile, the Obama administration failed to undertake a serious campaign of financial diplomacy against Pyongyang.
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The administration has denied knowing where North Korea’s slush funds are, but those denials become harder to believe as the open-source evidence accumulates. For years, open sources have reported that U.S. and South Korean authorities had pursued and identified large amounts of those funds. A recent spate of high-level defections — yet another was revealed just today — has likely added to the U.S. government’s knowledge of those funding streams. Good journalism has done much to expose North Korea’s China-based money laundering. In the coming days, an extraordinary and little-known organization, the Center for Advanced Defense Studies, will release a meticulously researched report, based entirely on open-source information, that will provide a ground-breaking expose of the North Korean overseas procurement networks. Any guesses which country they operate from?
But perhaps “ground-breaking” is too optimistic. Six months after the latest report from the U.N. Panel of Experts, the administration still hasn’t sanctioned any of the dozens of third-country enablers of North Korean proliferation, smuggling, or money laundering named in that report. The Panel’s report added dozens of names to the long list of Chinese and China-based trading companies, middlemen, and assorted death-merchants to the list of those who’ve spent the last two decades helping Pyongyang buy, sell, and trade the instruments of proliferation and extortion. You won’t find any of them listed among this year’s designations by the Treasury Department.
The administration still hasn’t blocked Chinpo Shipping, which was convicted by a court in Singapore of facilitating North Korean weapons smuggling. It has taken no action against the Bank of China, whose local staff knowingly deceived their U.S. correspondents — and may have broken U.S. money laundering laws — by directing Chinpo to conceal any North Korean links to the shipment. It has not sanctioned Chinese ex-spy Sam Pa or his 88 Queensway Group for their dealings with Bureau 39 (sanctioned by both Treasury and the U.N.) although it did sanction Pa for violating Zimbabwe sanctions. The same goes for the North Korean mining companies and their foreign investors I found among the Panama Papers. Under Executive Order 13722, those companies and their enablers should be subject to sectoral sanctions. No action has been taken against any of them, either.
If the administration — despite the vast personnel, legal, and intelligence resources at its disposal — doesn’t have all of this information, that could only be because it isn’t trying to gather it. What seems much more likely is that the administration has decided not to act on it — on any of it. The fact that the Obama administration won’t act on the information it has makes it harder to believe its denials that it knows where Kim Jong-un’s money is. I have no way of knowing what Treasury knows on the classified or law enforcement sensitive level, of course, but Congress does. We’ll get to that at the end of this post.
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Is the administration simply afraid of the diplomatic consequences of secondary sanctions against Chinese and Russian interests? Clearly not. Just two weeks ago, the Treasury Department designated and blocked a network of traders and trading companies that were helping the Syrian government’s arms procurement and proliferation. One of those traders was a Chinese national and two were Russian; one of the companies is located in Shenyang and one in Moscow. And of course, the Obama administration has directly sanctioned some of Putin’s top officials and financiers over Russia’s invasion of the Ukraine.
The administration can’t credibly claim that China deserves a pass because of its good behavior, either. Recently, China has turned sharply toward authoritarianism, anti-Americanism, and imperial hegemony over neighboring states and waters. It just blocked a toothless U.N. censure of North Korea over missile launches that flagrantly violated a decade-long series of Security Council resolutions by inserting poison-pill language objecting to South Korea’s improvement of its missile defenses.
Yet instead of accepting responsibility for selling North Korea missile technology and road-mobile missile carriers, among other items, China’s Global Times blames the U.S. for the North Korean threat. Instead of sanctioning Pyongyang, Beijing is threatening Seoul with trade sanctions for having the temerity to want to defend itself from North Korea missiles. It has made a show of cozying up to North Korea and expressing its “significant differences” with the United States.It has even taken to bullying South Korea’s beloved K-pop artists. Korean conservatives are making an issue of this, as they should. Even the far-left, anti-American Hankyoreh Sinmun calls China’s threats “petty.” Scott Snyder is probably right that in the end, this will hurt China’s own economic interests. That is to say nothing of the nationalist backlash it will inspire among Koreans. But the broader point is that China isn’t taking the gravity of this threat to U.S., South Korean, and Japanese security seriously. That’s all the more reason why China must share in the cost of the threat it has done so much to incubate.
I disagree with John Park and James Walsh on the role of sanctions as often as not, but they are right that for sanctions to slow North Korea’s proliferation, the administration must be willing to pursue and sanction North Korea’s procurement networks in China. They are also correct that weakly enforced sanctions, like half-doses of antibiotics, only serve to strengthen the disease’s resistance to the cure. It should go without saying that in attacking North Korea’s procurement networks, it may be necessary to sanction their Chinese enablers, too. But to go beyond merely delaying Kim Jong-un’s progress toward an effective nuclear arsenal, we must do much more — we must instill the fear of God in Chinese banks that hold (at least) hundreds of millions of dollars in North Korean slush funds, and that allow Kim Jong-un and his cronies to use those funds to maintain his hold over his military and security forces.
In the weeks and months following the imposition of U.S. and U.N. sanctions, I’ve seen and seized on hopeful signs that Chinese banks were freezing North Korean accounts, and that North Korean operatives have been unable to pay their debts. No doubt the administration knows things that I don’t, but these isolated reports still do not suggest that Pyongyang is in the early stages of a liquidity crisis that will confront it with the choice to reform and disarm or perish. Rather, absent more evidence that Treasury is serious about finding and blocking North Korean slush funds, those initial hopeful signs will fade away. It will be business as usual all over again, just as it was not long after Chinese banks briefly froze North Korean funds in 2013.
The fact that Pyongyang continues to sell coal and iron ore to China — in volumes that are increasing, not decreasing — suggests that Pyongyang still has access to bank accounts where it can deposit its coal and iron ore revenues. North Korea’s unsanctioned mineral exports are also rising. Because the mineral trade is under regime control, the fact that it is not directly sanctioned does not absolve China from the duty to ensure that revenue from this trade isn’t used to support Pyongyang’s WMD programs. The rise in this trade reinforces the likelihood that China’s banking industry is open for North Korean business. One South Korean expert opines that it also reflects a rising consensus among Chinese trading companies that China has lost interest in enforcing sanctions against Pyongyang.
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Yes, the administration has taken the long-overdue step of blocking North Korean banks’ access to the financial system. Treasury’s regulation is still not final, and it still remains to be seen what effects U.S. and EU money-laundering blacklisting will have. On one level, the recent surge of defections suggests that the regime is under some financial duress, for some reason. Yes, the administration has designated Kim Jong-un by name for his human rights abuses, while signaling that this action is an entirely symbolic one. Those actions were commendable, so I commended them. But they were meant to be symbolic and much more. The administration must do more than name Kim Jong-un; it must find and freeze the billions of dollars he is not using to provide for his people. Whatever we are doing right, we can do it better.
Fortunately, Congress learned a lesson from the North Korean Human Rights Act: administrations don’t always want to enforce the law, so Congress must make them. When it passed the new sanctions law, Congress included numerous reporting requirements, including a requirement that the administration report to Congress 180 days after the enactment of the legislation on exactly what it has done to enforce the new sanctions. I wonder if the administration forgot about this. Congress hasn’t forgotten it. The time has come for Congress to ask for that briefing. I can think of some very detailed and specific questions the staff should ask about what the administration has done to follow the money. If the administration doesn’t have satisfactory answers, Congress should hold oversight hearings.
We are still in the early phases of implementing these new sanctions authorities. There is still time for sanctions to work, but we are also at the stage where China traditionally stops pretending to enforce sanctions and returns to business as usual. In Washington, the distractions of an election year present a high risk that the administration may prefer a quiet exit to stopping North Korea’s march to nuclear breakout. An administration that wasted eight years while the North Korean threat continued to build has not earned one last “era of procrastination, of half-measures, of soothing and baffling expedients, of delays.” We are entering an era of consequences. The President must enforce the law. Congress must use its oversight authority to ensure that he does.
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Sipping fruit tea in a Dandong café, Wang, the alias of a Pyongyang-born Chinese trader who speaks to TIME on condition of anonymity, describes how his business importing North Korean coal and minerals and exporting building materials has been eviscerated by the sanctions. “North Korean traders don’t have cash anymore,” he says. “I have to limit the amount of goods I sell to them on credit as the risk of default is so high.”
The report also says that refugees in South Korea have had an easier time sending money to their relatives back in North Korea. There’s nothing wrong with that, as long as Chinese banks enforce sanctions against the regime’s agents.