32 results found.
32 results found.
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.
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).
One of the more maddening tropes I see in reporters’ coverage is a question that’s usually presented as dispositive to the success of sanctions: “Will China cooperate?” For reasons I’ve already explained and don’t have time to repeat today, I always answer that question by asking what the questioner means by “China.” The point being: yes, it would be nice if Xi Jinping finally came around to the rising risk that Kim Jong-un will bring war, instability, disrepute, and bankruptcy to China, but he hasn’t. He hates us more and fears us less than he hates and fears Kim Jong-un, and I strongly doubt that we’ve brought him close to that tipping point.
What matters more is whether the Chinese banks that hold North Korean accounts, and the Chinese businesses that deal with North Korea and also use the financial system that runs through New York, have developed a healthy fear of the Treasury Department. For some very good reasons, yes, I think the banks have and the businesses are starting to. Consequently, we continue to see reports from the China-North Korea border that some of the divergent interests we lump together into a million-person jiaozi we call “China” are indeed cooperating.
Is this mainly because of (a) Chinese government action to enforce sanctions, (b) fear of public or legal exposure by Chinese exporters that use North Korean labor or materials, or (c) the fact that both parties are having difficulty finding finance for North Korea-linked transactions? I can’t say for certain, and I suspect that (a), (b), and (c) are all factors to different degrees, but I’m going with (c). Why? First, because that’s consistent with reports I compiled in September, going back over the preceding weeks, that banks in China were freezing or closing North Korean accounts. Second, because we continue to see reports like this one.
The trader in the Chinese border city of Dandong has seen business all but dry up, and he spends his days scrambling to obtain payment from the suddenly broke North Korean state companies to whom he sold on credit.
“They have no money to pay us in cash, and the worst is that because of sanctions they can’t settle the bill with goods such as coal, as they did in the past,” said Yu, reached by telephone at the offices of his Dandong Gaoli Trading Company.
Yu said he’s owed about $1 million in all for deliveries of toothpaste, instant noodles and other household items. He’s trying to avoid laying off staff by continuing to export foodstuffs such as pine nuts and red beans. “If they become unemployed, it would be bad for both the state and society.”
Yu’s plight appears increasingly commonplace across Dandong, where the bulk of the cross-border trade is handled. Interviews with four trading companies and recent media reports indicate Chinese companies are hurting in a city where North Korean trucks used to rumble across the Yalu River bridge several times a week delivering metal scrap and returning with everything from televisions to toilet bowls.
The owner of another firm, Dandong Baoquan Commerce and Trade Co., which used to import iron ore and coal and export basic consumer goods, said he was owed around $200,000 by his North Korea clients.
“I had to lay off about 10 staffers, but I had no other choice because it was the government policy,” Han Lixin said, referring to the sanctions. “I’m still in business hoping to trade with other countries, but it takes a lot of time and efforts to develop customers.” [AP]
See also this report, indicating that the root cause of the trade slump is that the North Korean traders are suddenly broke; this report that North Korean traders can’t pay their debts to their Chinese partners; and this report on the slowing of trade in Rason. North Korean workers also continue to leave China, including its fishing industry. The Chinese businesses are now backfilling their production lines with Chinese workers.
In the interest of balance, and to give some very cautious credit where it’s due, there have also been some reports that the Chinese government has ordered North Korean businesses to close down. Adam Cathcart also points to a Chinese-language report of a corruption crackdown in the border region (I can’t read Chinese, so I’ll take his word for that). On the other hand, this report by the Financial Times tells us that sanctioned North Korean entities, including Minzheng International Trading, continue to operate freely in Hong Kong. Other reports confirm that China’s flagrant cheating on shipping and coal import sanctions continues (see here, here, here, and here).
An October report that the elites in Pyongyang were being deprived of rations has not been backed up by other reporting since then, and I’d add that rations almost certainly make up a very small portion of what the Pyongyang elites live on.
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My suspicion has long been that China tends to crack down on North Korean money laundering either (1) to make good headlines until we lose interest and quietly go back to business as usual, or (2) to claim credit for, and conceal our influence on, trends that occur for other reasons, such as market fears of secondary sanctions. There are still not enough such reports for me to feel confident that this is an across-the-board trend that will endure, but it has certainly introduced both uncertainty and additional cost into any supply chain that begins in North Korea.
Overall, the news encourages us that if the administration continues to accelerate its enforcement efforts, they will present Kim Jong-un with the difficult choice to disarm or lose the confidence of his crocodiles. There is still much more that we haven’t done, and there is no time to lose in doing it.
Our Treasury Department is off to half-decent start, but I’ll believe it’s really serious when I see 9-figure fines like these on the banks that are laundering Kim Jong-un’s money.https://t.co/59XixGqsF9 https://t.co/xOlvRbY2dh
— Joshua Stanton (@freekorea_us) November 30, 2017
Finally, an interpretive advisory for journalists: when you read Ambassador Haley’s threat to “take the oil situation into our own hands,” rather than immediately jump to alarmist conclusions and spread panic, consider a much more likely possibility — that Haley may be threatening that the U.S. will freeze and/or forfeit the assets of shippers, merchants, and refineries that deal with North Korea (see, e.g., the Treasury Department’s designation of Velmur and its corporate officers, and the Justice Department’s recent forfeiture suit against its funds). I have mixed feelings about oil sanctions, frankly, and will probably do a post on that at some point, but every policy decision is a balance of risks against threats, and I need not tell you that the threat is rising.
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Update: This interview with a resident of Pyongyang from mid-November, however, indicates that sanctions weren’t having much of an effect there. Yet.
Here at OFK, we’ve chronicled a curious fact that few professional foreign policy scholars have noticed: China is opposed to unilateral sanctions, except when it isn’t. Last week — barely a week after President Trump returned from Beijing — he gave Xi Jinping something to oppose.
OFAC designated Dandong Kehua Economy & Trade Co., Ltd., Dandong Xianghe Trading Co., Ltd., and Dandong Hongda Trade Co. Ltd. pursuant to E.O. 13810. Between January 1, 2013 and August 31, 2017, these three companies cumulatively exported approximately $650 million worth of goods to North Korea and cumulatively imported more than $100 million worth of goods from North Korea. These goods have included notebook computers, anthracite coal, iron, iron ore, lead ore, zinc ore, silver ore, lead, and ferrous products.
OFAC designated Sun Sidong and his company, Dandong Dongyuan Industrial Co., Ltd. (Dongyuan), pursuant to E.O. 13810. Sun and Dongyuan were responsible for exporting over $28 million worth of goods to North Korea over several years, including motor vehicles, electrical machinery, radio navigational items, aluminum, iron, pipes, and items associated with nuclear reactors. Dongyuan has also been associated with front companies for weapons of mass destruction-related North Korean organizations. [Treasury Dep’t Press Release]
All told, last week’s designations include four Chinese companies, one Chinese individual, seven North Korean shipping or trading companies, two North Korean government agencies, and 20 North Korean ships. Most of the designations target North Korea’s shipping industry, and OFAC, the Office of Foreign Assets Control, even included photographs of North Korean ships doing ship-to-ship transfers of oil, in violation of UNSCR 2375, paragraph 11. If I had to guess, I’d guess that those photographs were taken by a spy satellite.
Treasury did not name the other ship or its nationality; however, in testimony at the House Foreign Affairs Committee in September, Treasury Assistant Secretary Marshall Billingslea showed other photographs “provided by the intelligence community” and named the ships, the flag states, and their destination ports (in China and Russia, of course).
The designation of the North Korean entities suggests that Treasury is pursuing a phased strategy. In the first phase, Treasury blacklists North Korean entities to put third-country companies, insurers, and banks on notice to avoid doing any business involving them. Treasury is still years behind the U.N. Panel of Experts, however, in naming the various persons and entities known to be involved in violating North Korea sanctions. Although a person designated by OFAC can sue to challenge the designation, the courts would apply a deferential standard and uphold any designation supported by “substantial evidence.” In most cases, the U.N. Panel’s careful and thorough work, including its annexes, would be more than sufficient to meet that standard.
Take, for example, the case of one of Treasury’s designations, the North Korean Maritime Administration. The U.N. Panel of Experts had recommended its designation in its most recent report, in September, for helping U.N.-designated North Korean arms smuggler Ocean Maritime Management evade sanctions. I’ve pasted the relevant text from the POE’s report below the “continue reading” link.
The next phase will require Treasury to hit some third-country targets to sever that business and warn others of the consequences of breaking that boycott. In the case of the Sun Sidong network, we’ve reached that second phase. Sun’s network first came to our attention last August, when a leaked U.N. report revealed that the Egyptian authorities had found a large shipment of PG-7 rocket-propelled grenades aboard a Chinese-flagged merchant ship, the Jie Shun, at the southern end of the Suez Canal. At the time, I’d guessed the rockets were headed for Syria, but the Washington Post later reported that the customer was none other than Egypt itself.
By June of this year, the Center for Advanced Defense Studies had pursued the POE’s clues and traced the ownership and control of the Jie Shun back to a Chinese national named Sun Sidong.
#SunSidong formerly owned the Jie Shun, a ship seized during a multimillion arms transfer from North Korea to Egypt, highlighting how “licit North Korean businesses are being used to facilitate North Korean illicit activity” (@JobyWarrick) https://t.co/WGlDscjFSn
— C4ADS (@C4ADS) November 22, 2017
It then released a remarkable report that not only exposed Sun’s network, it effectively mapped out most of North Korea’s money laundering network in China. C4ADS found that this network was “centralized, limited, and vulnerable” to sanctions. Sun and his companies account for a large portion of that network.
To put @USTreasury ‘s most recent set of #NorthKorea sanctions in context, it’s important to understand the layers of licit business that #NK uses to obscure illicit arms and tech trade via China https://t.co/EmQlYLlg4G pic.twitter.com/6hFRnnYcAh
— C4ADS (@C4ADS) November 22, 2017
For example, one of its subsidiaries, Dandong Zhicheng Metallic Materials Company, was until recently the single largest purchaser of North Korean coal.
“These companies will have a tough time continuing operations as even Chinese banks will increase scrutiny of their transactions, if not completely cut them off,” Anthony Ruggiero, a Senior Fellow at the Foundation for the Defense of Democracies, told NK News.
“These actions continue the narrative on the problem China has in Dandong and Dalian, something Treasury highlighted in its advisory where it noted the activities of Chinese banks and companies working with North Korea.” [NK News, Leo Byrne]
Last week’s designations are not the feds’ first strike on the Sun Sidong network. In August, the Justice Department filed a civil forfeiture complaint against DZMM. Last month, the Wall Street Journal reported that Sun was under investigation by the FBI, so it may not be the last strike, either.
This beautiful New York home was purchased with North Korean money – check out @freekorea_us on how “Sun’s network may have been Pyongyang’s since most important portal” into the global economy #sanctions https://t.co/eMXY1N3B87 pic.twitter.com/rYVGs3FUtj
— C4ADS (@C4ADS) November 22, 2017
One other company, the Korea South-South Cooperation Corporation, was designated for slave labor exports to “China, Russia, Cambodia, and Poland.” Technically speaking, UNSCR 2375 permits member states to allow labor contracts with North Korea to expire, but in this case, Treasury is telling the parties to those transactions to keep them out of the dollar system.
Although the designations came one day after President Trump announced that North Korea would be returned to the list of state sponsors of terrorism, the designations are not directly related to North Korea’s recent sponsorship of terrorism. It would not surprise me, however, to see future designations of North Korean nationals under Executive Order 13224. The President has indicated that we’ll see more designations soon.
President Donald Trump, in announcing Monday his administration’s decision to designate North Korea as state sponsor of terrorism, indicated that additional sanctions measures were on the way. “It will be the highest level of sanctions by the time it’s finished over a two-week period,” Mr. Trump said. [WSJ, Felicia Schwartz]
The designations also tell us a few things about the role of China in enforcing these sanctions. First, although I’d feared that Trump would get hoodwinked by Xi Jinping in Beijing and ease off on secondary sanctions, it’s clear that he hasn’t eased up entirely. It’s also clear that the visit by a Chinese emissary to Pyongyang, which was much ballyhooed on Twitter (including by the President himself) achieved exactly as much as I’d expected (bupkes). By now, all wizened Korea-watchers either know or should know that the words “great expectations,” “diplomat,” and “Pyongyang” can only be assembled into transitory delusions.
Don’t hold your breath. It was designed to appear to be doing something to please you. https://t.co/UPey7pdFOb
— Robert Manning (@Rmanning4) November 16, 2017
We soon learned that when Xi Jinping’s messenger showed up, His Porcine Majesty was conveniently out of town looking at things. No doubt, Xi is unhappy with both Donald Trump and Kim Jong-un now. But he’d have no reason to be unhappy with us now if he enforced the sanctions his government voted for at the U.N.
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The Chinese government unexpectedly arrested the head of a major company operating cargo ships linking North Korea and China, which the United States had designated as an entity subject to its independent sanctions, a joint investigation by The Dong-A Ilbo and Channel A found on Sunday. Beijing is reportedly conducting far-reaching investigation of all companies engaged in trade with North Korea, as well as Chinese firms and individuals Washington included in the list of entities subject to its independent sanctions since this past summer, and is taking disciplinary action if illegal acts are detected.
According to informed sources on North Korea, the Chinese government arrested a man identified by his last name Jin, head of Dalian Global Unity Shipping, and is probing him in a location other than Dalian. Jin, a Korean Chinese, is an entrepreneur widely known in the field who is almost monopolizing shipping service linking Dalian and North Korea. Since his arrest, the operation of all the vessels linking Dalian and North Korea has been suspended. The measure is reportedly putting heavy pressure on North Korea, with the North’s export to China having been halted. [Dong-a Ilbo]
Dalian Global Unity isn’t part of the current round of designations; it was added to the SDN List back in June.
Finally, OFAC designated Dalian Global Unity Shipping Co., Ltd. (Dalian Global Unity) pursuant to E.O. 13722 for operating in the transportation industry in the North Korean economy. Dalian Global Unity is reported to transport 700,000 tons of freight annually, including coal and steel products, between China and North Korea. According to the 2013 report by the UN Panel of Experts on North Korea, Dalian Global Unity was actively involved in eight cases of luxury goods smuggling incidents and is suspected of involvement in at least one other case. Middlemen from Dalian Global Unity gave specific instructions about how shipments and transactions could evade the UN-mandated luxury goods ban. [U.S. Treasury Dep’t]
Remember the ten-week rule: never celebrate any apparent Chinese compliance with North Korea sanctions until it has been in effect for at least ten weeks.
I still remember my excitement, bordering on giddiness, when in May 2013, a few big banks in China froze some North Korean accounts. That action came two months after the Treasury Department designated North Korea’s Foreign Trade Bank, and just over a week after Ed Royce dropped the first draft of the NKSPEA. But as we’ve learned from our friends in the FBI and the Justice Department since then, big Chinese banks began clearing the FTB’s transactions as soon as they felt that the coast was clear.
The lesson I’ve learned from this and other, similar episodes is that one should be cautious before believing any highly publicized case of China enforcing sanctions against Pyongyang or applying economic pressure to it. I’ve seen this show enough times to suspect that China has a deliberate media manipulation strategy of making a big deal of enforcing sanctions until reporters lose interest.
For example, reports that China has halted tourism to North Korea just before President Trump arrived in China seem suspect. Technically, there are no U.N. sanctions prohibiting tourist travel. North Korea’s business partners — UNSCR 1718, paragraph 8(d) if you doubt me — are obliged to “ensure” that they aren’t indirectly funding WMD programs and other prohibited purposes (spoiler alert: in a place like North Korea, they can’t), but I doubt that most Chinese businesses either know or care about that obligation yet. Instead, remember the ten-week rule: check back in ten weeks and I’ll tell you if it’s for real.
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Take the coal export cap under UNSCR 2321, which later became a coal ban in UNSCR 2371. Remember August, when China announced that it was halting coal imports from North Korea? We’ve since learned that this is yet another case of China initially complying with an obligation, only to resume its cheating as soon as reporters looked the other way. The flaw in this strategy is that nowadays, too many reporters don’t look the other way for long. The sharp-eyed crew at NK News has been especially diligent about spotting North Korean bulk carriers at Chinese coal terminals, but this time, I’ll credit VOA.
China imported 509,000 tons of coal from North Korea last month, raising doubts about its implementation of U.N. sanctions over Pyongyang’s nuclear and missile programs, Voice of America (VOA) reported Tuesday. VOA’s Korean Service said China bought US$44 million of coal from the North in September, citing data from the Korea International Trade Association. [Yonhap]
China is now saying that the coal landed in February but did not clear customs until September because Beijing implemented the ban so suddenly. But this does not resolve the question in China’s favor. First, under a strict reading, China should have returned any coal that wasn’t “imported” before the full ban. Second, by February, China had already exceeded the existing quota for 2017, under the most recent resolution then in effect, UNSCR 2321. Third, two of the three largest suppliers of North Korean coal are companies controlled by U.N.-designated entities — the Reconnaissance General Bureau and the Munitions Industry Department. If the RGB or the MID ultimately controlled the coal that was sold to China, China’s legal obligation under UNSCR 1718, paragraph 8(d), was to seize the coal and dispose of it. Hold that thought.
The resolution that finally imposed a total ban on coal exports, UNSCR 2371, does not have a grace period for coal exports. It’s a flat ban. Now, a friend with deep knowledge of the facts and law tells me it’s actually more complicated than that, for reasons that the person was unable to make clear to me. Still, I don’t see anything in the language of the resolution that permits the purchase of North Korean coal in September. I read this as a violation of the resolutions.
What can we do about that? For one, the President should be raising it with Xi Jinping. For another, if any of those coal transactions were denominated in dollars, paid to one of the blocked North Korean coal exporters, and cleared through the United States, he should unleash the Justice Department, whose aggressive prosecutors have begun to enforce the legal prohibitions against dealing with sanctioned North Korean entities strictly. The fact that Congress is keeping the pressure on and tightening the coal ban further will also help. It will take more of that strict enforcement to make the coal ban stick.
If you haven’t read my last post on this week’s deadline for the Secretary of State to decide whether North Korea has repeatedly sponsored acts of international terrorism, you may want to start there. This post will be a combination of breaking news and supplement to that post. This morning, Bloomberg News, citing a report in the Joongang Ilbo, is reporting that yet again, North Korean agents have been caught while on their way to assassinate a dissident in exile. This time, the target was Kim Han-sol, the son of Kim Jong-nam, whom the North Korean government also assassinated.
Chinese police arrested several North Koreans dispatched to Beijing on suspicion of plotting to murder Mr Kim Jong Un’s 22-year-old nephew, South Korea’s JoongAng Ilbo newspaper reported.
Two of seven North Korean agents were arrested over the alleged plot to kill Mr Kim Han Sol, whose father Kim Jong Nam was assassinated in Malaysia earlier this year, the newspaper said, citing an unidentified person familiar with North Korean issues.
Some agents are being interrogated in special facilities on the outskirts of Beijing, the paper said, without elaborating on whether the other five were arrested. China’s Foreign Ministry did not immediately respond to a faxed request for comment. [Bloomberg, crediting the Straits Times]
Let’s review the elements of “international terrorism:” To qualify, the conduct must be —
1. an act of, an attempt at, or a threat of violence,
2. that is unlawful where it was or would have been committed,
3. involves the citizens or territory of more than one country,
4. is carried out by clandestine agents or subnational groups, and
5. is done with the apparent intent* to influence the conduct of a government or a civilian population.
Subject to confirmation of the original report, that would be check, check, check, check, and check. I recently wrote about Kim Han-sol’s rescue from the apparent fear of assassination by Pyongyang’s hit squads by Cheollima Civil Defense, which looks to be the first indigenous North Korean resistance organization, though it appears to operate only outside North Korea using non-violent methods, and does not yet appear to pose a serious threat to the regime’s internal control.
For a list of recent North Korean state-sponsored attempts to assassinate human rights activists and dissidents in exile, I’ll refer you to my report for HRNK. (You don’t have to read all 100 pages. The table of contents will direct you to the appropriate section.) This week, when Thae Yong-ho testifies — under extraordinarily tight security — before the House Foreign Affairs Committee, I hope the members will ask him about this latest report. I hope they’ll ask him how reports like this make him feel about his own safety and the safety of his family. I hope they’ll ask him just what message he thinks Kim Jong-un is trying to send by dispatching these terrorists, how he intends to respond, and whether he will remain silent. What message do you suppose Secretary Tillerson will send to Thae and other North Korean dissidents in exile if he, like his predecessors, refuses to call North Korea a state sponsor of terrorism?
So, to summarize, Secretary Tillerson should re-list North Korea because —
1. North Korea has repeatedly sponsored acts of international terrorism, and the American people have an interest in having a government that tells them the truth.
2. To begin restoring the State Department’s badly damaged credibility in Congress, which suffers every time State refuses to re-list Pyongyang. In last week’s post, I cited a number of op-eds and a letter from several members of the House of Representatives calling for Pyongyang’s re-listing. I neglected to link to this letter, signed by 12 U.S. senators of both parties.
3. To send a message of support to dissidents in exile like Kim Han-sol, Thae Yong-ho, Park Sang-hak, Lee Hyeon-seo, and others.
4. To send a message to Pyongyang that we are not afraid to attach, and are determined to attach, consequences to its crimes.
5. To further tighten existing sanctions. In addition to the potential civil liability and securities law consequences I wrote about last week, there’s another important point I forgot to mention. Re-designating Pyongyang would close a loophole in our sanctions by unlocking the stricter sanctions regulations in 31 C.F.R. Part 596. That regulation unambiguously requires an OFAC license for any dollar transactions or transactions by U.S. persons with a government that’s listed as a state sponsor of terrorism.
Why does that matter? Because the existing North Korea Sanctions Regulation (NKSR) at 31 C.F.R. 510, in my view, does not do that. It hasn’t been updated since 2011 — two statutes and three executive orders ago. Instead, the NKSR prohibits “[a]ll transactions prohibited pursuant to Executive Order 13466,” 13551 (which potentially applies to anyone involved in Pyongyang’s arms trafficking, proliferation, and money laundering, but in reality only applies to a few people who’ve been designated under this EO), 13570 (which requires a license for most imports from and exports to North Korea).
But to see how vague, circular, and Kafkaesque this regulation really is, you have to see what 13466 covers: any property that was already blocked until 2008, when President Bush took North Korea off the terror list and canceled Trading With the Enemy Act sanctions. That appears to include only property that was blocked in 2008. Maybe Treasury would disagree. Then again, maybe if it tried to sanction or prosecute anyone for violating the NKSR — and with a single exception, it never has — a competent defense attorney would argue that the regulation is ambiguous on its face, and that under the rule of lenity, the court should construe any ambiguity in favor of the accused. The courts will not give Chevron deference to an agency’s interpretation of a regulation for purposes of imposing a criminal punishment. Part 510 is so vague in its wording, circular in its reasoning, and outdated in its incorporation of authorities that not even I could tell you what it really means, and reporters and government officials routinely ask me what these laws and regulations mean. Why wouldn’t a banker or trading company official in Dandong be able to make the same argument?
If our government is serious about “maximum pressure,” some clarity would be useful.
The State Department worries about how Pyongyang would react to a re-listing. There will be tantrums, paroxysms, and provocations, of course. That’s de rigeur for Pyongyang, but provocations are inevitable, for one excuse or another, regardless of what Tillerson decides. What Tillerson can better control is whether he will also face a tantrum from Congress. Regardless of which convenient excuse it may seize on, Pyongyang engages in provocations to achieve political and diplomatic aims, and tests weapons to advance technical capabilities. Our objective should be to demonstrate to Pyongyang that attacks on our interests carry real consequences. An SSOT re-listing will carry both financial and symbolic consequences.
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* Previously said “attempt.” Since corrected.
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A reader’s question causes me to clarify a few points. First, Treasury’s FAQs say that financial transactions through the U.S. with North Korea require a license. Second, EO 13570, which is appended to the NKSR en toto, bans the export of “services” to North Korea, and the case law supports the position that clearing dollar transactions through the U.S. is an export of services. EO 13722, which is not appended to the most recent version of the NKSR published by the Government Printing Office online, also contains similar language.
But that’s far from intuitive or unambiguous enough for many of the persons who might consider dealing with North Korea. Even a brief review of what financial flows the Justice Department and the U.N. Panel of Experts have exposed in recent months shows that we haven’t made this nearly clear enough to the financial industry. Perceptions can become realities. EO 13810 made it much clearer, of course, but why not make the text of the regulation itself clear? Heck, we have four sets of sanctions regulations for Iran. You’d think having one set of clear sanctions regulations for North Korea isn’t too much to ask. The relative attraction of Part 596 is that at least it’s clear to everyone. Sorry for the wonky tangent.
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Update, Nov. 4: The original Joongang Ilbo report is now available in English. It cites an unnamed source. The South Korean National Intelligence service officially says that it has no knowledge of the plot. Separately, it told KBS that Kim Jong-nam is safe in a third country and questioned the veracity of the Joongang Ilbo’s report on the basis that Kim Han-sol isn’t in China. The NIS may have sound reasons to doubt this anonymous report. It may also be under political pressure from Moon Jae-in’s cabinet to avoid implicating Pyongyang in its latest attempted act of terrorism. But the fact that Kim Han-sol isn’t in China — assuming that’s true — is probative of nothing. Regardless of where Han-sol is living, one naturally would expect the North Korean agents to transit through China. After all, most flights out of Pyongyang transit through there, many of its agents reside there, and so does most of its cash.
Previously, I’ve written about the C4ADS investigation that exposed the Sun Sidong network, and that network’s role in money laundering and arms smuggling for North Korea, most notably the seizure of the Jie Shun arms shipment in Egypt. Shortly after the release of C4ADS’s report, Treasury froze the assets of one of Sun’s companies, Dandong Zhicheng Metallic Materials, and the Justice Department filed a civil forfeiture suit against $4 million of its assets. Now, the Wall Street Journal reports that Sun is under FBI investigation:
The FBI has been looking into Mr. Sun’s U.S. connections to potentially illegal transactions with North Korea, according to one person familiar with the investigation. Another person said the FBI has inquired about a personal U.S. real estate deal involving Mr. Sun, and a third person said Mr. Sun was on the FBI’s radar. Neither Mr. Sun nor his businesses are officially sanctioned by the U.S. [WSJ]
That last statement isn’t entirely true.
One of Mr. Sun’s companies and a company owned by his sister, Sun Sihong, have each been listed as owners of a cargo ship, the Jie Shun, that the United Nations said was seized off Egypt’s coast last year and found to be hiding 30,000 rocket-propelled grenades under piles of iron ore.
At the time of the seizure, the ship was owned by Ms. Sun’s Hong Kong-based company, Vast Win Shipping, and it had been previously owned by Mr. Sun’s Hong Kong-based company, Jie Shun Shipping Co., according to the Equasis shipping database and Hong Kong corporate records. Ms. Sun declined to comment. [WSJ]
In related news, Vietnam recently expelled the local Vast Win representative, describing it as a subsidiary of North Korean shipper Ocean Maritime Management, which was designated by the UN and the US over a 2013 arms shipment, also in violation of the UN embargo. Vietnam also denied visas to 20 North Korean “IT workers.”
Anyway, so much for the theory (or guess) advanced by “experts” that North Korea’s Chinese enablers were shadowy, isolated, inscrutable, and sanctions-proof.
Mr. Sun has had assets in the U.S. as well—he sold a four-bedroom house in Great Neck, N.Y., in August for $1.1. million, according to real-estate records and people involved in the transaction.
By C4ADS’s reckoning, Sun’s network may have been Pyongyang’s most important portal into the Chinese (and thus, the global) economy. I don’t expect most of these enablers to have physical assets in the U.S. like Sun had, but I do expect all of the major ones to require access to the dollar system.
Mr. Sun is linked in Chinese corporate records to several other firms registered in Hong Kong and mainland China. He also is listed in U.S. public records as the chief executive of Dongyuan Enterprise, a Flushing, N.Y.-based firm. That company successfully applied for a U.S. work visa last year for another Chinese national, its director, according to Labor Department records. Dongyuan Enterprise didn’t respond to repeated requests for comment.
Dongyuan Enterprise shipped 42,000 pounds of apples from South Korea to the U.S. in January, according to Descartes Datamyne, an international trade-data provider. It also shipped $35,000 worth of “used furniture” from one of Mr. Sun’s Chinese firms to the U.S., in March.
Mr. Sun’s U.S. business might allow him to do transactions around the world without any obvious ties to his China-based, North Korea-focused dealings, said C4ADS’s research chief, David Lynch. It could also provide him with the ability to register for business services within the U.S., including bank accounts to transfer funds internationally and overseas trade, Mr. Lynch said. [WSJ]
I don’t know anything more about this investigation against Sun than you do, but the conduct described here suggests an investigation for money laundering and violations of the International Emergency Economic Powers Act. I suppose we’ll also see a forfeiture action of some kind, listing the real property or proceeds of the sale as “proceeds” of criminal activity. If Sun Sidong runs back to China and the authorities there won’t extradite him, that may be the only way to impose any meaningful accountability on him.
The Wall Street Journal is reporting that hackers employed by the government of North Korea have been implicated in yet another international bank fraud scheme using hacked SWIFT software. This time, the victim is a bank in Taiwan, and the take was $60 million, all of it laundered through accounts in Cambodia, Sri Lanka, and the United States.
In a blog post Tuesday, cybersecurity researchers at U.K. defense company BAE Systems PLC also implicated Lazarus in the Taiwanese theft, saying that tools used in the attack on the Far Eastern International Bank include those used by Lazarus in the past.
“The attack this month on Taiwanese Far Eastern International Bank has some of the hallmarks of the Lazarus group,” BAE researchers wrote.
The suspected ties to Lazarus suggest the group’s continued focus on financial cybercrimes. In addition to the Bangladesh Bank theft, the BAE researchers said the group has been targeting bitcoin and is behind attacks on banks in Mexico and Poland.
Security researchers suspect the group has links to North Korea. U.S. authorities have said that one hack also linked to Lazarus—the 2014 Sony Pictures hack—originated in North Korea. The country has denied being behind the attack.
The BAE researchers said they found further evidence of the group’s North Korea links, saying they observed infrastructure in North Korea controlling the malware used in a previous Lazarus-linked attack. Representatives at North Korea’s Beijing embassy and Hong Kong consulate weren’t immediately available for comment. [WSJ, Dan Strumpf]
Sri Lankan authorities have arrested two suspects, one of whom was trying to withdraw $520,000 (which is more than my ATM ordinarily allows me to take out before a trip to Home Depot for plywood and router bits).
That report closely follows this New York Times story on the recent history of North Korea’s cyber crimes, including the Bangladesh Bank fraud, where the North Koreans got away with $81 million, the 2013 Dark Seoul cyberattacks, the 2014 Sony cyberattack and cyberterrorist attack against the U.S. homeland (about which the United States of America did approximately diddly squat), and (consequently) this year’s the WannaCry ransomware attacks.
Earlier this year, I wrote about reports that high officials in U.S. intelligence and law enforcement agencies had found evidence implicating North Korea in recent cyberattacks. Clearly, the FBI is investigating this course of criminal conduct, which is something I presume the FBI wouldn’t do without some prospect of a prosecution. We are speaking, after all, of conduct that is highly dangerous, ongoing, and undeterred. That gives the U.S. government a powerful incentive to charge those who conspired to commit these crimes.
Which brings us to this question: Is there any real doubt as to who the real person of interest is here? Of course, the feds would need at least some proof to get a grand jury to indict. The opacity of the royal court in Pyongyang presents some obvious challenges to this, but just over a decade ago, when prosecutors very nearly indicted His Porcine Majesty’s father for counterfeiting — before George W. Bush stopped them for political reasons — they concluded that those challenges were surmountable.
“The most difficult thing is connecting evidence of criminality to a state’s leader, because there is so much deniability built in. But there isn’t a whole lot of activity in North Korea that isn’t sanctioned by the leadership, and the evidence we had already built up was very good. These cases were very doable.” The criminal cases, says Asher, were based on information from undercover agents, informants, and a vast surveillance operation. [Vanity Fair, David Rose]
If you’ve read the links above or my posts on the Sony cyber attacks, it’s apparent that our signals intelligence is part of the case that implicates state-sponsored North Korean hackers. The Justice Department has cited the testimony of defectors in recent civil forfeiture cases against North Korean funds, and at least two defectors with inside knowledge of North Korean cyber operations have spoken publicly.
But even assuming there are no defectors who testify to His Porcine Majesty’s complicity, and that the government offers no signals intelligence implicating him (which it might not want to do to protect sources and methods) the feds could still do what the plaintiffs did in their lawsuits against North Korea for the state sponsorship of terrorism — they could call experts to testify about North Korea’s system of government, command systems, and the certainty that this conspiracy must have been approved at the very top.
Then, what would the feds most likely charge? Prosecutors’ opinions inevitably vary, but here are my best guesses. I’ve linked the relevant sections in the Criminal Code so that you can read the elements yourself.
Assuming the feds do indict, would His Porcine Majesty, a sitting head of state, be immune from prosecution in a U.S. court? I want to thank one of my Twitter followers, Shin Chang-hoon, for pointing me to this interesting discussion of that potential obstacle in the broader, global context. In the U.S. federal courts, however, there is at least one precedent for the feds successfully indicting, prosecuting, and convicting a sitting, de facto head of state. That would be Manuel Antonio Noriega, the former dictator of Panama, whom we arrested after the 1989 U.S. invasion of that country. Noriega argued his indictment on drug charges must be dismissed because he was immune from prosecution. The U.S. Court of Appeals for the 11th Circuit rejected Noriega’s argument on the grounds that the U.S. had not recognized him as the lawful head of state, and because (and this is admittedly circular) by invading Panama, and by arresting and extraditing him, the U.S. showed that it did not intend to immunize him. You can read the court’s decision here.
Yes, the potential for such prosecutions to get out of hand is obvious, but it’s hard to believe that a federal court of appeals would immunize a head of state from prosecution for straight-up international bank fraud. The key distinction is whether the prosecuted conduct consists of the acts of a head of state or “for private or criminal acts.”
Having navigated past one problem, we encounter a more difficult one: the requirement to have a defendant present for the arraignment before a prosecution can go forward. (One of my least pleasant trials was a case where I defended a man who ran away after his arraignment and before trial. Much like Clint Eastwood did not do in 2012, only more effectively, I had to defend an empty chair. The chair got three years — a good result, given the charges and the evidence.)
So, does this bring us to an Emily Litella moment?
Not quite. Admittedly, my experience in federal civilian criminal litigation is limited, but as I read the Federal Rules of Criminal Procedure and the U.S. Attorneys’ Manual, you don’t need to have custody of a defendant to indict. The statute of limitations (typically, five years) stops running when the feds indict. Then, the indictment sits on a shelf until arraignment, which starts the ticking of the defendant’s speedy trial clock. But why do that? Again, past history is instructive.
The final stage, which David Asher says President Bush had been fully briefed about, would have been the unsealing of criminal indictments. “We could have gone after the foreign personal bank accounts of the leadership because we could prove they were kingpins,” Asher says. “We were going to indict the ultimate perpetrators of a global criminal network.” “The world wanted evidence that North Korea is a criminal state, not a lot of hoo-ha,” says Suzanne Hayden, a former senior prosecutor at the Department of Justice who ran its part of the Illicit Activities Initiative. “The criminal cases would have provided the evidence. It would have been in the indictments. As with any money-laundering investigation, we would have identified the players and traced them back, from Macao to those who were behind it in North Korea.” [Vanity Fair, David Rose]
A better reason might be to charge and prosecute the third-country nationals and businesses that provide the North Korean hackers with the havens and support they require.
The feds would also have the alternative of filing a civil forfeiture case under 18 U.S.C. 981, alleging all of the same counts in a civil, in rem suit against funds that belong to Kim Jong-un, on the theory that the funds are proceeds of that conduct, or are facilitating property (such as property co-mingled with the stolen funds to conceal their origin and ownership). The advantage of that strategy is that the feds would only have to prove the forfeitability of the property by a preponderance of the evidence, and the feds would win the suit by default unless Kim Jong-un enters an appearance in federal court and intervenes in the proceeding.
In 2005, President Bush decided not to go forward with the prosecution of Kim Jong-il because it was afraid that he’d walk out of six-party talks. But of course, North Korea did walk about of six-party talks in 2008, hasn’t returned since then, and is absolutely adamant in its refusal to negotiate either a freeze or denuclearization, that concern isn’t present.
Of all the dumb things smart people tend to write about North Korea, the dumbest of them all may be the idea that what North Korea needs most is for us to teach it how to do capitalism. Over the last week, I’ve read reports of how North Korea and its officials make money through drug trafficking, racetrack gambling, tourism, and ivory and rhino horn smuggling. It runs one of the world’s more sophisticated money laundering operations using front and shell companies in Hong Kong. The last thing Pyongyang needs us for is to teach it how to make money. To Pyongyang, capitalism is not a path to reform, but a path to the enslavement of all Koreans. What Pyongyang needs to learn is an object lesson in the rule of law — that at last, its crimes will have consequences, even if some of those consequences are symbolic. And for a system of government built on symbols and myths, symbolic consequences can be some of the most powerful ones.
As I’ve mentioned previously, this has been a busy month for me, and a difficult one for keeping up with the many developments in North Korea sanctions enforcement. Over the last months, I’ve been keeping a tally of how those efforts are taking shape. The accumulating evidence now gives reason for guarded optimism that at last, the sanctions are starting to show significant effects.
Financial. Treasury Undersecretary Sigal Mandelker sent the right message to the financial industry in her recent testimony before the Senate Banking Committee:
Banks worldwide should take note that we are acting to protect the U.S. financial system from North Korean illicit financial activity. The new authorities granted to the Treasury Department by the Executive order issued last week give us even greater ability and leverage to target foreign banks that support the Kim regime. We now have the ability to suspend correspondent account access to, or designate and freeze the assets of, any foreign financial institution that knowingly conducts significant transactions in connection with any trade with North Korea or on behalf of any North Korea-related designated person. These new financial sanctions will be forward looking, and will apply to behavior that occurs following the date of the Executive order. These types of sanctions were used to great effect in the Iran context, and present a stark choice to banks around the world.
Treasury took an important step late last month when it designated most of the remaining active North Korean banks (see the list in this post for reference). The designation of North Korea’s Central Bank, which issues its currency and has historically sold gold overseas, could be the most significant. But the designation of 26 individual North Korean bankers, trade representatives, and diplomats (read: money launderers and arms dealers) also matters, because banks everywhere now have a legal duty to close and/or freeze their accounts. Targeting these operatives in larger numbers makes it harder for the regime to react and shift funds to other operatives. The regime probably can’t replace these operatives and their valuable contacts faster than we’re designating them now.
Financial sanctions are also having second-order effects. The decision by China National Petroleum to stop selling fuel to North Korea reflects a concern that Pyongyang can’t pay for it, although Beijing has historically supplied fuel to Pyongyang through a cross-border pipeline, free of charge, and without reporting it in its official trade statistics. Last month, I noted that banks in China were freezing or closing North Koreans’ accounts.
Similarly, the North Korean coal industry, which has been sanctioned by the U.N., and (perhaps more significantly) targeted by the U.S. Treasury and Justice departments for asset freezes, seizure warrants, and civil forfeiture suits, is clearly suffering, according to Daily NK interviews of citizens living near the mines.
In late September, China reportedly ordered joint ventures with North Korea to shut down. Since then, other reports have suggested that North Korean workers are returning from China in large numbers — despite the fact that U.N. sanctions allow those workers to complete their three-year contracts — and multiple reports suggest that Chinese businesses that relied on the cross-border trade have been hurt or idled. In Russia, too, North Korean money launderers are having trouble remitting funds.
Although most press reports have assumed that these developments were the result of Beijing ordering Chinese firms to comply with U.N. sanctions, I’ve theorized that the actual reason for these changes may be, as one Chinese trader put it, that their North Korean partners “can’t pay us.” That is most likely a consequence of Chinese banks’ fear of losing their access to the dollar system. Chinese firms may also be concerned that products made with North Korean labor or materials will lose their access to U.S. markets, or that millions in profits may be frozen in correspondent accounts.
Historically, actions by Beijing have tended to generate optimistic headlines until, a few weeks later, we’d learn that its actions weren’t being enforced. It’s too early to conclude that this trend will continue, but it bears watching.
Designations. And yet, there are still some surprising oversights. It is objectively difficult to understand why, months after the U.N. and C4ADS exposed them, the feds still haven’t frozen and forfeited the assets of large North Korean arms-trading fronts like Glocom and Vast Win Trading, unless we believe that Malaysia, Singapore, and China are going to do that for us. Belatedly, Treasury has also designated one of the Chinese companies that sold North Korea the chassis that it converted into transporter-erector-launchers for its missiles.
Lawmakers like Senator Cory Gardner (R, CO) and Ed Markey (D, MA) recently introduced new legislation to toughen the sanctions even more, and to emphasize human rights — a key component that has been missing from our diplomatic efforts to build a global coalition. It’s good that they’re keeping the pressure on, and offering this useful course correction. Legislation is one way to do that, but another is to demand regular classified briefings, which means that congressional committee staffs need more staffers with the right clearance levels.
Diplomatic. A month ago, I aggregated the evidence that State’s efforts to isolate North Korea diplomatically — efforts that only began in the final weeks of the Obama administration, and that began to increase last spring — were starting to pay off. Spain, Mexico, Italy, Kuwait, and Peru all cut diplomatic relations with North Korea. Poland, the Philippines, Malaysia, India, the Sudan, Taiwan, Vietnam, and Egypt all announced that they would reduce trade relations with North Korea, or expel North Korean money launderers, slave laborers, or arms dealers.
Since the publication of that post, Portugal and the United Arab Emirates have also announced that they would sever relations with Pyongyang. The UAE also joins Kuwait in ending its acceptance of North Korean workers. Treasury’s removal of a number of Sudan designations suggests that the administration believes that Khartoum has also stopped buying North Korean weapons. Malaysia has banned travel to North Korea, and will not be replacing its withdrawn ambassador, in the wake of a brief hostage crisis early this year following the assassination of Kim Jong-nam. The EU has imposed new sanctions that ban oil and gas exports, textile imports, joint ventures and investments, and new work authorizations for North Korean laborers.
Finally, sanctions are, if slowly, taking their toll on the North Korean embassies that remain to sell its weapons and launder its money, by requiring national governments to freeze payments and shut down the businesses the embassies use to fund their salaries and operations. These developments represent not just a loss of multiple revenue sources, but also nodes within a global, interdependent money-laundering network.
Domestic. As state industries have increasingly struggled to meet their quotas, the regime has turned increasingly to the taxation of domestic industry, including small businesses, for its revenue. A new yuan-denominated tax on license plates suggests that even the state may be losing confidence in the North Korean won. That’s not entirely a bad thing, as one consequence of it is that more people gain a greater degree of economic independence from the state, people have more access to the things they need, there are more opportunities for corruption to siphon off more of this revenue, and the tax collection process puts more citizens into conflict with the state and its corrupt petty despots.
Personnel changes within the regime suggest that it may be under financial strain. An unconfirmed South Korean report says that Pyongyang may have replaced the head of Bureau 39. And whereas until recently, people associated with Jang Song-thaek were under suspicion, some are now being promoted. Jang’s network of operatives in China was Pyongyang’s financial root system. Their restoration might — I stress, might — mean that in its financial desperation, the regime is now (at least, temporarily) prioritizing money over loyalty.
Domestically, the regime is increasingly coming into conflict with its people as the regime squeezes them to make up for the loss of revenue, but the regime can only squeeze them so much: first, there is hardly anything left to steal from them; and second, as with the Great Confiscation of 2009, the regime knows that it has historically been economic conflicts with the state that have caused North Koreans to resist it. In the last six months, prices of fuel and other commodities have risen. South Korea’s National Intelligence Service believes that North Koreans are already disgruntled over the economic effects of sanctions, and that the regime is “conducting a large-scale campaign” to suppress that disgruntlement. None of these developments is irreversible, but for the first time since 2007, there are clear signs that sanctions are starting to take a toll on Pyongyang’s access to the global economy.
Donald Trump hit Kim Jong-un with his first sanctions executive order today. (Update: Its official number is Executive Order 13810.) The new EO partially implements UNSCR 2371, UNSCR 2375, and the KIMS Act, which the President signed in August. As a strictly legal matter, this EO will not affect anyone’s interests immediately because Treasury didn’t announce any new designations. As a practical matter, however, we may already be seeing the effects of the clear seriousness of purpose that Trump has already shown. You can read the full text here and a White House fact sheet here.
The New Authorities: A Summary
The new provisions broaden the administration’s authority to designate (and thus, freeze any assets within U.S. jurisdiction of) entities that engage in the conduct described below:
Treasury previously authorized sectoral sanctions against anyone operating in North Korea’s the mining, energy, transportation, and financial services industries. The newly designated industries include those sanctioned under the new U.N. resolutions and the KIMS Act. Sanctions on the medical industry are a notable exception. This will draw gasps of horror from some, but remember, there’s still a humanitarian general license that exempts “medicine distribution” and “the provision of health services.” Section 7 of the EO exempts UN operations entirely. So why say “medical” at all? The feds may suspect Pyongyang of hiding behind “medical” uses to make biological weapons, but that’s only a guess.
Executive Order 13570 previously banned unlicensed imports and exports between the United States and North Korea. This provision, by contrast, bans any transactions through the U.S. financial system, or by U.S. persons, that facilitate imports to or exports from North Korea by anyone, to or from any country. In effect, if you trade with North Korea now, you have to use a non-dollar currency or get an OFAC license.
This effectively cuts the Gordian Knot around the spurious claims of China (or this one, by Tanzania) that the North Koreans they’re dealing with aren’t representatives of the North Korean government. Hopefully, Treasury will now start mining names out of the U.N. Panel of Experts reports and designating the members of Pyongyang’s overseas proliferation and money laundering networks, thus putting the banking industry on notice to freeze their accounts.
I’m glad Treasury exempted North Koreans (including refugees) who are legally in the United States. I would have preferred that Treasury had clarified that North Korean refugees in Europe and South Korea are also exempt. I realize that Treasury has no intention of enforcing sanctions against refugees in England or South Korea — and I hope the banks realize this, too. Some clarifying guidance from Treasury might be useful. Refugees in South Korea, in particular, often keep their family members alive by remitting money to them. As I’ve argued before, remittances might be a rare case of financial interaction with North Korea that actually does drive reform, by helping the poor start businesses and achieve financial independence from the state. Thankfully, a general license covers noncommercial, personal remittances.
Things start to get more interesting in Section 2, which provides for a secondary boycott on ships and aircraft. Under the EO, any ships or aircraft that have been in North Korea in the last 180 days can’t land in the United States. This both overlaps with and complements section 315 of the KIMS Act. It is also the same concept that Japan and South Korea had previously applied to North Korean ships, meaning that ships that visit North Korea will now incur a six-month ban from the waters of China’s three largest trading partners. Furthermore, any ship that has done a ship-to-ship transfer with a ship that has been in North Korea in the last 180 days also gets banned from U.S. ports for 180 days. Shipping trackers suggest that a fair number of these transfers are happening off the Chinese coast. A concern, however, is that the existing humanitarian general license may not cover shipments of commercial food imports (which we should want to encourage).
Section 3 contains some very tough secondary financial sanctions. Section 3(a) freezes any funds controlled by a “North Korean person,” or in which a North Korean person as an interest. This is very powerful — much like its ancestor, section 104(c) the NKSPEA, which blocks all property of the “Government of North Korea,” a term that the NKSPEA defines in roughly similar terms to this EO’s definition of “North Korean person.” The EO also extends the blocking to any person who finances, approves, facilitates, or guarantees a transaction that would be frozen under this paragraph.
Section 4 contains some additional penalties that are tailored to the financial industry. Any person who knowingly conducts or facilitates a transaction in property blocked under a North Korea-related executive order, or who knowingly conducts or facilitates a significant transaction in trade with North Korea, can lose access to the U.S. financial system. That potentially means no correspondent accounts, or the freezing of all of the bank’s assets in the United States. This amounts to a mini Patriot Act section 311 just for North Korea. And of course, banks that knowingly deal with Pyongyang could also face prosecution for money laundering, criminal or civil forfeitures, or the kind of civil penalties that were applied to BNP Paribas for violating Iran sanctions.
We sound like we really mean it this time.
The effects of previous, strong-on-paper EOs fell short of their potential because President Obama never showed the world that he was serious about enforcing them (or rather, until the very end of his administration, he showed the world that he wasn’t serious about enforcing them at all). Let no one accuse Donald Trump of indecision or paralysis.
“A new executive order will cut off sources of revenue that fund North Korea’s efforts to develop the deadliest weapons known to humankind,” Trump said at the start of a trilateral luncheon meeting with South Korean President Moon Jae-in and Japanese Prime Minister Shinzo Abe in New York….
Trump said China’s central bank had just told the country’s other banks to “immediately” stop doing business with North Korea, and thanked Chinese President Xi Jinping for that “unexpected” decision.
“For much too long North Korea has been allowed to abuse the international financial system to facilitate funding for its nuclear weapons and missile programs,” he said. [Yonhap]
Take note, humanity: Donald Trump just said the right thing in the right tone, and it all appears to be true, right down to “unexpectedly.” Then, Treasury Secretary Steven Mnuchin said this at the U.N., just to be sure the whole world heard him:
For far too long, North Korea has evaded sanctions and used the international financial system to facilitate funding for its weapons of mass destruction and ballistic missile programs. No bank – in any country – should be used to facilitate Kim Jong-un’s destructive behavior.
This new Executive Order will authorize Treasury to impose a range of sanctions, such as suspending U.S. correspondent account access to any foreign bank that knowingly conducts or facilitates significant transactions tied to trade with North Korea or certain designated persons.… Foreign financial institutions are now on notice that, going forward, they can choose to do business with the United States or with North Korea, but not both….
We call on countries around the world to join us by cutting all trade and financial ties with North Korea in order to achieve a denuclearized Korean peninsula. [link]
Finally, in a conference call this afternoon, a senior National Security Council official and a senior Treasury Department official (whom we weren’t allowed to name) emphasized the administration’s seriousness. Some key points:
Signs of impact on North Korean trade
So, you ask, will the Chinese banks finally listen? I’ve cited the evidence that they already are. Fuel prices in North Korea have spiked, North Korean workers are flooding back over the border to China, and trading companies in China are effectively out of business and unhappy about the freezing of their bank accounts. The coal industry, which has taken some hard hits from the Treasury and Justice Departments lately, is also showing the strain. These things could be consequences of the banks telling their customers to de-risk North Korea. We may soon find out just who’s right here.
North Korea was built to endure pain. Sanctions don’t work. Good luck!
— John Delury (@JohnDelury) September 21, 2017
Today, Reuters reports that the Chinese government has directed its banks to stop dealing with North Koreans entirely, to include winding down loans with existing customers. If that’s true — and if it lasts — that will be fatal. The timing is curious. One of the “senior administration officials” said that President Trump had only notified President Xi about this EO today, yet the reports of the alleged Central Bank order — the bankers say they received it Monday — come a week after multiple press reports of Chinese banks closing North Korean-controlled accounts. Could Beijing be making a virtue of necessity by ordering banks to do what they’re already doing for their own sake? As I’ve said before, there isn’t just one “China.” Various ministries and industries have diverse and conflicting interests.
This week, President Trump acted strongly, decisively, publicly, and with a deliberate seriousness of purpose. Banks and governments around the world will disregard his words at their peril (meaning, very few of them will). His misbegotten threats against North Korea (as opposed to its regime) shouldn’t distract us from what he did right, if only because his predecessors could not do it right. His words and actions, and in tandem with other governments’ actions to cut their trade and diplomatic ties to North Korea, should be difficult for Pyongyang to withstand for long. We may soon conclude the sanctions-never-work portion of our narrative and enter the sanctions-are-starving-North-Korean-babies portion of our narrative fairly soon. In fact, it looks like we already have.
What sort of place could be so horrible that a family of five would choose to die together rather than be sent there? The answer, of course, is this place, or this one, or this one, or this. Here is the story of a family that made that choice.
A North Korean family of five, including a former senior official of the Workers Party, committed suicide last week after they were caught by Chinese police and faced deportation to the North. They were heading to South Korea.
Activist Kim Hee-tae told the Chosun Ilbo on Sunday, “Fifteen defectors who were on their way to South Korea were caught by police in the Chinese province of Yunnan a week ago.”
“They killed themselves by taking poison after they were taken to Shenyang, Liaoning Province three days ago and faced deportation to the North,” he added. They were a 50-something senior official of a regional agency of the Workers Party, his wife, son and two daughters.
“Right after they were caught in Yunnan, they tried to bribe their way out through a local fixer, but once they were taken to Shenyang they probably lost hope and killed themselves,” Kim speculated. [Chosun Ilbo]
The story was also reported by Radio Free Asia. Otherwise, the U.S. and foreign press almost completely ignored the story. Did they fail to even investigate it, or did they run into a stone wall in trying to find the truth in China? I wonder if we will ever even know their names. Try to imagine the moment of that terrible choice. Imagine the words they spoke to one another as they prepared for that possibility. Imagine their thoughts as they all realized that they would have to go through with it. Imagine their last words to each other. Imagine what dreams, aspirations, and potential the children might have had to live lives that we, in our ingratitude, refer to as “normal.” They are not alone in making that choice.
China’s long-standing policy of forcible repatriation of North Korean refugees only complicates the dangers and difficulties faced by refugees. China does not consider North Koreans refugees but illegal economic migrants to be sent back to their home country, under a border protocol agreed upon in 1986.
“Many of the refugees carry razor blades to slit their wrists or arsenic with which to commit suicide in case they are forcibly repatriated,” Peters said. [S. China Morning Post]
Now, imagine the cruelty of governments that inflict this on people for no greater crime than aspiring to eat, to survive, to live a life that is better than slavery. Imagine the cruelty of a government — of China’s government — which sends them back to a fate this family judged to be far worse than the death it chose instead.
Even in China, where the government has increased its repatriations of refugees to North Korea, and even pays bounties for their arrests — repatriations that a U.N. Commission of Inquiry has described as complicity with crimes against humanity — there are signs that public anger at North Korea’s belligerence is growing.
In South Korea, there are also growing doubts about the government’s commitment to the protection of North Korean refugees. The president himself is a former member of a hard-left lawyers’ group that is trying to violate refugees’ right to confidentiality. One South Korean official was recently charged with selling refugees’ personal information — information that could be used to identify and intimidate North Korean refugees by threatening their families inside North Korea, and to force them to “re-defect.” Hundreds of North Korean refugees who had made it to South Korea are unaccounted for. Most are believed to be in foreign countries, but which countries?
Our news media hardly paid any attention to the tragedy of the Yunnan Five, but Pyongyang certainly did. It launched a massive security crackdown to cover their story up, to punish those who failed to prevent their escape, and to track down anyone who might have helped them escape. In North Korea, any lapse in brutality begets greater acts of brutality, and everyone is a hostage to the obedience of everyone else. Truth is the greatest enemy of the state, because even the most repressive states know that the truth will eventually destroy them.
In the last year, the number of defectors from the military and the elites has risen. The defectors now include even diplomats, senior officials from the internal security forces, and workers posted overseas. If only for utilitarian reasons, we should look on refugees as potential allies. Consider, for example, the Justice Department documents that have cited the testimonies of refugees in forfeiture suits against regime funds. If the humanity of North Korean refugees isn’t reason enough reason to support their cause, the fact that they can help us bankrupt Kim Jong-un and break his hold on power should be. But for now, the regime is winning its war against its people. Although more members of the elites are escaping, the overall number of North Koreans who successfully escape continues to fall because of Kim Jong-un’s border crackdown.
That is why Pyongyang is so desperate to intimidate Seoul into returning refugees, or to intimidate the refugees themselves into “re-defecting,” so that it can put them on display as examples to other North Koreans, and as propaganda props to deceive gullible journalists (and thereby, us). Koreans — don’t turn away from your brothers and sisters. Americans — don’t let our government forget these people. Doing so is short-sighted. It is against our interests. It is against our values. It is not who we are. Please share this post, and join us this Friday.
Several news sources are reporting that Chinese banks, particularly in China’s northeast, have started to freeze or close accounts held by North Korean individuals and businesses. The Daily NK, citing unnamed local sources, was the first to report this potentially important development. It says both large state-owned banks (such as the China Construction Bank) and regional banks (such as Pudong Bank) recently banned all North Koreans from opening new accounts and ordered the closure of existing accounts. It also quotes a March 2017 report by Radio Free Asia that “[p]rivate Chinese banks are beginning to close bank accounts held by North Korean nationals” and that “North Korean laborers earning foreign currency in China have been issued an emergency alert.”
Kyodo News, citing “sources familiar with the situation,” says that the new measures have made it “nearly impossible to do business between the two countries.” It reports that the Bank of China, the China Construction Bank, and the Agricultural Bank of China branches in Yanji, have all banned North Koreans from opening accounts. The banks have not yet frozen the accounts, meaning that the North Koreans can still withdraw cash, but they can’t make deposits or remittances. According to an unnamed employee of one of the banks, “This is being influenced by international sanctions against North Korea.”
Kyodo speculates that either “China may have become more serious about curbing its nuclear ambitions,” or that the measures were “intended to help major Chinese banks avoid being hit by sanctions imposed by the United States and other countries,” like the Bank of Dandong was. Interestingly, it also attributes a 75 percent decline in North Korea’s imports of refined petroleum products over three months, and a corresponding rise in fuel prices inside North Korea, to the fact that “North Koreans were having difficulty paying for petroleum product imports because of the banking restrictions.”
Reuters, citing a bank teller in Liaoning, reports that the China Construction Bank “completely prohibited business with North Korea” starting on August 28th. A customer service representative for the Industrial and Commercial Bank of China also told Reuters that the bank “had stopped opening accounts for North Koreans” and (for good measure) Iranians on July 16th, but didn’t explain further. Those dates closely follow a series of forfeiture complaints, seizures, and designations by the Justice and Treasury Departments, most of them targeting financial flows through Chinese banks, involving North Korean front companies, which turn out to be less well hidden than many “experts” had assumed.
The Bank of China, which became a bête noire for Congress much earlier than other Chinese banks over revelations that its Singapore branch willfully helped Chinpo Shipping facilitate money laundering (and indirectly, arms smuggling) for His Porcine Majesty, stopped allowing North Koreans to open accounts at the end of last year. Or so says an unnamed teller at the BoC’s Dandong branch, who adds that the BoC also froze existing North Korean accounts. A teller at the Agricultural Bank of China branch in Dandong also said that BoC was refusing to open new accounts for North Koreans.
The Financial Times also reports that “multiple bank branches,” including those of China’s big five banks, “had imposed a freeze on new accounts” for North Korean individuals and companies, and that some of the banks were also “cleaning out” existing North Korean accounts and banning North Koreans from making new deposits. Officials at all of the banks refused to comment.
Both the FT and the Daily NK note that the banks’ new measures exceed what new U.N. sanctions require, but all of the reports fail to note that these actions would be completely consistent with stricter U.S. financial regulation on North Korean money laundering, along with the aforementioned recent actions by the Treasury and Justice departments, showing that the feds can trace North Korean transactions through specific Chinese banks — including those named in these reports — and are willing to take legal action against them. Some sources told the FT that corporate told them to freeze North Korean accounts in August; others said they were told in January.
Unfortunately, the Daily NK reports that North Koreans affected include not only “consular officials” and state trading companies, but also “laborers,” who may be either illegal (and increasingly scarce) migrant workers or state-contracted slave laborers (the report didn’t specify). Either way, that’s an unfortunate and unavoidable consequence of what would be an extremely important development — if it lasts. The FT quotes a Chinese professor of North Korea studies, who puts a brave face on the actions, saying that the actions benefit China, and that “China takes sanctions very seriously.” Stop laughing, dammit — this is a serious, adult conversation about banking regulation.
~ ~ ~
The FT calls this “unprecedented,” but it really isn’t (of the five news sources I cite here, only the Daily NK gets this). There is, of course, the example of Banco Delta Asia and what we too easily forget — the Bush administration’s global campaign of financial diplomacy that persuaded banks around the world to close North Korean accounts. We now know that that strategy put Kim Jong-Il’s regime under severe financial strain, until Bush lost his nerve, lifted the pressure, and exchanged invaluable sanctions relief for a handful of worthless North Korean promises.
Then, in 2013, after Pyongyang’s third nuclear test, after Treasury sanctioned the DPRK Foreign Trade Bank, and after Ed Royce first introduced the bill that would later become the NKSPEA, which mandates secondary sanctions, big Chinese banks began to freeze and close North Korean accounts. It didn’t last, because the banks soon saw that Xi Jinping wanted those accounts open more than Barack Obama wanted them closed. The same pattern repeated itself in early 2016, and again (as Justice Department filings later showed) it was right back to business as usual a few month later, again because the Obama administration wasn’t willing to back its sanctions with enforcement actions.
Is this time any different? The answer depends on why the banks are doing this. As noted, what the banks are doing here doesn’t exactly align with what the U.N. resolutions require, but it aligns perfectly with what I’d expect inexperienced Chinese compliance officers to do to protect their banks from rising legal risks under U.S. banking and sanctions laws. In this post, I explained the importance of distinguishing the interests and actions of the Chinese government from those of individual Chinese banks, which are actually global corporations with global exposure. In other words, “Chinese” banks may be bending to Treasury’s will for the same basic reason that U.S. tech companies have collaborated with Chinese censors. My belief that the Chinese security establishment is fundamentally hostile to U.S. interests and thus willfully weaponizing North Korea remains unmoved. On balance, it seems more likely that the banks are doing this to protect their own reputations, credit ratings, and share prices — just as the Chinese Finance Ministry wants them to, and just as the Defense and Foreign ministries don’t.
Also, when is the last time an American Secretary of the Treasury said anything like this?
“If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system — and that’s quite meaningful,” Mnuchin said during an event at CNBC’s Delivering Alpha conference in New York on Tuesday. [….]
“North Korea economic warfare works,” Mnuchin said. “We sent a message that anybody that wanted to trade with North Korea — we would consider them not trading with us.” [Bloomberg]
Next, read this excerpt from the written testimony of Assistant Secretary of the Treasury Marshall Billingslea before the House Foreign Affairs Committee yesterday. Billingslea first explains that Treasury works closely with U.S. allies, the intelligence community, and the State Department to “conduct detailed forensic investigation and analysis” to “deny North Korea its current, principal source of funds.” He goes on to say that while we prefer to have Beijing’s voluntary cooperation, we’re also perfectly willing to hit Chinese targets we don’t get it.
For instance, on August 22, we struck at the heart of North Korea’s illegal coal trade with China. Treasury designated 16 individuals and entities, including three Chinese companies that are among the largest importers of North Korean coal. We estimate that collectively these companies were responsible for importing nearly half a billion dollars’ worth of North Korean coal between 2013 and 2016. These funds are used to support the Government of North Korea and the Workers’ Party of Korea, including its nuclear and ballistic missile programs. On top of that, we know that some of these companies were also buying luxury items and sending an array of products back to the North Korean regime. On August 22 we sent two clear messages. The first was to North Korea: we intend to deny the regime its last remaining sources of revenue, unless and until it reverses course and denuclearizes. The second message was to China. We are capable of tracking North Korea’s trade in banned goods, such as coal, despite elaborate evasion schemes, and we will act even if the Chinese government will not. [….]
China is even more central to a successful resolution of the crisis caused by Kim Jong-Un. China accounts for at least 90 percent of North Korea’s exports. North Korea is overwhelmingly dependent upon China for both trade and access to the international financial system. China’s full and effective enforcement of UN sanctions is therefore essential. Unfortunately, I cannot assure the Committee today that we have seen sufficient evidence of China’s willingness to truly shut down North Korean revenue flows, expunge the North Korean illicit actors from its banking system, and expel the North Korean middlemen and brokers who are establishing webs of front companies. We will continue to work with the Chinese to maximize economic pressure on North Korea, but we will not hesitate to act unilaterally. If China wishes to avoid future measures, such as those imposed on Bank of Dandong or the various companies sanctioned for illegal trade practices, then it urgently needs to take demonstrable public steps to eliminate North Korea’s trade and financial access. [Treasury Dep’t]
Then, watch his testimony on video.
Mr. Billingslea shows great promise. Let’s hope we have the next Stuart Levey or Juan Zarate on our hands, because we’ve never needed one more than we do now.
Of course, it’s The Boss, House Foreign Affairs Committee Chairman Ed Royce, who has been pushing for this strategy for years. Two laws, one presidential election, and three nuclear tests later, Royce looks to have finally gotten his way. Speaking at a hearing of his Committee yesterday, Royce called on the feds to “target major Chinese banks, including Agricultural Bank of China Ltd. and China Merchants Bank Co., for aiding Kim’s regime.” Royce was referring to a letter he sent to Mnuchin listing some of the banks that keep showing up in Justice Department indictments, forfeiture complaints, and seizure warrants as having effectively provided sanctioned North Korean banks with indirect correspondent account services in violation of this Treasury Department regulation, and asked the Treasury Department to sanction them.
Personally, I don’t expect Treasury to do anything as blunt or binary as a total asset freeze or a 311 action to most of those banks (on that point, Billingslea told the Committee that the 311 action on the Bank of Dandong had “a very clear effect” on its operations, but didn’t elaborate). Instead, I expect Treasury to start auditing the big banks and their correspondents for compliance with its new North Korea-specific regulation, with an eye toward civil penalties and fines like those imposed against European banks that skimped or cheated on anti-money laundering compliance on behalf of Iran and other sanctioned countries. Those fines often amounted to hundreds of millions of dollars (or, in the case of BNP Paribas, $9 billion). There may be such a thing as “too big to fail,” but there is no such thing as “too big to fine.”
~ ~ ~
The Daily NK reports that small traders are already adapting to the new measures by going to a cash-based business model. Reporters are fond of saying that Pyongyang can easily evade financial sanctions by carrying around briefcases full of cash, but that’s mistaken on several levels. First, a typical briefcase only holds just over $2 million, which is enough to fuel the sort of cross-border trade in food and consumers goods that we shouldn’t want to stop, but hardly an efficient way for a Syrian arms client or Burmese middleman to pay a KOMID dealer for a shipment of machine tools or vacuum dryers. Needless to say, it’s not nearly enough to feed a million-man army or sustain an entire government. After all, China may not really care about policing bulk cash smuggling — notwithstanding its occasional, short-lived pretenses to the contrary — but countries like Bangladesh and Sri Lanka do.
That is to say, one potential outcome of these restrictions could be to break up larger, regime-controlled trading blocs in favor of smaller traders whose wares are more likely to end up in the homes and bellies of the poor. That would be a largely positive development. Our goal should not be a complete embargo of North Korea, which is why I was actually relieved that the U.N. didn’t impose a total fuel ban in its latest sanctions resolution. Our goals ought to be to expose and destroy Pyongyang’s state-controlled overseas trading networks, to freeze its cash reserves (which sit in Chinese banks, and which Pyongyang may be depleting rapidly), to de-fund its military and security forces to give the North Korean people a little breathing space and freedom from fear, and to create the “death spiral” that will cause money launderers who can’t make their kick-up payments to defect and bring us yet more valuable financial intelligence, which will help us find and freeze yet more assets.
Today, the U.N. Security Council adopted Resolution 2371 unanimously. The text is in black, my commentary is in blue italic.
PP1: Recalling its previous relevant resolutions, including resolution 825 (1993), resolution 1540 (2004), resolution 1695 (2006), resolution 1718 (2006), resolution 1874 (2009), resolution 1887 (2009), resolution 2087 (2013), resolution 2094 (2013), resolution 2270 (2016), resolution 2321 (2016), and resolution 2356 (2017), as well as the statements of its President of 6 October 2006 (S/PRST/2006/41), 13 April 2009 (S/PRST/2009/7) and 16 April 2012 (S/PRST/2012/13), (updated PP1 of UNSCR 2321)
PP2: Reaffirming that proliferation of nuclear, chemical and biological weapons, as well as their means of delivery, constitutes a threat to international peace and security, (PP2 of UNSCR 2321)
PP3: Expressing its gravest concern at the July 3 and July 28 of 2017 ballistic missile tests by the Democratic People’s Republic of Korea (“the DPRK”), which the DPRK has stated were tests of intercontinental ballistic missiles, in violation of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016) 2321 (2016), and 2356 (2017), and at the challenge such tests constitute to the Treaty on Non-Proliferation of Nuclear Weapons (“the NPT”) and to international efforts aimed at strengthening the global regime of non-proliferation of nuclear weapons, and the danger they pose to peace and stability in the region and beyond, (PP3 of UNSCR 2321)
PP4: Underlining once again the importance that the DPRK respond to other security and humanitarian concerns of the international community, (PP4 of UNSCR 2321)
PP5: Underlining also that measures imposed by this resolution are not intended to have adverse humanitarian consequences for the civilian population of the DPRK, (PP5 of UNSCR 2321)
PP6: Expressing serious concern that the DPRK has continued to violate relevant Security Council resolutions through repeated launches and attempted launches of ballistic missiles, and noting that all such ballistic missile activities contribute to the DPRK’s development of nuclear weapons delivery systems and increase tension in the region and beyond, (PP6 of UNSCR 2321)
PP7: Expressing continued concern that the DPRK is abusing the privileges and immunities accorded under the Vienna Conventions on Diplomatic and Consular Relations, (PP7 of UNSCR 2321)
PP8: Expressing great concern that the DPRK’s prohibited arms sales have generated revenues that are diverted to the pursuit of nuclear weapons and ballistic missiles while DPRK citizens have unmet needs, (PP8 of UNSCR 2321)
Are you listening, Singapore?
PP9: Expressing its gravest concern that the DPRK’s ongoing nuclear- and ballistic missile-related activities have further generated increased tension in the region and beyond, and determining that there continues to exist a clear threat to international peace and security, (PP9 of UNSCR 2321)
PP10: Acting under Chapter VII of the Charter of the United Nations, and taking measures under its Article 41,
1. Condemns in the strongest terms the ballistic missile launches conducted by the DPRK on 3 July and 28 July of 2017, which the DPRK has stated were launches of intercontinental ballistic missiles, and which used ballistic missile technology in violation and flagrant disregard of the Security Council’s resolutions; (Based on OP1 of UNSCR 2270)
Reading that language, it’s not hard to reverse engineer how the argument between the U.S. and Russian diplomats went.
2. Reaffirms its decisions that the DPRK shall not conduct any further launches that use ballistic missile technology, nuclear tests, or any other provocation; shall suspend all activities related to its ballistic missile program and in this context re-establish its pre-existing commitments to a moratorium on missile launches; shall abandon all nuclear weapons and existing nuclear programs in a complete, verifiable and irreversible manner, and immediately cease all related activities; and shall abandon any other existing weapons of mass destruction and ballistic missile programs in a complete, verifiable and irreversible manner; (OP 2-4 of UNSCR 2270, adapted and combined)
3. Designate individuals and entities for asset freeze/travel ban: Decides that the measures specified in paragraph 8(d) of resolution 1718 (2006) shall apply also to the individuals and entities listed in Annex I and II of this resolution and to any individuals or entities acting on their behalf or at their direction, and to entities owned or controlled by them, including through illicit means, and decides further that the measures specified in paragraph 8(e) of resolution 1718 (2006) shall also apply to the individuals listed in Annex I of this resolution and to individuals acting on their behalf or at their direction; (OP3 of UNSCR 2321)
4. Designation of additional WMD-related Items: Decides to adjust the measures imposed by paragraph 8 of resolution 1718 (2006) and this resolution through the designation of additional goods, directs the Committee to undertake its tasks to this effect and to report to the Security Council within fifteen days of adoption of this resolution, and further decides that, if the Committee has not acted, then the Security Council will complete action to adjust the measures within seven days of receiving that report; (OP25 of UNSCR 22270)
5. Designation of additional Conventional Arms-related Items: Decides to adjust the measures imposed by paragraph 7 of resolution 2321 (2016) through the designation of additional conventional arms-related items, materials, equipment, goods, and technology, directs the Committee to undertake its tasks to this effect and to report to the Security Council within thirty days of adoption of this resolution, further decides that, if the Committee has not acted, then the Security Council will complete action to adjust the measures within seven days of receiving that report, and directs the Committee to update this list every 12 months; (Based on OP7 of UNSCR 2321 and OP25 of 2270)
6. Prohibit port calls by designated vessels tied to illicit activities: Decides that the Committee may designate vessels for which it has information indicating they are, or have been, related to activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution and all Member States shall prohibit the entry into their ports of such designated vessels, unless entry is required in the case of emergency or in the case of return to its port of origination, or unless the Committee determines in advance that such entry is required for humanitarian purposes or any other purposes consistent with the objectives of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution; (New)
I’m not sure this adds much to existing sanctions that already require member states to seize designated North Korean ships that enter their harbors. It may be that member states were so reluctant to deal with the hassle of disposal that someone figured it would be easier to require them to keep the ships out of port entirely. I’m not so sure.
7. Prohibit chartering of vessels flagged by the DPRK: Clarifies that the measures set forth in paragraph 20 of resolution 2270 (2016) and paragraph 9 of resolution 2321 (2016), requiring States to prohibit their nationals, persons subject to their jurisdiction and entities incorporated in their territory or subject to their jurisdiction from owning, leasing, operating any vessel flagged by the DPRK, without exception, unless the Committee approves on a case-by-case basis in advance, apply to chartering vessels flagged by the DPRK;
The only country I’ve heard was doing this is a Middle Eastern country that starts with “i” and ends with “n” and is spelled “i-r-a-n.”
8. Full ban on coal, iron and iron ore: Decides that paragraph 26 of resolution 2321 (2016) shall be replaced by the following:
“Decides that the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, coal, iron, and iron ore, and that all States shall prohibit the procurement of such material from the DPRK by their nationals, or using their flag vessels or aircraft, and whether or not originating in the territory of the DPRK, decides that for sales and transactions of iron and iron ore for which written contracts have been finalized prior to the adoption of this resolution, all States may allow those shipments to be imported into their territories up to 30 days from the date of adoption of this resolution with notification provided to the Committee containing details on those imports by no later than 45 days after the date of adoption of this resolution, and decides further that this provision shall not apply with respect to coal that the exporting State confirms on the basis of credible information has originated outside the DPRK and was transported through the DPRK solely for export from the Port of Rajin (Rason), provided that the exporting State notifies the Committee in advance and such transactions involving coal originating outside of the DPRK are unrelated to generating revenue for the DPRK’s nuclear or ballistic missile programs or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution; (New)
The good news: there is no longer a coal cap for China to cheat on. The bad news: there is now a complete coal ban for China to cheat on. A little birdie tells me – and in the near future, that little birdie will also tell you — that the North Koreans are smuggling their coal to China via third countries. My guess is that even if this isn’t airtight in practice, it will still make it harder and more expensive for Pyongyang to sell its coal, meaning it will cut into Pyongyang’s export profits.
9. Prohibit seafood exports from the DPRK: Decides that the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, seafood (including fish, crustaceans, mollusks, and other aquatic invertebrates in all forms), and that all States shall prohibit the procurement of such items from the DPRK by their nationals, or using their flag vessels or aircraft, whether or not originating in the territory of the DPRK, and further decides that for sales and transactions of seafood (including fish, crustaceans, mollusks, and other aquatic invertebrates in all forms) for which written contracts have been finalized prior to the adoption of this resolution, all States may allow those shipments to be imported into their territories up to 30 days from the date of adoption of this resolution with notification provided to the Committee containing details on those imports by no later than 45 days after the date of adoption of this resolution;
Good on you, U.N., for using this nifty idea. I first suggested the same thing in this post, and section 311 of the KIMS Act now allows the President to designate anyone who buys fishing rights, food, or agricultural products from North Korea. I read the resolution’s language to cover the sale of fishing rights as well as seafood. For its next act, the U.N. should also ban food exports entirely. Pyongyang has no business exporting food for hard currency while the poor starve.
10. Prohibit lead exports from the DPRK: Decides that the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, lead and lead ore, and that all States shall prohibit the procurement of such items from the DPRK by their nationals, or using their flag vessels or aircraft, whether or not originating in the territory of the DPRK, and further decides that for sales and transactions of lead and lead ore for which written contracts have been finalized prior to the adoption of this resolution, all States may allow those shipments to be imported into their territories up to 30 days from the date of adoption of this resolution with notification provided to the Committee containing details on those imports by no later than 45 days after the date of adoption of this resolution;
I did not even realize North Korea exported lead, but evidently, it does.
11. Ban the hiring and paying of additional DPRK laborers used to generate foreign export earnings: Expresses concern that DPRK nationals frequently work in other States for the purpose of generating foreign export earnings that the DPRK uses to support its prohibited nuclear and ballistic missile programs, decides that all Member States shall not exceed on any date after the date of adoption of this resolution the total number of work authorizations for DPRK nationals provided in their jurisdictions at the time of the adoption of this resolution unless the Committee approves on a case-by-case basis in advance that employment of additional DPRK nationals beyond the number of work authorizations provided in a member state’s jurisdiction at the time of the adoption of this resolution is required for the delivery of humanitarian assistance, denuclearization or any other purpose consistent with the objectives of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution; (New)
Here is the first binding limit on North Korean labor exports, but it’s really a cap. On the bad side, because everyone involved in these contracts was already concealing or misrepresenting the number of North Korean laborers anyway, it will be hard to tell what “exceeds.” On the good side, this doesn’t prevent the U.S. from using section 321 of the KIMS Act to sanction employers of North Korean slave labor or their governments, and it will give the U.S. a stronger argument to convince host nations to send those workers home. This assumes we’re making that effort – and I keep hearing that we are, quietly. I also don’t interpret this to diminish the existing requirements of UNSCR 1718, paragraph 8 that purchasers of North Korean labor (a) “ensure” that the money doesn’t go to the nuke fund, and (b) abstain from dealing with designated persons.
12. Prohibiting new or expanded joint ventures and cooperative commercial entities with the DPRK: Decides that States shall prohibit, by their nationals or in their territories, the opening of new joint ventures or cooperative entities with DPRK entities or individuals, or the expansion of existing joint ventures through additional investments, whether or not acting for or on behalf of the government of the DPRK, unless such joint ventures or cooperative entities have been approved by the Committee in advance on a case-by-case basis; (New)
So, got your tickets yet for that big investment fair in Rason in two weeks? Are those tickets refundable? Yeah. Unfortunately, the word “existing” means that this isn’t necessarily the end for the MKP Group, although some parts of it (such as banking joint ventures) are banned by other resolutions. Ditto Orascom. It would be nice to get more definition on the words “new,” “existing,” and “expansion,” which seem like potential loopholes.
13. Clarifies that the prohibitions contained in paragraph 11 of resolution 2094 (2013) apply to clearing of funds through all Member States’ territories; (New)
This is useful. Although section 201 the NKSPEA effectively (if indirectly) banned direct and indirect dollar clearing services for North Korean banks, this extends that obligation to other issuers of convertible currencies – the EU, the UK, Canada, Australia, Switzerland, Hong Kong, Japan, etc. – and also closes a potential loophole for offshore dollar clearing. As always, detection and enforcement will be key.
14. Clarifies that companies performing financial services commensurate with those provided by banks are considered financial institutions for the purposes of implementing paragraph 11 of resolution 2094 (2013), paragraphs 33 and 34 of resolution 2270 (2016), and paragraph 33 of resolution 2321 (2016); (New)
In other words, shadow banks and money launderers (such as DCB Finance and Kim Chol-Sam) are banks for purposes of the resolutions. That matters, because North Korea increasingly relies on trading companies to perform the functions of banks.
15. Prohibiting use of chemical weapons and calling for accession to the CWC: Recalls paragraph 24 of resolution 2270 (2016), decides that the DPRK shall not deploy or use chemical weapons, and urgently calls upon the DPRK to accede to the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and Their Destruction, and then to immediately comply with its provisions; (Based on OP24 of UNSCR 2270)
For reasons that ought to be obvious ….
16. Abiding by the VCDR/VCCR: Demands that the DPRK fully comply with its obligations under the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations; (New)
In South Dakota English, this means stop renting out your embassies as eurotrash flophouses.
Impact on the People of the DPRK
17. Regrets the DPRK’s massive diversion of its scarce resources toward its development of nuclear weapons and a number of expensive ballistic missile programs, notes the findings of the United Nations Office for the Coordination of Humanitarian Assistance that well over half of the people in the DPRK suffer from major insecurities in food and medical care, including a very large number of pregnant and lactating women and under-five children who are at risk of malnutrition and nearly a quarter of its total population suffering from chronic malnutrition, and, in this context, expresses deep concern at the grave hardship to which the people in the DPRK are subjected; (New)
I can’t overstate how smart and important this language is. Pyongyang will always try to use its people as human shields against sanctions. It will always steal from the poor to give to the rich and the military. The world needs to remember exactly why so many North Koreans are poor and hungry, and it’s not because North Korea is a poor country, or because of weather, or sanctions. It’s because of choices – choices that are made in Pyongyang.
18. State implementation report: Decides that Member States shall report to the Security Council within ninety days of the adoption of this resolution, and thereafter upon request by the Committee, on concrete measures they have taken in order to implement effectively the provisions of this resolution, requests the Panel of Experts, in cooperation with other UN sanctions monitoring groups, to continue its efforts to assist Member States in preparing and submitting such reports in a timely manner; (based on OP36 of UNSCR 2321)
If they weren’t filing their reports before, it’s going to take more than a strongly worded appeal to make them file now. That’s where the BRINK Act becomes important. Take a gander at section 104 for some of the sanctions non-compliant states might face.
19. Redouble implementation efforts: Calls upon all Member States to redouble efforts to implement in full the measures in resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013) 2270 (2016), 2321 (2016), and 2356 (2017), and to cooperate with each other in doing so, particularly with respect to inspecting, detecting and seizing items the transfer of which is prohibited by these resolutions; (OP38 of UNSCR 2321)
20. Update Committee and POE mandate: Decides that the mandate of the Committee, as set out in paragraph 12 of resolution 1718 (2006), shall apply with respect to the measures imposed in this resolution and further decides that the mandate of the Panel of Experts, as specified in paragraph 26 of resolution 1874 (2009) and modified in paragraph 1 of resolution 2345 (2017), shall also apply with respect to the measures imposed in this resolution; (OP39 of UNSCR 2321)
21. Standard “seize and dispose” provision: Decides to authorize all Member States to, and that all Member States shall, seize and dispose (such as through destruction, rendering inoperable or unusable, storage, or transferring to a State other than the originating or destination States for disposal) of items the supply, sale, transfer, or export of which is prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution that are identified in inspections, in a manner that is not inconsistent with their obligations under applicable Security Council resolutions, including resolution 1540 (2004), as well as any obligations of parties to the NPT, the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Development of 29 April 1997, and the Convention on the Prohibition of the Development, Production and Stockpiling of Bacteriological (Biological) and Toxin Weapons and on Their Destruction of 10 April 1972; (OP40 of UNSCR 2321)
This provision addresses what I call the Mu Du Bong problem. Remember when Mexico seized the Mu Du Bong after it ran aground off the port of Tuxpan? For the longest time, the Mexicans didn’t know what to do with the ship. This question eventually came to me via an indirect route. I pointed out that paragraph 8 of UNSCR 2087 already authorized Mexico to seize, destroy, or dispose of the ship as it saw fit. Of course, 2087 isn’t a Chapter VII resolution, but the Mu Du Bong became an artificial reef shortly thereafter, so I’d like to think I played some small role in the lives of some red snapper and grouper.
22. Force majeure clause: Emphasizes the importance of all States, including the DPRK, taking the necessary measures to ensure that no claim shall lie at the instance of the DPRK, or of any person or entity in the DPRK, or of persons or entities designated for measures set forth in resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), or this resolution, or any person claiming through or for the benefit of any such person or entity, in connection with any contract or other transaction where its performance was prevented by reason of the measures imposed by this resolution or previous resolutions; (OP41 of UNSCR 2321)
This keeps governments that freeze assets from getting tied up in litigation for enforcing the resolutions – theoretically. Of course, not all member state courts will recognize this, and it only applies to claims by North Korea or by designated persons. It will require good implementing legislation, which (let’s face it) very few countries have.
23. Request Interpol notices: Requests that Interpol issue Special Notices with respect to designated individuals, and directs the Committee to work with Interpol to develop the appropriate arrangements to do so; (New)
OK, I’ll admit that I’m mildly impressed by this. I’ll believe it when Kim Chol-Sam leaves China for good.
24. Expand POE capacity and resources: Requests the Secretary General to provide additional analytical resources needed to the Panel of Experts established pursuant to resolution 1874 (2009) to strengthen its ability to analyze the DPRK’s sanctions violation and evasion activities; (Based on OP42 of UNSCR 2321)
Hmm. Are they hiring lawyers, and what do they pay?
25. Reiterates its deep concern at the grave hardship that the people in the DPRK are subjected to, condemns the DPRK for pursuing nuclear weapons and ballistic missiles instead of the welfare of its people while people in the DPRK have great unmet needs, and emphasizes the necessity of the DPRK respecting and ensuring the welfare and inherent dignity of people in the DPRK; (OP45 of UNSCR 2321)
As stated above, this matters.
26. Reaffirms that the measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017), and this resolution are not intended to have adverse humanitarian consequences for the civilian population of the DPRK or to affect negatively or restrict those activities, including economic activities and cooperation, food aid and humanitarian assistance, that are not prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270 (2016), 2321 (2016), 2356 (2017) and this resolution, and the work of international and non-governmental organizations carrying out assistance and relief activities in the DPRK for the benefit of the civilian population of the DPRK and decides that the Committee may, on a case-by-case basis, exempt any activity from the measures imposed by these resolutions if the committee determines that such an exemption is necessary to facilitate the work of such organizations in the DPRK or for any other purpose consistent with the objectives of these resolutions, and further decides that the measures specified in paragraph 8(d) of resolution 1718 (2006) shall not apply with respect to financial transactions with the DPRK Foreign Trade Bank or the Korea National Insurance Corporation if such transactions are solely for the operation of diplomatic missions in the DPRK or humanitarian assistance activities that are undertaken by, or in coordination with, the United Nations; (Based on OP46 of UNSCR 2321)
So, spoiler alert: the FTB, which Treasury designated in 2013, and which featured prominently in this recent civil forfeiture suit, is designated in one of the annexes below, which is good. When I say that Pyongyang uses its people as human shields, the Foreign Trade Bank is a perfect example of that strategy, and how some humanitarian aid NGOs have been willing accomplices of it. That exemption is probably a smart move, tactically.
27. Reaffirms its support for the Six Party Talks, calls for their resumption, and reiterates its support for the commitments set forth in the Joint Statement of 19 September 2005 issued by China, the DPRK, Japan, the Republic of Korea, the Russian Federation, and the United States, including that the goal of the Six-Party Talks is the verifiable denuclearization of the Korean Peninsula in a peaceful manner, that the United States and the DPRK undertook to respect each other’s sovereignty and exist peacefully together, that the Six Parties undertook to promote economic cooperation, and all other relevant commitments; (OP47 of UNSCR 2321)
Note the language “reaffirms its support.” I occasionally see claims, either from soft-liners here or from Beijing, that the resolutions require us to return to six-party talks — never mind that North Korea won’t return to them — and that some notion of reciprocity consequently releases China from its obligations to enforce the other provisions. But “reaffirms its support” is non-binding language, in contrast to the sanctions provisions that say “decides,” and which are binding. The obligations aren’t reciprocal, and the idea that this provision requires anyone to return to the talks (including Pyongyang) is baseless. The resolutions do, however, use “decides” when they require Pyongyang to completely, verifiably, and irreversibly dismantle its nuclear, chemical, biological, and ballistic missile programs.
28. Reiterates the importance of maintaining peace and stability on the Korean Peninsula and in north-east Asia at large, and expresses its commitment to a peaceful, diplomatic, and political solution to the situation and welcomes efforts by the council members as well as other States to facilitate a peaceful and comprehensive solution through dialogue and stresses the importance of working to reduce tensions in the Korean Peninsula and beyond; (OP48 of UNSCR 2321)
29. Affirms that it shall keep the DPRK’s actions under continuous review and is prepared to strengthen, modify, suspend or lift the measures as may be needed in light of the DPRK’s compliance, and, in this regard, expresses its determination to take further significant measures in the event of a further DPRK nuclear test or launch; (OP49 of UNSCR 2321)
30. Decides to remain seized of the matter. (OP50 of UNSCR 2321)
Now, the designations.
Travel Ban/Asset Freeze (Individuals)
1. CHOE CHUN YONG
a. Description: Representative for Ilsim International Bank, which is affiliated with the DPRK military and has a close relationship with the Korea Kwangson Banking Corporation. Ilsim International Bank has attempted to evade United Nations sanctions.
b. A.K.A.: Ch’oe Ch’un-yo’ng
c. Identifiers: Nationality: DPRK; Passport no.: 654410078; Gender: male
With respect to each of these guys, I can only ask: are their designated successors in Beijing yet?
2. HAN JANG SU
a. Description: Chief Representative of the Foreign Trade Bank.
b. A.K.A.: Chang-Su Han
c. Identifiers: DOB: November 08, 1969; POB: Pyongyang, DPRK; Nationality: DPRK; Passport no.: 745420176, expires on October 19, 2020; Gender: male
3. JANG SONG CHOL
a. Description: Jang Song Chol is a Korea Mining Development Corporation (KOMID) representative overseas.
b. AKA: n/a
c. Identifiers: DOB: 12 March 1967; Nationality: DPRK
4. JANG SUNG NAM
a. Description: Chief of an overseas Tangun Trading Corporation branch, which is primarily responsible for the procurement of commodities and technologies to support the DPRK’s defense research and development programs.
b. A.K.A.: n/a
c. Identifiers: DOB: July 14, 1970; Nationality: DPRK; Passport no.: 563120368, issued on March 22, 2013; Passport expiration date: March 22, 2018; Gender: male
5. JO CHOL SONG
a. Description: Deputy Representative for the Korea Kwangson Banking Corporation, which provides financial services in support to Tanchon Commercial Bank and Korea Hyoksin Trading, a subordinate entity of Korea Ryonbong General Corporation.
b. A.K.A.: Cho Ch’o’l-so’ng
c. Identifiers: DOB: September 25, 1984; Nationality: DPRK; Passport no.: 654320502, expires on September 16, 2019; Gender: male
6. KANG CHOL SU
a. Description: Official for Korea Ryonbong General Corporation, which specializes in acquisition for the DPRK’s defense industries and support for the DPRK’s military-related overseas sales. Its procurements also likely support the DPRK’s chemical weapons program.
b. A.K.A.: n/a
c. Identifiers: DOB: February 13, 1969; Nationality: DPRK; Passport no.: 472234895
7. KIM MUN CHOL
a. Description: Representative for Korea United Development Bank.
b. A.K.A.: Kim Mun-ch’o’l
c. Identifiers: DOB: March 25, 1957; Nationality: DPRK
8. KIM NAM UNG
a. Description: Representative for Ilsim International Bank, which is affiliated with the DPRK military and has a close relationship with the Korea Kwangson Banking Corporation. Ilsim International Bank has attempted to evade United Nations sanctions.
b. A.K.A.: n/a
c. Identifiers: Nationality: DPRK; Passport no.: 654110043
9. PAK IL KYU
a. Description: Official for Korea Ryonbong General Corporation, which specializes in acquisition for DPRK’s defense industries and support to Pyongyang’s military-related sales. Its procurements also likely support the DPRK’s chemical weapons program.
b. A.K.A.: Pak Il-Gyu
c. Identifiers: Nationality: DPRK; Passport no.: 563120235; Gender: male
List Update for Aliases:
• JANG BOM SU (KPi.016) – New AKA: Jang Hyon U with date of birth 22 February 1958 and diplomatic passport number 836110034, which expires on 1 January 2020.
• JON MYONG GUK (KPi.018) – New AKA: Jon Yong Sang with date of birth 25 August 1976 and diplomatic passport number 836110035, which expires on 1 January 2020.
Asset Freeze (Entities)
1. FOREIGN TRADE BANK (FTB)
a. Description: Foreign Trade Bank is a state-owned bank and acts as the DPRK’s primary foreign exchange bank and has provided key financial support to the Korea Kwangson Banking Corporation.
b. AKA: n/a
c. Location: FTB Building, Jungsong-dong, Central District, Pyongyang, DPRK
Now we’re talking.
2. KOREAN NATIONAL INSURANCE COMPANY (KNIC)
a. Description: The Korean National Insurance Company is a DPRK financial and insurance company and is affiliated with Office 39.
b. AKA: Korea Foreign Insurance Company
c. Location: Central District, Pyongyang, DPRK
Another good one, though the failure to designate the Korean Shipowners’ Protection and Indemnity Association, which insured the Chong Chon Gang, seems like an oversight.
3. KORYO CREDIT DEVELOPMENT BANK
a. Description: Koryo Credit Development Bank operates in the financial services industry in the DPRK’s economy.
b. AKA: Daesong Credit Development Bank; Koryo Global Credit Bank; Koryo Global Trust Bank
c. Location: Pyongyang, DPRK
4. MANSUDAE OVERSEAS PROJECT GROUP OF COMPANIES
a. Description: Mansudae Overseas Project Group of Companies engaged in, facilitated, or was responsible for the exportation of workers from the DPRK to other nations for construction-related activities including for statues and monuments to generate revenue for the Government of the DPRK or the Workers’ Party of Korea. The Mansudae Overseas Project Group of Companies has been reported to conduct business in countries in Africa and Southeast Asia including Algeria, Angola, Botswana, Benin, Cambodia, Chad, the Democratic Republic of the Congo, Equatorial Guinea, Malaysia, Mozambique, Madagascar, Namibia, Syria, Togo, and Zimbabwe.
b. AKA: Mansudae Art Studio
c. Location: Pyongyang, DPRK
In theory, African dictators will have to build their own big, ugly statues now. Recall that UNSCR 2321 banned the export of statues. But … no Air Koryo? Really? I guess we’ll have to wait for the nuke test for that one.
These sanctions could be damaging — if member states enforce them. The sanctions in UNSCR 2270 should have been more damaging than they were, but China violated them and, until very recently, got away with it. Getting other member states to enforce the sanctions will require the President to use the authorities Congress has given him in the NKSPEA and the KIMS Act. A truly effective policy will require a whole-of-government approach: the State Department will have to lobby foreign governments, the Treasury and Justice Departments must be prepared to sanction violators, and the Homeland Security Department must step up the screening of cargo from ports that don’t inspect North Korean cargo.
Finally, the administration must speak coherently about sanctions, diplomacy, human rights, the proper role of engagement, what happens if diplomacy fails, and how to reunify Korea peacefully (or, as peacefully as possible). So far, I’ve seen some encouraging steps on sanctions enforcement, but not the coherent whole-of-government effort we’ll need.
~ ~ ~
The question most people are asking now is, “Will things be any different this time?” There’s one reason to think that they just might be. No, this isn’t the first sanctions resolution that might have done serious harm to Pyongyang’s palace economy if it had been enforced, but as I’ve said before, U.N. sanctions don’t enforce themselves. All the U.N. can really do is pass new resolutions and issue the occasional Panel of Experts report. (The Panel, which had previously issued its reports annually, will now start issuing them bi-annually. Its first mid-term new report should be coming out in the new few days. Expect it to be bleak about enforcement and compliance efforts so far, but it will also call out more cheaters and concentrate the attention of the FBI, the Treasury Department, and the Justice Department on them.)
Persuading governments and companies that want to trade with Pyongyang to stop doing so sometimes requires either an inducement or a threat. Yun Byung-Se was skilled at the use of inducements, particularly in Africa, but with Moon Jae-In in office, the U.S. has probably lost Seoul as a valuable diplomatic ally against Pyongyang.
The Trump administration has recently become more willing to use threats. It hasn’t talked about it much yet, but the Treasury and Justice Departments have begun to seize and forfeit the funds of the trading companies that broker Pyongyang’s coal exports to China. It has also zapped one Chinese bank that was involved in laundering money for North Korea, and fired a shot across the bow of the correspondent banks that carelessly clear those transactions through our financial system. As the Justice Department noted last September, Pyongyang has tried to switch to non-dollar currencies, but without much success. Sellers prefer dollars. Now, for the first time, the U.S. has made a credible threat to banks and trading companies that facilitate Pyongyang’s coal exports.
As for those who might be tempted to accept China’s view that Pyongyang’s coal exports were for “humanitarian” purposes, a new story by the Washington Post’s Peter Whoriskey cites the Justice Department filings I refer to in the preceding paragraphs to debunk that cynical lie (as I characterize it in the article, which quotes me):
Documents from a recently unsealed U.S. court filing, combined with another federal case, suggest that much of the money China has paid to North Korea for coal over the years went toward the country’s weapons and military efforts.
The coal trade cited in the court documents, which has accounted for as much as a third of North Korean exports, helps explain how North Korea continued to develop its weapons programs despite being impoverished and under trade sanctions. The connections to the military also undermine Chinese claims that their imports were benefiting North Korean civilians.
“We considered that to be a very narrow [humanitarian] exception, but it soon became clear that not all others shared our view,” a State Department spokesperson said before the vote.
In the most recent court filing, unsealed last month, U.S. government attorneys were granted a seizure warrant against the largest Chinese importer of North Korean coal and four related front companies after presenting evidence that the Chinese company’s transactions with North Korea were “ultimately benefiting sanctioned North Korean end users, including North Korea military and North Korea weapons programs.”
The documents cite a defector, deemed “reliable,” who said that the vast majority of the revenue from the country’s coal exports go toward the military, nuclear missiles and weapons programs.
Those disclosures followed a court case filed in September in which federal attorneys cited a spreadsheet showing a major Chinese coal importer making purchases from various North Korean government agencies.
The Chinese importer was also purchasing from a North Korean company controlled by a secretive government branch believed to be conducting illicit activities and slush funds for political leaders. [WaPo, Peter Whoriskey]
It’s always refreshing to see journalists find, read, and cite primary sources rather than call up the same familiar “experts” who may not know anything about sanctions or even about North Korea, but who can be relied on to validate their own opinions. Read the whole thing.
Last year, Ed Royce, the Chairman of the House Foreign Affairs Committee, and Cory Gardner, Chairman of the Senate Asia Subcommittee, led the charge to cut Pyongyang’s access to the hard currency that sustains it by drafting and passing the North Korea Sanctions and Policy Enhancement Act. We’ve known all along that nothing short of presenting Kim Jong-Un with an existential choice — disarm and reform, or perish — would create the conditions for a negotiated disarmament of North Korea, assuming that’s still possible. And we’ve always known that it would take several years for even aggressively enforced sanctions to present Pyongyang with that choice.
One nuclear test and multiple missile tests later, neither international compliance with U.N. resolutions nor (until very recently) U.S. enforcement of the NKSPEA has been enough to either change Kim Jong-Un’s mind or weaken his hold on power. Congress now seeks to raise the pressure on Pyongyang by closing loopholes in existing sanctions, attacking its developing sources of income (textiles, fisheries, and labor exports), catching U.S. law up with new U.N. sanctions, and most importantly, increasing penalties for foreign banks and governments that (for various reasons) haven’t complied with the U.N. resolutions.
Ed Royce continues to lead this effort with the KIMS Act, which passed the House overwhelmingly in May, and which has now been merged into Title III of the Russia, Iran and North Korea Sanctions Act of 2017, or RINKSA. But the foreign affairs committees can only go so far in attacking Pyongyang’s cash flow through financial regulation before the parliamentarians in Congress give primary jurisdiction over a bill to the financial services committees. Some of the most important remaining sanctions loopholes are within the banking committees’ jurisdiction.
Introducing S.1591, the BRINK Act
An unlikely champion has stepped into this void in the form of Senator Chris Van Hollen of Maryland, a liberal Democrat who sits on the Senate Banking Committee. I say “unlikely,” because historically, it hasn’t been liberal Democrats who’ve led Congress’s efforts to raise the pressure on Pyongyang. This would be a good time to abandon any assumption that Democrats are soft on North Korea. Now, Van Hollen and Republican Senator Pat Toomey of Pennsylvania have introduced S.1591, the Banking Restrictions Involving North Korea Act, or BRINK Act, of 2017. The text of the bill, which you can read here, hasn’t been posted on GovTrack or Congress.gov, although the bill itself was introduced several days ago. At the outset, I’ll just get this bit of full disclosure out of the way. I’ve had some discussions with Senator Van Hollen’s staff about this bill, and ….
The BRINK Act is a tough and sophisticated piece of legislation. It will be a strong complement to both the NKSPEA and the RINKSA. This post will discuss its key provisions, starting with the definitions. A very important new one that appears in multiple places in the bill is “North Korean covered property:”
That definition potentially covers just about every transaction the North Korean government profits from. The key question, of course, is whether the U.S. can reach any given transaction in NKCP — either because a U.S. person (or a foreign subsidiary) is a party to the transaction, or because part of that transaction occurs in the United States (most likely, because a financial transaction is cleared through a U.S. correspondent bank, or because a product seeks to enter U.S. commerce).
Another significant definition is “knowingly,” which includes circumstances in which a party to the transaction “should have known” that it was prohibited.
Section 101 of the BRINK Act creates a blacklist of Chinese and other foreign banks that are failing their due diligence obligations to prevent North Korea from accessing the financial system, or are helping North Korea evade sanctions by facilitating offshore dollar clearing, or dealing with North Korea in precious metals or other stores of value. It then provides a list of sanctions that restrict the access of those banks to the U.S. financial market, add additional civil penalties to the criminal penalties under 31 U.S.C. 5322, or (at worst) block their assets here.
Like all of the sanctions under the BRINK Act, this sanction can be suspended if North Korea makes progress toward disarmament and accounting for American POW/MIAs, and can be lifted when North Korea completes that disarmament and accounting.
Section 102 requires any transactions in North Korean covered property within U.S. jurisdiction (involving a U.S. person or occurring in whole or in part in the United States) to be licensed by the Treasury Department’s Office of Foreign Assets Control. As we’ve learned from recent actions by the Justice Department, North Korea’s banks, smugglers, and money launderers — and their Chinese bankers — tend to evade OFAC licensing requirements, despite their preference for dealing in U.S. dollars. Under this provision, any unlicensed transactions in NKCP are punishable by a $5 million fine and 20 years in prison. More importantly, the proceeds of unlicensed transactions, and property “involved in” unlicensed transactions, will be subject to forfeiture. In most cases, that’s the only form of “punishment” we have the power to impose on the targets of these activities.
Section 104 authorizes new sanctions against foreign governments that fail to comply with U.N. sanctions, such as those that require member states to freeze the property and close the offices of designated North Korean entities (KOMID, Korea Kwangson Bank, the Reconnaissance General Bureau, Bureau 39, etc.), to expel representatives of North Korean banks and North Korean diplomats who engage in arms trafficking, and to deregister North Korean ships. For governments identified as noncompliant, the U.S. can limit exports of goods or technology to those countries, withhold foreign aid, and instruct our diplomats to vote against them getting IMF, World Bank, and other international loans. This provision may well put teeth into sections 313 and 317 of the RINKSA (discussed below) and broadens the sanctions authorities of section 203 of the NKSPEA.
Section 105 authorizes grants for governmental and non-governmental organizations that currently provide the U.S. government with much of its actionable intelligence on North Korea money laundering — the U.N. Panel of Experts, and private groups like the Center for Advanced Defense Studies and Sayari Analytics. (Again, this complements a provision in the RINKSA — specifically, section 323, which provides rewards for informants who provide information leading to the arrest of persons responsible for North Korean money laundering or cyber attacks).
Section 106 requires a report on North Korea’s use of beneficial ownership rules to mask its interests in property (previously discussed here).
Section 107 directs the President to team up with the World Bank’s stolen assets recovery initiative to go out and find the hidden, ill-gotten gains of Kim Jong-Un and his minions, wherever in the world they can be found, block them, and release them for humanitarian use.
Section 108 will undoubtedly create headlines in South Korea — it urges South Korea not to reopen Kaesong until North Korea completely, verifiably, and irreversibly dismantles its nuclear, chemical, biological, and radiological weapons systems and any systems for delivering them.
Sections 201 through 204 call on and encourage assets and pension fund managers to divest from companies that have investments in North Korea, and immunize those fund managers from suit for any such divestment.
The KIMS Act becomes Title III of the RINKSA
For a while, it looked like all that would survive of the KIMS Act in the Senate was an untitled bill called S.1562, which removed most of the KIMS Act’s toughest provisions except for secondary sanctions on North Korea’s labor exports. But last week, S.1562 was referred, ironically enough, to the Banking Committee, taking it out of the hands of Foreign Relations. More importantly, the White House is also signaling its support for a newer bill, the Russia, Iran, and North Korea Sanctions Act. The RINKSA incorporates nearly all of the KIMS Act into Title III (full text here; scroll down to page 144).
Bob Corker, the Chairman of the Senate Foreign Relations Committee, has expressed some concern about how easy it will be to pass a bill that big this year. I don’t have the knowledge to say whether this was a good tactical move or not, so I’ll defer to the congressional leadership on that point. (Some of us are keenly aware that Congress still has to reauthorize the North Korean Human Rights Act this year, or it will expire.) Instead, I’ll describe the provisions of Title III in a bit more detail than I described the KIMS Act before.
Section 311 amends the key provision of the NKSPEA, section 104, to expand both the mandatory sanctions of section 104(a) and the discretionary sanctions of NKSPEA 104(b). Mandatory sanctions would now apply to purchases of precious metals from North Korea, selling aviation or rocket fuel to North Korea, providing bunkering services for any U.N.- or U.S.-designated ship, reflagging North Korean ships, or providing correspondent services to any North Korean bank (Title III, section 312, also codifies a prohibition on providing indirect correspondent account services to North Korean banks).
Section 311 also expands the President’s discretionary authority to designate and sanction persons who violate U.N. sanctions, and U.S. regulations and executive orders, that apply to North Korea. These new, discretionary authorities also authorize the President to designate persons who purchase more coal and iron ore than U.N. limits allow, who purchase textiles or food products from North Korea, who transfer bulk cash or other stores of value to North Korea, and who export crude oil to North Korea (humanitarian exports of gasoline, diesel, and heavy fuel oil are exempt). Other new sanctions authorities apply to North Korea’s online gambling, sale of fishing rights, labor exports, and banking, transportation, and energy sectors.
Some of these areas are already subject to the potential for asset freezes under Executive Order 13722, but designations under section 104(a) or 104(b) of the NKSPEA can have additional and more severe consequences.
Sections 313 and 317 are secondary sanctions provisions applicable to governments that aren’t complying with U.N. sanctions. Section 313 amends and strengthens NKSPEA 203 sanctions against governments that engage in arms deals with North Korea, by denying them most foreign assistance. Section 317 creates a blacklist of noncompliant governments, which would dovetail nicely with the sanctions provisions of section 104 of the BRINK Act.
Section 314 expands the President’s authority to increase customs inspections for cargo coming from ports that fail to inspect all cargo going to or coming from North Korea, as required by UNSCR 2270. This provision is a secondary shipping sanction. It presents a very real risk that cargo coming to the U.S. from noncompliant ports may be held up longer in Customs, which could cause shippers to take their business elsewhere. As with all secondary sanctions, it forces third-country entities to choose between doing business with the U.S., or with North Korea. It also provides a list of suspect ports in China, Russia, Iran, and Syria that would be first in line to blacklisted for additional inspections.
Section 315 is another secondary shipping sanction, and a very tough one indeed — ships flagged by countries that reflag North Korean ships (a violation of UNSCR 2270 and 2321) could be denied access to U.S. ports and waterways. Vessels that have visited North Korea recently, for other than strictly humanitarian purposes, could also be banned.
Section 316 orders a report on WMD cooperation between North Korea and Iran.
Section 318 orders a report on whether SWIFT and other providers of specialized financial messaging continue to service North Korean banks, including those designated by the U.N.
Section 321 is a set of powerful sanctions against employers of North Korean labor and the sellers of products made with North Korean labor. It subjects those employers to potential sanctions under the Trafficking Victims Protection Act or the freezing of their assets. Governments that allow the use of North Korean labor could also see their TVPA status drop. A rebuttable presumption would apply to any goods made with North Korean materials or labor, excluding from U.S. commerce under section 307 of the Tariff Act.
Section 323 provides for the government to pay rewards to informers — whether these be defectors or NGOs — that provide information leading to the arrest of North Korean money launderers or persons responsible for cyber attacks.
Section 324 again raises the pressure on the State Department to declare North Korea to be a state sponsor of terrorism.
~ ~ ~
Both of these bills attempt to attack North Korea’s third-country enablers. Legislation of this kind is necessarily creative and complex because it’s not always obvious how the U.S. can reach North Korea’s income while minimizing harm to legitimate commerce and to the North Korean people. If the target only does business with North Korea, then our next option is to target the bankers, shippers, and insurers that deal with the primary target and force them to choose between access to the U.S. or the North Korean economy. The most common ways we can influence the conduct of these enablers are (1) prohibiting U.S. persons and their subsidiaries from dealing with the target; (2) denying the target access to U.S. financial markets, trade, foreign assistance, and technology. Clearly, the U.S. has a stronger case when it enforces the terms of a U.N. Security Council resolution than when it acts alone.
While it may be too difficult to merge RINKSA Title III and the BRINK Act at this point in the congressional calendar, the two bills would go together like chocolate and peanut butter. Minor inconsistencies between the two will likely be resolved by amendments to the BRINK Act. I’ll defer to others how best to enact them, but each bill serves important purposes in making sanctions work, and in presenting Kim Jong-Un with that existential choice.
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.
~ ~ ~
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.
~ ~ ~
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.
And so, the “maximum pressure” we’ve been waiting for begins in earnest. Yesterday afternoon, the Treasury Department announced a series of legal actions against Chinese enablers of North Korea’s proliferation, smuggling, and money laundering. First, Treasury’s Office of Foreign Assets Control froze the assets of two businessmen and a shipping company. One of those businessmen, Sun Wei, was the sole shareholder of Mingzheng International Trading, the Chinese company targeted in this recent civil forfeiture action. The shipping company was sanctioned for smuggling luxury goods to North Korea, in violation of UN sanctions.
The more potentially significant action, however, was Treasury/FINCEN’s action against a Chinese bank. The target was the Bank of Dandong, and the weapon was 31 U.S.C. 5318A(b)(5), otherwise known as the Fifth Special Measure of Section 311 of the Patriot Act — the same provision used against Banco Delta Asia in 2005. The action effectively makes the BoD a global pariah and cuts it off from the financial system.
[Alderaan shot first.]
Interestingly enough, if you had asked me to pick just one Chinese Bank to make an example of, I would have named the Bank of Dandong. Yes, the Bank of China was the most flagrant violator, but a large bank calls for a different strategy (which I’ll discuss below). Based on the open-source evidence, it was the BoD that had the most integration into Pyongyang’s palace economy. This 2013 report documented its ties to US- and UN-sanctioned Korea Kwangson Bank (KKBC). This report from early 2016 indicates that Chinese merchants trading with North Korea (temporarily) shifted away from the Bank of Dandong after the U.N. Security Council passed Resolution 2270. A few months later, the Justice Department indicted a Chinese company, Dandong Hongxiang Industrial Development, for laundering money for KKBC through 12 Chinese banks, including the BoD. Just a few days before, the Center for Advanced Defense Studies had revealed that DHID had an equity stake in the BoD.
To this body of evidence, the Treasury Department now adds a Notice of Proposed Rulemaking to support the 311 action. Treasury accuses the BoD of facilitating money laundering by trading companies that are fronts for North Korean banks and agencies designated for proliferation. Sorry for the long money quote, but it’s all worth reading:
Bank of Dandong serves as a gateway for North Korea to access the U.S. and international financial systems despite U.S. and UN sanctions…. For example, as of mid-February 2016, North Korea was using bank accounts under false names and conducting financial transactions through banks located in China, Hong Kong, and various southeast Asian countries. The primary bank in China was Bank of Dandong.
In early 2016, accounts at Bank of Dandong were used to facilitate millions of dollars of transactions on behalf of companies involved in the procurement of ballistic missile technology. Bank of Dandong also facilitates financial activity for North Korean entities designated by the United States and listed by the United Nations for WMD proliferation, as well as for front companies acting on their behalf.
In particular, Bank of Dandong has facilitated financial activity for Korea Kwangson Banking Corporation (KKBC), a North Korean bank designated by the United States and listed by the United Nations for providing financial services in support of North Korean WMD proliferators. As of May 2012, KKBC had a representative embedded at Bank of Dandong. Moreover, Bank of Dandong maintained a direct correspondent banking relationship with KKBC since approximately 2013, when another Chinese bank ended a similar correspondent relationship. As of early 2016, KKBC maintained multiple bank accounts with Bank of Dandong.
Bank of Dandong has also facilitated financial activity for the Korea Mining Development Trading Corporation (KOMID), a U.S.- and UN-designated entity. As of early 2016, a front company for KOMID maintained multiple bank accounts with Bank of Dandong. The President subjected KOMID to an asset blocking by listing it in the Annex of Executive Order 13382 in 2005, and the United States designated KOMID pursuant to Executive Order 13687 in January 2015 for being North Korea’s primary arms dealer and its main exporter of goods and equipment related to ballistic missiles and conventional weapons.
FinCEN is concerned that Bank of Dandong uses the U.S. financial system to facilitate financial activity for KKBC and KOMID, as well as other entities connected to North Korea’s WMD and ballistic missile programs. Based on FinCEN’s analysis of financial transactional data provided to FinCEN by U.S. financial institutions pursuant to the BSA as well as other information available to the agency, FinCEN assesses that at least 17 percent of Bank of Dandong customer transactions conducted through the bank’s U.S. correspondent accounts from May 2012 to May 2015 were conducted by companies that have transacted with, or on behalf of, U.S.- and UN-sanctioned North Korean entities, including designated North Korean financial institutions and WMD proliferators.
In addition, U.S. banks have identified a substantial amount of suspicious activity processed by Bank of Dandong, including: (i) transactions that have no apparent economic, lawful, or business purpose and may be tied to sanctions evasion; (ii) transactions that have a possible North Korean nexus and include activity between unidentified companies and individuals and behavior indicative of shell company activity; and (iii) transactions that include transfers from offshore accounts with apparent shell companies that are domiciled in financial secrecy jurisdictions and banking in another country. [FINCEN NPRM]
For a brief discussion of the BoD’s rights to challenge this action before it officially becomes final in 60 days, see this post. The Bank of Dandong can’t say it wasn’t warned; in its notice, Treasury cites its November 2016 regulation at 31 C.F.R. 1010.659, calling on banks to exercise enhanced due diligence with regard to North Korean customers, and to deny North Korean banks direct or indirect access to the financial system. That regulation was promulgated to implement Treasury’s designation of North Korea as a jurisdiction of Primary Money Laundering Concern in November, which in turn was in response to section 201 of the North Korea Sanctions and Policy Enhancement Act, which effectively forced Treasury to make that designation.
Naturally, the principal congressional leaders behind passing the law that led to this result welcomed Treasury’s decision. Rep. Ed Royce (R-CA), chairman of the House Foreign Affairs Committee called the action “a big step,” adding, “The administration is right to target any around the world who act as financial lifelines to Kim Jong-un, and to give them a clear choice: You can do business with North Korea or with the U.S., but not both.” Royce also called on the Senate to pass his KIMS Act. Senator Cory Gardner (R-CO) issued a statement applauding the action and calling it long overdue.
It’s hard to believe that it was a complete coincidence that Treasury took this action while Moon Jae-In was in town. The message thus sent is that the U.S. and South Korea must be aligned on sanctions enforcement. We cannot have a repeat of 2005, when South Korea undermined the sanctions the U.S. imposed (Roh Moo-Hyun opened Kaesong, which became a $100-million-a-year subsidy for Kim Jong-Il, just as the Banco Delta Asia sanctions were achieving their effects). Someone in the White House clearly understands that we cannot make a coherent policy of sanctioning and subsidizing the same target at the same time. Treasury Secretary Steven Mnuchin emphasized that yesterday’s action was directed at North Korea, not China, and expressed the hope that China would “continue to work with us” to pressure North Korea.
What should we watch for next? First, for North Korean money men to step up their bulk cash smuggling game, or shift to non-dollar currencies or trade-based money laundering as sanctions dodges. The excellent Noon in Korea Twitter feed, for example, points to a Korean-language report that authorities in Vladivostok have seized bulk cash from North Korean money launderers who are apparently having trouble sending wire transfers (an increasingly rare case of Russia enforcing sanctions). Interestingly, Treasury says that BoD also maintains “euro, Japanese yen, Hong Kong dollar, pound sterling, and Australian dollar correspondent accounts that would not be affected by this action.” That’s why it will be important for State and Treasury to engage in some good financial diplomacy to get those third-country regulators to blacklist the BoD under their own authorities.
Also, look for the “death spiral” — North Korean money launderers who defect because they can’t pay their kick-up quotas because of sanctions, who then provide us more intelligence, leading to yet more sanctions. Rinse and repeat. (We might as well put out the word now that they’ll get better living arrangements if they bring their ledgers and laptops.) For a fascinating interview of one of those money launderers who defected after the Jang Song-Thaek purge, read this. North Korean money launderers’ fear of coming home to Pyongyang short-handed may be one of our intelligence agencies’ best tools to be a major player in the sanctions game. For reasons I explained here, that death spiral could pose a serious threat to the survival of the regime.
We should also watch for local regulators stepping in to take over the Bank of Dandong to prevent a run and shield other local banks from secondary effects. We should look for more reports that other Chinese banks are closing North Korean accounts. We should also look for correspondent banks in the United States to raise their scrutiny of Chinese banks that try to clear dollar transactions on behalf of suspicious or poorly documented customers. If FINCEN plays its cards right, Chinese banks that don’t step up their compliance game may find it difficult to clear their transactions. For more on how EU and New York state regulators have applied similar strategies, see this post.
Finally, we should look for China to send more mysterious convoys to North Korea and engage in conspicuous sanctions violations to deter any more actions by Treasury. We must be prepared to escalate in kind. Chinese retaliation may be Trump’s excuse to do what some in his administration have wanted to do all along — hit China with, say, steel tariffs. Fortunately, Trump has backed off from a threat to withdraw from NAFTA. And needless to say, the worst possible time to drop or renegotiate the Free Trade Agreement with South Korea is when China is bullying it with unilateral trade sanctions. After all, you can’t wage a trade war with everyone at once. If you trade less with China and you aren’t willing to eat a recession, you have to trade more with someone else. Given that most of the economies that compete with China as providers of low-wage labor or high-technology manufacturing (or both) are in East Asia, Trump should consider making some face-saving changes to the Trans-Pacific Partnership and reviving it as part of a long-term plan to encourage an emigration of manufacturers from China to friendlier venues in Southeast Asia and Japan. While I’m not a fan of protectionism, Xi Jinping’s behavior in the South China Sea, North Korea, and Hong Kong has also convinced me that “peaceful rise” is a self-serving delusion, and that our economic interest in robust trade with China is outweighed by the threat that we’re selling Xi the rope to hang us with.
We also need a strategy for banks like the Bank of China that may think they’re too big to sanction. The Bank of Dandong is expendable, but the Bank of China is not. Unlike the Bank of Dandong, however, the Bank of China has deep links to the U.S. financial system, is under pressure from the Chinese Finance Ministry to improve its anti-money laundering compliance, and has a branch in New York (which regularly checks in on this humble blog for … for posts like this one, I suppose). The better approach for Treasury, then, would be to use FINCEN to treat the BoC’s North Korea ties as an anti-money laundering compliance problem and, in the event the feds smell something fishy, issue subpoenas with a mind toward doing to the BoC what it did to BNP Paribas — impose heavy fines and a deferred prosecution agreement for data stripping and flunking Know-Your-Customer obligations. That is to say, there is no such thing as “too big to sanction,” merely different strategies for different targets. Another advantage of a deferred prosecution agreement, of course, is that it can force a bank to cooperate by providing financial intelligence — intelligence the feds can use to take action against other targets.
Some of these effects should be evident within the next week or two. The effects that matter most, however, are on the stability of the North Korean system. To have any chance at all for a negotiated denuclearization of North Korea, we will have to force the regime to choose between its nukes and its survival. My guess is we’ll see effects of that kind within a year or two if — and only if — we continue to press the financial, law enforcement, and diplomatic campaign needed to starve the regime of funds.
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.
Federal prosecutors are building cases that would accuse North Korea of directing one of the biggest bank robberies of modern times, the theft of $81 million from Bangladesh’s account at the Federal Reserve Bank of New York last year, according to people familiar with the matter.
The charges, if filed, would target alleged Chinese middlemen who prosecutors believe helped North Korea orchestrate the theft, the people said.
The current cases being pursued may not include charges against North Korean officials, but would likely implicate North Korea, people close to the process said. [Wall Street Journal, Aruna Viswanatha and Nicole Hong]
Traditionally, robbery has meant theft by means of force or intimidation. I thought this case sounded like a better fit for bank fraud until I read the Criminal Code section on bank robbery, which is much broader than the common law definition and covers the whole life cycle of the criminal course of conduct.
The FBI’s Los Angeles Field Office and the U.S. Attorney’s Office for the Central District of California have the lead, which means the indictments would most likely issue in the Central District of California (and consequently, the Ninth Circuit). It’s not an ideal place to pick venue if you’re the government. The USAO for the Southern District of New York is also investigating other bank fraud cases it suspects of being the work of the same North Korean hacking group, known as “Lazarus.”
As I noted in my report on North Korea’s sponsorship of terrorism, the U.S. government thinks the Reconnaissance General Bureau (which is designated by both U.S. Treasury and the U.N. Security Council) did the Sony cyber attack. Recent reports have also linked the code used in the Bangladesh fraud to the code used in the Sony attack. That would make the RGB a prime suspect in both attacks, which means it would have been a violation of the International Emergency Economic Powers Act (IEEPA) for anyone to knowingly engage in dollar transactions with the RGB’s agents after August 30, 2010, when that agency was first designated.
If charges are filed against alleged middlemen in the Bangladesh theft, they are expected to be similar to charges unsealed in September against a Chinese businesswoman, Ma Xiaohong, some of these people said.
That makes sense. The “Chinese middlemen” could be charged with violating the IEEPA and money laundering whether the feds can pin the bank fraud on the North Koreans or not. Here’s my post on the Ma Xiaohong/Dandong Hongxiang case, with links to the indictment and the civil forfeiture complaint.
There is, apparently, a “minority view” among the feds that the North Koreans may have sold the code to third parties without being directly involved. Depending on the evidence, that might still be a crime — most likely conspiracy to commit bank fraud or a violation of the Computer Fraud and Abuse Act, or aiding and abetting one of those crimes. That might even be a smarter charging strategy.
The report also says the Treasury Department may freeze the assets of those under investigation (I’d guess under Executive Order 13722, implementing the NKSPEA, or EO 13757, Obama’s eleventh-hour cyber executive order).
A decade ago, the feds were ready to indict North Korean officials for counterfeiting, but political pressure from the State Department got the case shelved — permanently. That was the George W. Bush administration. I don’t get the impression that the Trump administration would do any such favors for Kim Jong-un.