Search results

17 results found.

Kim Jong Il Unplugged, Part 17

After North Korea showed up at last month’s disarmament talks just long enough to give the United States the finger, you wouldn’t expect us to go wobbly on our financial measures against North Korea’s financing of WMD’s, counterfeit currency, and other illegal proceeds.  With the passage of U.N. Security Council Resolutions 1695 and 1718, those measurements have become requirements.  The good news is that we’re not going wobbly.

Treasury, mainly in the physical form of Undersecretary Stuart Levey, has been the instrument in that new policy, which started here.  Since then, Levey  has traveled to various nations making polite requests of bankers to cease their suspicion transactions with North Korea (and that’s just about all of them).  Since last August, when Treasury made a vivid example of Banco Delta Asia, polite requests have worked remarkably well in such places as Japan, Singapore, and even some South Korean banks.  The latest bank to offer its cooperation was based in Vietnam   (much more here). 

It was inevitable, of course,  that a polite request would eventually be refused.  That regrettable choice was made by Iran’s Bank Sepah, so Stuart Levey politely unholstered his weapon, squeezed the trigger, and recaptured  everyone’s undivided  attention  with the pool of Sepah assets that’s spreading across the lobby floor.  Here’s a quote from  Levy’s official statement today:

Continue Reading

Kim Jong Il Unplugged, Part 9

The Treasury Department is not through with Kim Jong Il. Undersecretary Stuart Levey has set his sights on two of North Korea’s last two lifelines, South Korea and now, Russia:

The United States is not yet satisfied with the results of sanctions aimed at changing North Korea despite the impact the sanctions have had, a senior Treasury official said Friday. The U.S. will watch how the situation develops with Russia, which reportedly has become one of the very few havens for North Korea to hide illicit funds, Undersecretary Stuart Levey said.

The U.S. sanctions on Pyongyang have been “more powerful than many thought possible,” he said. “I think our sanctions have had real impact, but the real goal, I think, is to see a real change in North Korea,” he said at the American Enterprise Institute.

Why, what a fascinating — and encouraging — choice of words at that forum.

Continue Reading

Kim Jong Il Unplugged, Part 8

Nigel Cowie, North Korea’s most “legitimate” banker, is selling out, and this time, that’s not just a moral judgment. Richardson links this piece, written by none other than Bradley K. Martin, indicating that he’s selling his Daedong Credit Bank to the British-based Koryo Group, but will stay on to help manage the bank. As for the issue of Daedong’s much-proclaimed legitimacy, Martin adds what strikes me as a highly salient fact:

The minority owner of Daedong Credit is Korea Daesong Bank, a unit of North Korea’s Daesong Group. A 1995 U.S. government study cited close ties between Daesong and Room 39, an office of the ruling North Korean Workers’ Party said to handle foreign exchange-gathering projects for the country’s leader.

Now, there’s the kind of jaw-dropping understatement you don’t read every day. Bureau 39’s function is “foreign exchange-gathering” in the same sense that Heidi Fleiss was a physical therapist and Gotti’s bag was alternative dispute resolution. That’s a disappointment from Martin, a first-rate journalist who wrote a must-read book, well worth its high price for its defector interviews alone (and mainly for them). By more-or-less universal acclaimation, Bureau 39 is suspected of being North Korea’s primary dealer in counterfeit currency, missiles and WMD components, and dope (more). And what of its “close ties” to Korea Daesong Bank? According to a report from the Far Eastern Economic Review, this close:

Kim Dok Hong, a top North Korean official who fled to South Korea in 1997, says that both banks [wholly-owned KDB subsidiary Golden Star Bank being the other] come under the jurisdiction of Bureau 39.

Another interesting fact reported in this article:

The Congressional Research Service–which provides United States congressmen with background briefings–reported on March 5 last year that “the U.S. military command and the Central Intelligence Agency reportedly believe that North Korea is using for military purposes the large cash payments, over $400 million since 1998, that the Hyundai Corporation has to pay for the right to operate [the] tourist project.”

I did not find the Treasury report referenced in Martin’s article, but I did find a U.S. Embassy document that relays a South Korean government conclusion that Bureau 39 controls Korea Daesong Bank. If those reports are accurate, Mr. Cowie’s bank, Daedong Credit Bank, is a direct business partner of Korea Daesung Bank. This, in turn, arguably makes Mr. Cowie an indirect business partner of the men at Bureau 39 who are printing supernotes and dealing in dope, and of the man in direct control of Bureau 39 — Kim Jong Il himself. That would make this spirited protestation of Daedong Credit Bank’s independence from the regime misleading in the extreme. As for the financial prognosis of that regime, it’s a bleak day when a bitter-end promoter like Cowie decides selling his interest in the bank, especially now. With most of its assets still frozen in Banco Delta Asia and unlikely to be unfrozen soon, you have to believe that he’s getting a less-than-optimal price.

In the end, however, Stuart Levey may just be hastening what what Kim Jong Il has been doing all along — breaking its agreements and scaring away investors.

Continue Reading

Kim Jong Il Unplugged, Part 7 (Updated)

[Update: My closing comment below about an expansion of our goals was an understatement:

The U.S. Treasury Department, in a shift in its policy toward North Korea, has decided to treat all transactions involving the nation as suspect and subject to sanctions while dictator Kim Jong Il develops nuclear weapons.

“Given the regime’s counterfeiting of U.S. currency, narcotics trafficking and use of accounts worldwide to conduct proliferation-related transactions, the line between illicit and licit North Korean money is nearly invisible,” said Stuart Levey, Treasury’s undersecretary for terrorism and financial intelligence.

Levey’s statement to Bloomberg News departs from Treasury’s earlier position that it was targeting only overtly illegal activities by North Korean companies. The policy change, which may impinge on foreign banks, coincides with an effort by President George W. Bush to pressure North Korea to return to talks aimed at scrapping its nuclear-weapon and ballistic- missile programs.

It looks like my calls in this post are holding up pretty well. This is essentially a PATRIOT 311 approach without the formal designation. I can’t say whether it’s the opaque dullness of international finance or the fact that George W. Bush finally has an effective North Korea policy, but almost no one seems to have taken note of the most important U.S. policy initiative toward North Korea in decades. H/t NKZone.]

==============================================================
Now, it’s Russia:

Fresh U.S. and Japanese economic sanctions against North Korea are becoming more likely with signs that the reclusive country may be preparing for a nuclear test. A government official in Seoul said Friday the U.S. regards Pyongyang’s outrage at earlier financial sanctions as feigned, implying that the freezing of the North’s accounts in a Macau-based bank last September may have just been the first step.

Peter Beck, a North Korea expert at the International Crisis Group in Seoul, says the next target of U.S. investigations will be North Korea’s accounts in Russia. He added the Bush administration was very pleased with the results of the investigation in Asia. Beck said the U.S. chased accounts and financial transactions in Asia, then in Europe, and now for the final stage will be moving on to Russia.

After having its accounts in Macau frozen, North Korea attempted to open accounts in Vietnam, Mongolia and Hong Kong but was turned down everywhere. Increasingly desperate, the Stalinist state turned to Luxemburg and Germany but was rebuffed there too. “The U.S. has the ability to put all kinds of pressure on European banks,” a government official here said.

This sort of pressure makes the re-imposition of trade sanctions we lifted in 1999 seem meaningless. What we’re doing now is cutting off everyone’s trade with Kim Jong Il, not just ours. Eventually, this will result in a direct confrontation between the United States and South Korea over trade with the North.

To further show just how dramatically the U.S. has moved toward squeezing the North Korean regime, the State Department’s chief negotiator is getting behind the effort:

The top U.S. point man with North Korea will urge Asian powers to end arms-related trade with Pyongyang as ordered by the U.N. on a tour of the region next week, U.S. officials say.

Assistant Secretary of State Christopher Hill, who departs on Sunday for Japan, China and South Korea, will assure them that despite the U.N. order increasing pressure on the North, the United States still backs six party talks to persuade it to abandon its nuclear activities, one official said.

The United Nations order to choke off weapons-related trade with North Korea passed after Pyongyang launched multiple missile tests on July 5.

The U.N. vote did not signal a new U.S. attitude to the six-party talks. “Our problem is that we don’t have a negotiating partner” in Pyongyang, said the official, who spoke on condition of anonymity because of diplomatic sensitivities.

That sounds about right to me. I also sense an expansion of the goal here, from choking off the missile trade to the arms trade as a whole. I’m certainly not going to criticize that.

Continue Reading

Kim Jong Il Unplugged, Part 6

From the AP:

The financial noose is tightening around North Korea as international banks sever ties with the nation – a move championed by the United States, a top Treasury Department official says.

[….]

“There is sort of a voluntary coalition of financial institutions saying that they don’t want to handle this business anymore and that is causing financial isolation for the government of North Korea,” Stuart Levey, the Treasury Department’s undersecretary for terrorism and financial intelligence, said in an interview Monday with The Associated Press.

“They don’t want to be the banker for someone who’s engaged in crime, as the North Korean government is,” he said.

Banks in Singapore, Vietnam, China, Hong Kong and Mongolia are opting not to do business with North Korea, Levey said.

“Is there a complete cutoff, so that they can’t get banking anywhere? No, that’s not the case, but they’re having a very difficult time finding banking services,” he said. “You’re seeing a near complete isolation.”

Remember — the feds brought Al Capone down with a tax evasion charge.

Continue Reading

Kim Jong Il Unplugged, Part 5

Stuart Levey’s visit to Asia last month is paying off. Yet another nation is cutting off Kim Jong Il’s finances.

Vietnamese banks have already closed down North Korean accounts over the past few weeks, most likely forcing Pyongyang to move its money to its last remaining haven, Russia, said Peter Beck, head of the International Crisis Group’s Seoul office, on Tuesday.

Beck said Nigel Cowie, general manager of North Korea’s Daedong Credit Bank in Pyongyang, e-mailed him last week and said Vietnamese banks have shut down Daedong’s and other North Korea-held accounts.

[….]

“The only financial window they (North Koreans) have left now is Russia, I am told,” Beck said at a roundtable on North Korea hosted by the Mansfield Foundation.

Somewhere, the world’s smallest violin is playing an adagio for Nigel Cowie, although I still count Switzerland and Luxemburg as two countries that may yet harbor North Korean accounts. I also recommend Andy Jackson’s post here, which discusses North Korea’s most “legitimate” banker. Cowie and his constituency of defenders in the comments probably set a record for most uses of the word “legitimate” per column inch, which I suppose depends on how you define the term. Whether Cowie is laundering money, wittingly or otherwise, is a matter I’ll leave to the Treasury Department, since there’s really little point in speculating in a factual vacuum about an investigation I can only assume to be ongoing, based on the media reports. You may also choose to accept Cowie’s explanation of why his bank’s “legitimate” transactions are conducted with large bundles of cash.

Third, there are good reasons why much of the international trade of the DPRK for these sorts of goods is cash-based. This relates mainly to the fact that the local currency is not convertible (and indeed we do not handle local currency), so imported goods are bought and sold for hard currency. The absence of the normal system of reciprocal correspondent bank accounts that exists in other countries which enables transactions to be settled by electronic book entry; the shortage of liquidity in the local market, which means that people are reluctant to deposit money in banks because they don’t know when they’ll be able to get the money out, so they would rather carry cash – and so on. This is quite a big subject in itself, and I have done a separate paper on this issue, but the bottom line is that people do tend to transact largely in cash, which in itself is not illegal – in this market, it is in fact often the only way.

Most of this could just as well apply to the Taliban in 2000. What all those conditions have in common is that they’re self-inflicted by the North Korean regime itself, out of a combination of economic dysfunction, repressive statism, recalcitrant lawlessness, and no small measure of concealment. But let’s make Nigel Cowie the only man in North Korea entitled to a presumption of innocence and assume that his bank’s transactions are all lawful. He has chosen to set up shop among stacks of dope money, suspicious dual-use imports, and counterfeit Benjamins. Then, Cowie complains when he winds up in Treasury’s impact zone as a result. In a regime as intentionally opaque as North Korea’s, some “collateral damage” to a relative sliver (veneer? perish the very thought!) of “legitimate” activities is inevitable. Things seems particularly murky in the wake of U.N. Security Council Resolution 1695, which demands that North Korea’s financiers exercise “vigilance” in assuring that their funds don’t go to the missile fund.

What we do know about Mr. Cowie’s business is that he aspires to profit by financing this regime, and that he knows damned well how Kim Jong Il will spend those finances. And won’t. If this is legitimate, then the world owes Walther Funk a historical absolution. Or, as Stuart Levey puts it:

“You don’t want to be the one ten years from now who’s got (Korean leader) Kim Jong Il’s money,” Treasury Undersecretary for Terrorism and Financial Intelligence Stuart Levey said in an interview with Reuters.

“(It’s) just like we saw during the (former U.S. President Bill) Clinton administration when they exposed the Nazi banks,” Levey said. Swiss banks were embarrassed in 1997 by revelations that the German government had passed funds through the Swiss National Bank and other Swiss banks during World War II to finance the Nazi war effort.

“You don’t want to be on the wrong side of that. I think banks understand that. I just don’t know whether they are taking all the steps that they can and we would encourage them to do it,” he said.

There’s no laundering the culpability that goes with enabling some things.

Continue Reading

Kim Jong Il, Unplugged

“You can get a lot farther with a kind word and a gun than a kind word alone.”
Al Capone

Raphael Perl of the Congressional Research ServiceIn an interview with Radio Free Asia (Korean only), Raphael Perl of the Congressional Research Service suggests exactly what I suspected about polite requests from U.S. Treasury Undersecretary Stuart Levey to crack down on North Korean money laundering — the polite requests are backed by some powerful veiled threats:

One option available to the US government, although this is quite an extreme option, would be in effect to kick banks that facilitate N. Korean criminal activity out of the international banking system.

That sounds a lot like other things Perl, an expert on North Korea’s illegal revenue, has said before, and suggests that the U.S. might use PATRIOT 311 against other banks, as it did with Banco Delta Asia, and with devastating effect on both BDA, Kim Jong Il, and his business associates. In fact, you have to suspect that those comments were aimed at someone whose cooperation the U.S. government isn’t getting, and leave it up to you to guess who.

North Korea is pretending not to care:

Stuart Levey

Earlier Friday, North Korea said it does not care about the United States’ move to impose additional sanctions against Pyongyang.

Undersecretary of the Treasury Stuart Levey said in a telephone interview with Yonhap News Agency on Thursday that the U.N. member states should freeze the assets of 11 North Korean entities that Washington designated last year as proliferators of missiles and weapons of mass destruction, as the first step in implementing the recent U.N. resolution against Pyongyang for its missile tests.

“It shows Washington’s intention of putting more pressure on us. We do not care about it,” Jung Sung-il, spokesman of the North Korean delegation, said.

That statement came in the context of six five ten-party talks in Malaysia, now comprising just about every nation in Taepodong range.

After Sergeant Kim's check bounced, the gun store demanded that he henceforth pay cash for his ammo.After years of preparing its people to fight uniformed Yankee hordes, the regime’s undoing could be a few unassuming men in pinstripes. One can hope that North Korea’s privileged classes would not be willing to share the misery and deprivation that those in the countryside and decayed industrial towns have felt for decades.

Follow the money.

Postscript: Is this, or is this not, the coolest news grapic ever?

Continue Reading

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

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

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

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

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

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

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

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

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

~   ~   ~

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.

Continue Reading

Leaked U.N. report reveals record seizure of North Korean arms last August (updated)

The 2017 report of the U.N. Panel of Experts isn’t due to be published for another month, but a Kyodo News reporter has already obtained and published leaked excerpts. The focus of Kyodo’s story is the now-familiar (and unquestionably accurate) castigation of member state governments for not putting enough will or resources into the enforcement of North Korea sanctions, but I’d like to start with this revelation:

“An interdiction of the vessel Jie Shun was the largest seizure of ammunition in DPRK sanctions history,” according to the document. A source informed Kyodo News the Egyptian port was not the general cargo ship’s final destination, despite its strategic location near a number of regional conflict hot spots. However, the report said that seizures like it demonstrate “the country’s use of concealment techniques as well as an emerging nexus between DPRK entities trading in arms and minerals.” [Kyodo News, Seana K. Magee]

The M/V Jie Shun, IMO 851780, is a 2,825-tonne general cargo vessel that flies a Cambodian flag. Built in Japan in 1986, it previously sailed under the names Velox, Armon, and Northern Queen.

[As seen here in better days]

As recently as 2014, it was up for sale. Its current owner is Liaoning Foreign Trade Foodstuffs Co., Ltd. of 72 Luxun Lu, Zhongshan Qu, Dalian, China. That’s right next to the address listed in the Panel’s 2014 report for Dalian Sea Glory Shipping Company, which managed the suspected smuggling ship M/V Light. This is not a reputable neighborhood.

Shipping trackers last spotted the Jie Shun at “Skohna” (probably Sokhna), an Egyptian port on the Red Sea near the southern terminus of the Suez Canal.

Despite what the trackers say, the Panel’s report says the ship wasn’t headed for any port in Egypt. Egypt has been a buyer of North Korean missiles and missile parts, but not of large quantities of North Korean munitions, at least to my knowledge. Nope, this time, my top three guesses are Syria, Syria, and Syria:

[What do I win?]

Liaoning Foreign Trade also operates one other ship, the Chinese-flagged M/V Fu Yun 228, IMO 8888654. The small bit of good news is that if trackers still show the Jie Shun as stuck in Egypt, Egyptian authorities must have seized the ship as the resolutions require it to. Inshallah, Red Sea divers will soon have a nice new artificial reef, or the Somali Coast Guard will soon have a new Q-Ship for stalking pirates.

It’s unquestionably true that up to this point, Pyongyang has invested more effort in hiding its dollars and ships behind front companies and shell companies than we have in finding them. That’s why Anthony Ruggiero, who spent years at the Treasury and State Departments administering sanctions, asked Congress this week to give the feds more resources for these investigations.

Mandate additional resources to address North Korea’s activities. The North Korea Sanctions and Policy Enhancement Act of 2016 is a comprehensive law that provides a myriad of tools for the Trump administration to address the North Korean threat. It is important that Congress continue to address additional areas through legislation in the same overwhelmingly bipartisan nature, signaling to North Korea and China that focus on this issue will continue. Throughout my testimony, I have detailed the challenge we face with an adversary that seems to be one step ahead of us. Our entire approach to the North Korea issue needs to change. One area Congress can address immediately is providing additional resources to the Treasury Department, Justice Department, Intelligence Community, and other government agencies to investigate violations of the NKSPEA. [Anthony Ruggiero, Testimony before the House Foreign Affairs Committee, Feb. 7, 2017]

There are other, more immediate steps we can take, beyond those I recommended here. First, we should add the Jie Shun, Liaoning Foreign Trade Foodstuffs Co., Ltd., and (for good measure) the Fu Yun 228 to the U.N. designation list and the Treasury Department’s list of Specially Designated Nationals. Second, we should also demand that China expel any North Koreans involved in this transaction, freeze any accounts associated with the transactions or the parties to it, and prosecute any Chinese nationals involved.

[As Anthony explains, just after the 5-minute mark.]

For now, however, this is just the latest example of how China continues to be a part of the problem rather than a part of the solution. Almost weekly, we see fresh evidence that China’s cost-benefit calculation hasn’t changed. It’s time to use more forceful methods to shift that calculation:

The Treasury and Justice Departments’ actions in late September 2016 showed a troubling pattern of Chinese persons assisting North Korean-designated persons, including through the U.S. financial system. These transactions lasted six years, up to September 2015, making it hard to believe the Chinese government regulators were unaware of this conduct. It is important that Congress and the American people understand the extent of China’s efforts, or lack thereof, to combat money laundering, sanctions violations, and proliferation financing. I recommend that new legislation include specific sections on North Korea’s network within China. It should also address the broader issue of Chinese support for, and harboring of, North Korean nationals involved in prohibited conduct. In particular, the report could also focus on whether the financial institutions involved should have been designated or subjected to secondary sanctions. [Ruggiero testimony]

My next recommendation depends on whether the Cambodian government has retaken control of its shipping registry, as it promised to do last August, and whether it has de-registered the forty-plus North Korean ships it had reflagged, but is required by U.N. Security Council resolutions to de-register. For years, Cambodia’s shipping registry has been notorious for reflagging North Korean ships. What few of us knew until C4ADS informed us last year was that the International Ship Registry of Cambodia was “a joint venture between the Cambodian government and a South Korean company, the Cosmos Group.”

The seizure of the Jie Shun would have been around the same time as Cambodia promised to de-register rogue ships, and two months after South Korea very politely asked Cambodian dictator Hun Sen to enforce U.N. sanctions against Pyongyang. Good diplomacy always starts with a polite request, and also, it’s always backed by the prospect of ghastly and unspeakable consequences. That dual approach worked superbly the last time we tried it, in 2005, when Treasury officials Stuart Levey and Daniel Glaser went on their world Kim Jong-il Unplugged tour. If Cambodia didn’t act, it would make a damn good example for the likes of Tanzania, Sierra Leone, and other states that haven’t gotten the message about reflagging North Korean ships. And in the case of Cambodia, the Cosmos Group’s role gives us a willing South Korean partner with jurisdiction and a shared interest in shutting this dirty business down ppali-ppali.

The U.S. has an obligation to investigate how the financial transactions behind the shipment were denominated and processed — specifically, whether they were processed through the U.S. financial system. (Unfortunately, the seizure came before UNSCR 2321 banned the insurance of North Korean ships.) If the evidence shows that either the North Koreans or their Chinese partners misused our financial system to break the law, we should freeze and forfeit assets, issue indictments, and consider civil penalties or other appropriate enforcement actions against the banks involved.

Lastly, let’s not forget that under UNSCR 2270, China is supposed to be inspecting all of this North Korean cargo. The NKSPEA also provides a new legal tool for cracking down on ports that shirk that responsibility.

SEC. 205. ENHANCED INSPECTION AUTHORITIES.

(a) Report Required.—Not later than 180 days after the date of the enactment of this Act, and annually thereafter, the President shall submit to the appropriate congressional committees a report that identifies foreign ports and airports at which inspections of ships, aircraft, and conveyances originating in North Korea, carrying North Korean property, or operated by the Government of North Korea are not sufficient to effectively prevent the facilitation of any of the activities described in section 104(a).

(b) Enhanced Customs Inspection Requirements.—The Secretary of Homeland Security may require enhanced inspections of any goods entering the United States that have been transported through a port or airport identified by the President under subsection (a).

That means that if Dalian doesn’t comply with its requirements to inspect North Korean cargo, U.S. Customs and Border Protection might require more intrusive inspections of cargo coming from Dalian. Think of it as the shipping equivalent of a 311 action.

~   ~   ~

Update: A reader writes that it’s just as possible that the weapons were headed for Hamas or Hezbollah. Yes, I suppose those are both plausible possibilities. North Korea is suspected of having sold arms to both groups in the past. Now that Hezbollah has a large contingent fighting in Syria, the easiest way to supply it would be by landing the ship at the Syrian ports of Tartous or Latakia. Supplying Hamas is a bit trickier, but would probably work something like this.

~   ~   ~

Update 2: I want to take on the argument, suggested in the Kyodo report, that North Korea’s money laundering and smuggling networks are so well-hidden inside China that we couldn’t possibly uncover them. Yeah, how can we do that? We put resources on the problem, for once. We use the same methods we used to expose the equally sophisticated money launderers who worked for Iran, Al Qaeda, and the Cali Cartel. We do what C4ADS did, when two smart researchers with no classified access whatsoever exposed a sophisticated, well-hidden network of North Korean money launderers and smugglers operating from China. Just like the Justice and Treasury departments did when they added their law enforcement authorities to the mix and came up with an indictment and a civil forfeiture count that reached 5 individuals, dozens of front and shell companies, and 12 different Chinese banks. We do it like the U.N. Panel of Experts has done, year after year after year after year after year after year. If we’d simply investigate and/or designate the dozens of Chinese and other third-country entities exposed by the Panel’s open-source reports and their confidential annexes, we’d tear huge holes in that network. We do it by trying, for once, and by not being afraid to break some china along the way.

Finally, let’s not forget the role of human intelligence, which shows us why we don’t have to expose the entire network at once to damage the integrity of the whole thing. The number of North diplomats and money launderers who defected last year probably exceeded the numbers seen in any previous year. Every time a fund manager brings his laptop or some bank account numbers to U.S. or South Korean intelligence, we gain another invaluable clue about the dimensions of that network and who operates it. Apparently, we’ve done some damage, too.

“As sanctions against North Korea have strengthened, trading companies are turning to products that are not included in the sanctions list. The recent activity comes from a decision by the Ministry of Foreign Trade demanding that trading companies double their contributions,” a source in Pyongyang told Daily NK on February 1.

The North Korean authorities are increasing the amount of loyalty contributions to compensate for dwindling exports of weaponry, which had previously been a significant source of revenue. As a result, the companies have no choice but to explore alternative items for export. [Daily NK]

Every time we freeze or seize money in one part of the network, we make other parts of the network fearful that they’ll miss their kick-up quotas. There are some encouraging signs that sanctions can trigger defections, which in turn raise the burden on remaining parts of the network and provide intelligence to help us freeze even more money. Eventually, it all becomes a death spiral:

The undercurrents of desperation amongst the trading companies is largely due to Kim Jong Un’s use of fearpolitik. Some officials returning from abroad for the end-of-the-year review, he said, were dismissed for not completing their assignments, sparking fierce competition to complete the trade assignments set at the beginning of each new year.

“Some traders are complaining, ‘If you pull a rubber band too much, it will snap. This is why there are growing number of defections among dispatched workers,'” he added.

The executives in charge of North Korea’s international trading companies are expected to come under intense pressure. It remains to be seen whether this will spark an increase in high-level defections to South Korea or other countries this year. [Daily NK]

This also has ripple effects on the banks, who are our most valuable sources of financial intelligence, via the Know-Your-Customer rules, and the Suspicious Activity Reports and Currency Transaction reports they’re supposed to file. If Treasury puts out the word that we’re going to enforce those requirements strictly against North Korea — which is a 311 jurisdiction, after all — banks may step up their compliance out of fear of being exposed by defectors, and of paying the massive fines like those we imposed on banks that violated other sanctions regimes.

Continue Reading

U.S. will announce new North Korea sanctions as early as this week.

At this event at the Heritage Foundation yesterday, I emphasized that U.S. and U.N. sanctions are mutually complementary, and that for the U.N. sanctions to work, the U.S. must show its determination to back them with the new authorities in H.R. 757, and by harnessing the power of the dollar.

The signs I’m seeing this week all suggest that the Obama Administration finally gets this. On Monday, President Obama said “that effective enforcement of sanctions on North Korea is one of the key tasks facing the country.” Yesterday, Treasury Secretary Jack Lew briefed a congressional committee on his talks with Chinese officials about enforcing North Korea sanctions, which he described as only “theory until you implement them” through “sustained efforts.” Said Lew, “We know from these sanctions programs that it’s grueling day-to-day work. You’ve got to identify the entities, act against the entities.” Exactly right.

The administration has also begun the hard work of financial diplomacy:

Adam Szubin, acting undersecretary of Treasury of terrorism and financial intelligence, will be in Beijing and Hong Kong on Monday and Tuesday to meet with senior government officials and compliance officers to discuss “a range of issues of mutual interest,” according to an advisory notice from Treasury. It comes in light of recent United Nations and U.S. sanctions on North Korea imposed this month, Treasury said.

“This trip provides an important opportunity for discussions of ways to strengthen U.S.-China coordination in response to North Korea’s destabilizing behavior and to ensure sanctions targeting the North Korean regime are as effective as possible,” the advisory notice said. [WSJ, Risk & Compliance Blog]

According to Channel News Asia, Szubin was to meet “with both government officials and the private sector” with regard to the implementation of both U.N. and U.S. sanctions. Reading the reports together, Szubin appears to have met with officials of certain banks that may hold North Korean assets. It may be a complete coincidence that Szubin visited Hong Kong just as HSBC froze Sam Pa’s accounts, and that HSBC’s top legal officer is Stuart Levey, Szubin’s predecessor. Coincidences do happen.

What we often forget about Treasury’s anti-money laundering effort against North Korea in 2005 and 2006 is that it was more than an action against one dirty bank. It was a broader campaign of financial diplomacy, led by Levey and Daniel Glaser (who is still a senior Treasury Department official today). It looks like we’re starting to see a similar strategy re-emerge now. There’s no question that implementing it will be challenging, based on what the U.N. Panel of Experts told us last week about North Korea’s extensive use of deceptive financial practices.

179. The financial sanctions notwithstanding, the Democratic People’s Republic of Korea continues to gain access to and exploit the global international financial system (including banking and insurance) through reliance on aliases, agents, foreign individuals in multiple jurisdictions, and a long-standing network of front companies and embassy personnel, all of which support illicit activities through banking, bulk cash and trade.

180. The Panel has concerns about banks without adequate banking regulations and the intent to enforce them, especially in countries lacking effective laws and compliance institutions.91 Transactions originating in foreign banks have been processed through corresponding accounts in the United States and Europe. The enhanced due diligence required under the resolutions in the case of the Democratic People’s Republic of Korea is frustrated by the fact that companies linked to the country are often registered by non-nationals, who also use indirect payment methods and circuitous transactions dissociated from the movement of goods or services to conceal their activity.

Cooperation and information sharing among member states will be essential to the success of the strategy.

181. The implementation of financial sanctions becomes more complex as it moves from targeted financial sanctions based on designation lists to activity-based sanctions,92 an endeavour that requires first establishing whether an entity is being controlled or used by a designated entity. The situation is complicated because lists of aliases are never exhaustive, not least because of alternative ways to transliterate Korean names. In addition, the Panel is hampered in updating information on designated entities owing to time lapses in responses to its inquiries, allowing entities more room to continue their activities.

Yonhap also reports that “[t]he U.S. is putting together a package of unilateral sanctions against the North to carry out the Security Council sanctions and the recent congressional legislation tightening the screws on Pyongyang.” Special Envoy for Human Rights Robert King adds, “There is an Executive Order being drafted right now that will deal with these additional sanctions.”

This is welcome, if unexpected. After all, what could a new executive order do that Executive Order 13687, which the administration has barely used, doesn’t already do? (Search “DPRK2.”) I suppose it could further clarify that the President may impose secondary sanctions on persons who engage in arms trafficking with North Korea, insure or reflag its ships, or maintain correspondent accounts for its banks, but H.R. 757 already gives the President the authority to address those things. What would be more useful would be a round of designations under section 104.

Treasury also sorely needs a better set of sanctions regulations to replace the weak ones at 31 C.F.R. Part 510. Instead, it needs something broadly analogous to the more comprehensive regulations that apply to Syria (Part 542), or to Iran (parts 560, 561, and 562). One important part of the new regulation would be its general licenses for humanitarian transactions, subject to the limits of section 208. Another would expansive definitions of “arms or related materiel” (to include technical assistance) and “severe human rights abuses” (to include the use of North Korean forced labor). Let’s hope Treasury is working on that, too, but for now, the good news is that Treasury is working.

Continue Reading

NYC insurer agrees to $271K penalty for insuring North Korean ships

This afternoon, the Treasury Department’s Office of Foreign Assets control announced that as part of a settlement, Navigators Insurance Company has agreed to pay OFAC a civil penalty of $271,000 for 48 sanctions violations involving Iran, Sudan, Cuba, and North Korea. Navigators is a New York-based provider of maritime insurance. It also had a branch in London, which evidently decided to cut costs by skimping on lawyers. Here’s how that worked out for them.

Between May 8, 2008 and April 1, 2011, Navigators and its London, U.K. branch (“Navigators U.K.”) issued global protection and indemnity (“P&I”) insurance policies that provided coverage to North Korean-flagged vessels and covered incidents that occurred in or involved Iran, Sudan, or Cuba—some of which led to the payment of claims. Navigators did not have a formal OFAC compliance program in place at the time it engaged in these apparent violations, and personnel within Navigators U.K. misinterpreted the applicability of OFAC sanctions regulations.

Between May 8, 2008 and February 18, 2011, Navigators provided insurance coverage to North Korean-flagged vessels under 24 P&I insurance policies and collected $1,142,237 in premium payments in relation to these policies. In addition, between February 23, 2009 and October 11, 2010, Navigators paid seven claims totaling $12,236 in relation to these policies. The base penalty amount for this set of apparent violations was $577,237. [OFAC]

In considering the amount of the penalty, Treasury considered that Navigators knew that these policy-holders were sanctioned, was “a commercially sophisticated financial institution,” and “did not have a formal OFAC compliance program in place at the time” of the violations. It also considered that Navigators self-disclosed the violation, and that once Treasury came knocking, Navigators cooperated and took remedial action.

The point being: if you do business with North Korea, good lawyers are a wise investment.

One of the few things our North Korea sanctions still do, specifically Section 2 of Executive Order 13466, is to prohibit U.S. persons from “owning, leasing, operating, or insuring any vessel flagged by North Korea.” That executive order was a place-holder for what remained in place as President Bush lifted most of our sanctions against Pyongyang, and removed it from the list of state sponsors of terrorism, in exchange for Kim Jong Il’s promise to disarm.

Seven years and two nuclear tests later, we’ve just seen the third action in one busy month to sanction North Korean shipping, following the EU’s designation of the Korea National Insurance Corporation, and the U.S. designation of Chinpo Shipping. This is enough data to show a pattern — Treasury is concentrating on North Korean shipping, and the EU might be, although it’s probably too early to say how broad, persistent, coordinated, or effective this effort will be, or how quickly the administration would back off for any deal Pyongyang offers.

With Pyongyang hinting that it will test some sort of nasty device this fall, feel free to insert your own “shot across the bow” pun in the comments.

The focus on shipping is curious in light of how little Treasury has done to North Korea’s banks recently, with the exception of the 2013 blocking of the Foreign Trade Bank. Surely Treasury doesn’t think shipping sanctions are a way to hurt Pyongyang without antagonizing Beijing. No, I didn’t think they’d think that:

Screen Shot 2015-08-06 at 8.52.26 PM

[As of 8:51 p.m. on August 6, 2015]

One important sign to watch for is whether senior U.S. officials will go on tour to enlist other governments to support a new enforcement effort. The action against Banco Delta Asia wasn’t effective just because we sanctioned a single dirty bank, but because Stuart Levey and Danny Glaser met with bankers and finance ministers across Asia and Europe and politely warned them about the risks of doing business with Pyongyang. Today, we tend to overlook the role of financial diplomacy in the success of the BDA effort. Like good diplomats, Levey and Glaser wore their velvet gloves when they shook hands. But anyone could feel that the iron fist within was BDA.

Continue Reading

Robert Einhorn to Lead North Korea Sanctions Implementation Effort

einhorn.jpgThe Joongang Ilbo is reporting that Clinton Administration alumnus and counter-proliferation expert Robert Einhorn is going to be put in charge of “streamlining the process by which it implements” international sanctions against North Korea, sanctions that are likely to be enhanced after an international investigation found that North Korea torpedoed and sank the South Korean warship Cheonan.

“The U.S. administration was seeking more efficient management of implementation of sanctions, which had been divided between the State and the Treasury departments,” the source said. “Philip Goldberg, the assistant state secretary at the Bureau of Intelligence and Research, had been doubling as the implementation coordinator, but Einhorn is poised to take over.

“The U.S. government also tried to strengthen its sanctions system after the second North Korean nuclear test last year, when Goldberg was named the coordinator,” the source said. Goldberg was appointed to his Bureau of Intelligence and Research post in February.

Another source said Einhorn’s nomination is also part of the U.S. government’s efforts to follow up on President Barack Obama’s order to review “existing authorities and policies” on North Korea. Soon after South Korean President Lee Myung-bak unveiled Seoul’s countermeasures against Pyongyang Monday, the White House expressed its support and said in a statement, “This review is aimed at ensuring that we have adequate measures in place and to identify areas where adjustments would be appropriate.

You can read more information about Philip Goldberg here and here. Previous reports suggested that he would quit as North Korea sanctions coordinator, but he continues to occupy a senior post within the State Department.

My research and inquiries about Einhorn suggest that we could do worse. He was deeply involved in negotiating Agreed Framework I, but since then, Einhorn has caught on faster than most of those in the foreign policy industry. His statement in 2007 that North Korea was “backtracking” on its promises to disarm suggests that he could see how Agreed Framework II would end a year before most reporters would see through Chris Hill’s glib deceptions.

“Aside from his knowledge of North Korean nuclear issues, Einhorn is tight with Gary Seymour, the weapons of mass destruction coordinator at the White House, and other nonproliferation officials in the Obama administration,” another source in Seoul said. “Einhorn should be able to provide leadership in his new role.

This is another good sign. The report probably means to refer to Gary Samore, an Obama Administration official whose validation of longstanding suspicions that North Korea was secretly enriching uranium departed from Democratic orthodoxy that the Bush Administration’s 2002 uranium enrichment accusations blew up a perfectly good disarmament deal with North Korea over sketchy evidence. Today, the evidence of North Korea’s cheating is so overwhelming that the Obama Administration is also insisting that North Korea disclose its uranium enrichment activities.

Is it bad news that someone from State, rather than Treasury, is going to lead the implementation effort? Yes, State ought to be handling our dealings with foreign governments, but Treasury — and I single out Undersecretary for Terrorism and Financial Intelligence Stuart Levey in particular — has generally been much more determined and effective than State in making sanctions work. The last time State and Treasury confronted one another over sanctions, Chris Hill rolled Treasury and got sanctions lifted against North Korea, in spite of Treasury’s persistent belief that North Korea continues to counterfeit U.S. currency. My suspicions are fueled by this recent history, and also by the fact that the same people are running State’s East Asia Bureau and Treasury’s Bureau for Terrorism and Financial Intelligence now as during President Bush’s second term. All of the key players in both departments are holdovers or career civil servants. During the Bush Administration, the absence of strong leadership at State, the White House, and the NSC meant that more junior officials like Christopher Hill could effectively set policy. Today, the White House and the NSC seem to be setting policy for the more junior officials to implement.

What the policy will be comes down to the question of political will, but the more reliable information I’ve heard, both before and after the Cheonan report, indicates that the Obama Administration is determined to pressure Kim Jong Il rather than caving in and signing Agreed Framework III. Einhorn isn’t one who appears to favor talks for the sake of talks, at any price. There’s reason, then, for cautious optimism. The question, of course, is where the pressure is taking us. Is the objective to force Kim Jong Il back to talks? There isn’t much point in that if, as almost everyone agrees, he’ll never disarm anyway. That’s especially so when China continues to signal that it will block and undermine sanctions against North Korea, and fails to enforce the sanctions in effect now. At some point, one can only hope that the administration decides to make North Korea China’s problem by trying to destabilize the regime.

Another diplomatic source said the Obama administration needed to tighten its sanctions regime. The source said when North Korean overseas accounts were closed off by U.S. sanctions, they simply changed the name of the individual or the company which had opened the account and resumed transactions. The sanctions were aimed at banning transactions by companies or individuals suspected of involvement in the North’s weapons of mass destruction programs.

“U.S. officials have taken note of such [name-changing] practices and they’re preparing measures to eliminate them,” the source said.

At the same time, the Chosun Ilbo reports that the Obama Administration intends to devote more attention to finding and freezing Kim Jong Il’s substantial personal accounts stashed in overseas banks. This is something I’ve been calling for for years.

Sanctions against North Korea by the U.S. government are expected to focus on Kim Jong-il’s personal slush funds. The aim is to tighten the noose around Kim and the rest of the North Korean leadership rather than to increase pressure on the North Korean people, in a parallel with the 2005 freezing of what was apparently money for Kim’s private use in the Banco Delta Asia in Macau.

U.S. and South Korean intelligence are exchanging information about the bank accounts managed by a department of the North Korean Workers Party’s Central Committee codenamed “Room 39,” which manages Kim’s personal coffers. “We discovered long ago that most of the overseas bank accounts that received money from South Korean businesses involved inter-Korean projects were owned by the North Korean military,” said a South Korean government official.

I’ll just pause here to let you bask in the warm, gentle glow of Sunshine and reflect on how much kinder and gentler it has made North Korea.

Room 39 is expected to be the main target of the latest financial sanctions. It has 17 overseas offices, some 100 trading companies, a gold mine and its own bank. The $200 million to $300 million earned by subsidiary companies have gone straight into Kim’s overseas bank accounts. The director of Room 39, Jon Il-chun, is expected to face financial sanctions as well. Kim appointed Jon after the former head, Kim Tong-un, was put on a blacklist of North Korean officials by the EU in December.

The U.S. government may also freeze overseas bank accounts held by North Korea’s Reconnaissance Bureau, which is believed to have orchestrated the attack on the South Korean Navy corvette Cheonan in March. But some experts say the U.S. may find it more difficult to apply financial pressure on North Korea because the North moved most of its money to accounts in China and Russia.

Are these developments connected? I can’t say for certain, but Einhorn has previously expressed support for tightening sanctions on luxury goods that support Kim Jong Il’s patronage system. The overseas accounts probably consist largely of proceeds of illicit activities, or those banned under U.N. Security Council resolutions. The funds in those accounts are probably paying for the yachts, cars, booze, and other luxuries that Kim Jong Il continues to import in violation of those resolutions.

How can the U.S. government reach those funds? I can think of at least two ways off-hand. One is to designate North Korea, Bureau 39, and/or Kim Jong Il as primary money laundering concerns under Section 311 of the USA PATRIOT Act, which would force any bank holding those accounts to freeze them, or risk losing its access to its correspondent accounts with U.S. banks. As the example of Banco Delta Asia showed, access to correspondent accounts in the United States means access to the global financial system. Depositors who are engaged in international business transactions can’t bank at an institution without that access. With the marginal rate at which banks are capitalized, even the threat of Section 311 sanctions would render most banks insolvent.

Another alternative would be to issue indictments and forfeiture counts against the North Korean accounts themselves, under 18 U.S.C. sec. 1956, our strongest money laundering statute. Because North Korea never contests litigation in U.S. courts, the Justice Department would win convictions on the criminal forfeiture counts, and correspondent accounts of the banks holding those assets would be blocked. The banks, in turn, would have to freeze the accounts to avoid absorbing the loss. Because the money laundering statute has extraterritorial jurisdiction, Justice could pursue the assets almost anywhere in the world. But how would we prove that all of the funds were proceeds of illicit activity? We wouldn’t have to. A long-standing principle of money laundering laws is that if illicit funds are “co-mingled” with legitimately derived funds, the entire amount is considered tainted and can be forfeited.

What charges would we be able to prove? First, Justice would have indicted North Korean entities for the supernote counterfeiting conspiracy years ago, had it not been for the State Department’s intervention. Second, an Australian newspaper recently reported that indictments could be forthcoming for the transactions associated with the 2009 Bangkok weapons seizure.

Finally, does the fact that many of Kim Jong Il’s funds have moved to Russian and Chinese banks put them beyond the reach of Treasury and Justice? No. Like every bank that needs access to the international monetary system, Russian and Chinese banks need their correspondent accounts in U.S. banks to operate. Back in 2005, when the Treasury Department first announced its sanctions against Banco Delta Asia, there were also reports that the Bank of China was also under suspicion. This caused such extreme consternation in the Bank of China that two years later, its officers refused to touch the frozen Banco Delta funds that both the U.S. and Chinese government wanted it to transfer back to North Korea to facilitate Agreed Framework II. For China’s government, the downside of its transition to a market economy is that even it doesn’t have complete control over its capital. And in the face of any hint of a Treasury Department investigation, capital is a coward.

Continue Reading

Plan B Watch: Treasury Sanctions Iranian, N. Korean Companies for WMD Financing

Treasury has sanctioned an Iranian company under Executive Order 13382 for its dealings with previously sanctioned North Korean entities suspected of involvement in WMD development and proliferation.  It has also designated a new North Korean entity, Namchongang Trading Company.  Treasury’s full announcement itself is interesting and worth reading.  I’ve posted the full text below the jump, interlaced with a few editorial comments of my own.

Continue Reading

Breaking News: Treasury Issues Money Laundering Alert Against North Korea

This is going to be a big deal.  By the time I have time to update this post, the world financial system will have started purging itself of its links to North Korea.  More later.

Update:   Call it Plan B light, and quite possibly a prelude to better things, but this by itself will have a significant effect.

Why, you ask?  After all, this alert doesn’t freeze anything.  It’s merely a warning:

The U.N. Security Council’s adoption of specific financial measures to address this conduct reinforces long-standing Treasury Department concerns regarding North Korea’s involvement, through government agencies and associated front companies, in financial activities in furtherance of a wide range of illicit activities. These activities include currency counterfeiting, drug trafficking, and the laundering of related proceeds. FinCEN has previously noted such conduct, most recently in 2007. The Treasury Department remains especially concerned about the use of deceptive financial practices by North Korea and North Korean entities, as well as individuals acting on their behalf. Such deceptive practices may include North Korean clients’ suppression of the identity and location of originators of transactions; their practice of arranging for funds transfers via third parties; repeated bank transfers that appear to have no legitimate purpose; and routine use of cash couriers to move large amounts of currency in the absence of any credible explanation of the origin or purpose for the cash transactions.

First, this warns U.S. financial institutions not to hold accounts or correspondent accounts for North Korean entities.  By itself, that shouldn’t matter much, because few do anyway:

In light of the financial measures in UNSCR 1718 and UNSCR 1874, and the use of deceptive financial practices by North Korea and North Korean entities, as well as individuals acting on their behalf, to hide illicit conduct, FinCEN advises all U.S. financial institutions to take commensurate risk mitigation measures. FinCEN notes that with respect to correspondent accounts held for North Korean financial institutions, as well as their foreign branches and subsidiaries, there is now an increased likelihood that such vehicles may be used to hide illicit conduct and related financial proceeds in an attempt to circumvent existing sanctions. Financial institutions should apply enhanced scrutiny to any such correspondent accounts they maintain, including with respect to transaction monitoring. Financial institutions should also continue to ensure that they are not providing financial services for North Korea’s procurement of luxury goods. This vigilance will help ensure compliance with UNSCR 1718, which prohibits North Korea’s procurement of such goods. In order to assist in applying enhanced scrutiny, a list of North Korean banks is included below. The Treasury Department encourages financial institutions worldwide to take similar precautions.

Much more importantly, however, it warns banks worldwide — banks that have correspondent accounts with American banks — about due diligence requirements that apply to their North customers, especially those handling large cash transactions, and those connected to the listed banks, which are North Korea’s only portals to the global financial system.  There’s also a veiled threat of investigations, perhaps by IRS or the Secret Service.  Note that unlike the previous paragraph, which warns “all U.S. financial institutions,” this warning is for “all financial institutions:”

In addition, Treasury is concerned that, in an attempt to evade U.N. Security Council Resolution provisions, North Korea may increasingly rely on cash transactions. All financial institutions should remain vigilant regarding attempts by North Korean customers to make large cash deposits into new or existing accounts, as well as the associated risk of the passing of counterfeit currency. The Treasury Department remains concerned about North Korean production and distribution of high-quality counterfeit U.S. currency. The U.S. government is ready to assist with the investigation of North Korean counterfeiting of U.S. currency wherever it is detected. For assistance with counterfeit U.S. currency-related investigations, please contact your local U.S. Secret Service office.

As of yesterday, every bank in Europe and Asia that services North Korean clients has been asking itself whether that  business is really worth the risk of being the next Banco Delta Asia.  BDA experienced instant insolvency in September 2005, following an alert much like this one.  Here is Treasury’s final ruling, cutting BDA out of the international financial system for laundering North Korean money.

The effect will be to scare most banks into purging themselves of any North Korean connections that may draw unwanted attention.  After all, the last thing those banks’ legitimate depositors and shareholders want is any hint that they’ll experience a BDA-style run, or summarily lose their access to their U.S. correspondent accounts.  That would deprive them of the ability to do wire transfers and drive away most of their legitimate business.  The few banks that are not immediately scared off  could become targets for Secret Service investigations and PATRIOT Act special measures.  I’d expect Treasury people will also be fanning out across the globe to emphasize those points, just as Levey did in 2005 and 2006.

One business I’ll be watching very closely is the Egyptian conglomerate Orascom, which was already looking like the latest in a long parade of businesses to invest in North Korea and lose a fortune there.  One wonders how Orascom will be able to continue to fund its ambitious projects in North Korea without running afoul of UNSCR 1874 or Treasury’s coming squeeze.  Another question:  in light of the new attitude in Seoul, how will this affect what’s left of the Kaesong Industrial Complex?  Even less certain is the question of how Chinese mining companies investing in North Korea will be affected.

What will the North Koreans do about this?  Like before, they’ll resort to dealing in precious metals, either on exchange markets or by selling their reserves to banks.  Another hot trend for money launderers these days is the use of stored value cards, like the gift cards you can get from major stores, or “secured” credit cards some banks issue.  Those methods can fund a drug trafficking syndicate, but those organizations are already highly profitable and have relatively little overhead.  North Korea still has to maintain, feed, and fuel one of the world’s largest standing armies and keep an entire country under the jackboot.  We probably can’t find all of North Korea’s illicit income, but we probably don’t have to.  All we have to do is disrupt enough of that income’s flow that large portions of the regime’s power structure become neglected.  That, in turn, could destabilize the power structure itself as factions fight over increasingly scarce resources.

This kind of blacklisting is not easily reversed.  Recall that after Chris Hill lifted those BDA sanctions in 2007, banks did not suddenly embrace Kim Jong Il; the risk of Treasury sanctions at some future date continued to deter most legitimate financial institutions from dealing with North Korea more than a year after the BDA funds were unblocked.  For that reason, the impact of Treasury sanctions may not produce dramatic results instantly this time.  North Korea’s finances still may not have recovered since 2007, and some undoubtedly remain underground.  Still, Treasury has learned plenty about tracking down hidden finances since 9/11, and the North Koreans will have to be very sophisticated to avoid a dramatic disruption to their system.

Continue Reading

Obama Gears Up for “Plan B;” John Kerry Blocks Terror Re-Listing

I really don’t know what to make of this.  A young, inexperienced president, one whom the North Koreans arguably endorsed, comes into office showing every sign of being easier meat than Lance Bass in Riker’s Island.  The North Koreans, true to Joe Biden’s prophetic gaffe, and with their exquisite sensitivity to American weakness, don’t even let the man get inaugurated before they begin the noisy repudiation of every agreed framework, U.N. resolution, and armistice they can stuff into a shredder.

Now for the unexpected part:  we actually seem ready to attach real consequences to those provocations.  What?  We aren’t already groveling for Agreed Framework III?  Did the North Koreans get Obama as wrong as Leon Sigal didDid I?  I’m starting to wonder if Obama is a closet OFK reader:

A U.S. delegation headed by Deputy Secretary of State James Steinberg briefed President Lee Myung-bak and other officials on independent U.S. sanctions “with a financial focus” against North Korea, a senior Cheong Wa Dae official said on Thursday. The sanctions are expected to be an expanded version of a 2006 freeze of North Korean accounts in Banco Delta Asia in Macau.  [Chosun Ilbo]

I can hardly believe I’m actually reading this, despite its welcome familarity.  Am I just three years ahead of my time?  Today, not only are Obama’s people talking about imposing sanctions, they’re talking about imposing them in a comprehensive way, which will be essential for them to really work.  Referring to the 2005-2006 Banco Delta Asia sanctions, one U.S. official says:

Continue Reading

Greeks Intercept Counterfeit N.K. Cigarettes

Officials in Greece nabbed a North Korean freight vessel that was carrying 1.5 million cartons of contraband cigarettes and arrested the seven seamen aboard, it was announced Monday. [link]

Let’s hope there’s a trial, and that this one won’t be  a goose egg  like the Pong Su case was.  Whether the Aegean could use another artificial reef, I leave to the Greeks, but  Greece is  always happy to do the exact opposite of what America asks.

The Greek Merchant Marine Ministry said the vessel was discovered about 11 km southwest of the Katakolo port on the Peloponnesus Peninsula in southern Greece, and all of the cargo looked bound for that country. The Evva is currently anchored at the Katakolo port. Greece has uncovered 4 million cartons of contraband cigarettes at sea so far this year, of which 3 million were aboard North Korean vessels.

Stuart Levey recently stated that counterfeit cigarettes are the North’s largest source of income.

Continue Reading

Now What? Part 4: Someone Didn’t Get the Memo

[Several very interesting updates here; scroll down.]

Recently, it has often seemed that different parts of South Korea have been applying different policies to the same issue. Take South Korea’s response to the new U.N. Security Council Resolution 1695, which requires countries and companies to exercise “vigilance” in making sure they don’t supply North Korea with the components or funds to build more missiles. UniFiction Minister Lee Jong-Seok has opted for a “don’t ask, don’t tell” interpretation of that resolution, but yesterday, Korea’s Ministry of Commerce seemed to be interpreting the resolution much more strictly:

The Ministry of Commerce, Industry and Energy has written to some 80,000 export-import companies here asking them to heed the UN Security Council resolution on North Korea. It warns Resolution 1695 may hurt firms that export “dual use” goods that can be used both for military and civil purposes.

That’s because South Korean firms that violate the resolution face a panoply of potential secondary sanctions by the United States, Japan, and other nations. The most likely would be asset-freezing under Executive Order 13,382. One wonders how this relates to Stuart Levy’s recent visit.

“The resolution will strengthen sanctions imposed by the international community against exports to North Korea,” the statement says. “When it comes to goods coming out of the joint-Korea Kaesong Industrial Complex in the North, a thorough review is needed to determine whether they violate the resolution,” it adds, suggesting that the government is hard at work on the matter. “We urge companies here to take special precautions so they do not engage in illegal exports of strategic materials to North Korea either directly or via a third country,” the e-mail says.

So we have a difference of interpretation within the South Korean government.

Clearly, this is going to have a disparate impact on Kaesong, and it leads to why all those who oppose Kaesong ought to support a Free Trade Agreement that excludes it (today, the Korean government is again hinting that it may drop Kaesong from its FTA demands). If every non-Kaesong product made in South Korea enjoys a heavy U.S. tariff preference over its Kaesong-made competitor, Kaesong instantly loses any advantage that its lower wages might offer. If there’s the additional risk that firms bringing dual-use technology into Kaesong could face sanctions under U.N. 1695, Kaesong suddenly becomes a very risky proposition. Finally, firms whose “wage” payments are suspected of funding North Korean missile development could face U.S. or international economic sanctions, even asset freezes. It all brings to mind Ross Perot’s infamous evocation of that “giant sucking sound.”

The prognosis for Kaesong has never been this bleak. The world should celebrate that.

Update: Kim Jong Il, Unplugged

The Joongang Ilbo is reporting that the United States Treasury Department is making swift (maybe even stunningly swift) progress toward disconnecting Kim Jong Il from his financial lifelines (background here). Treasury Undersecretary for Terrorism and Financial Intel Stuary Levy has apparently secured promises from Singapore and Vietnam to “cooperate in isolating North Korea from international financial channels.” More importantly, White House Spokesman Tony Snow is now confirming that the Bank of China’s Macau branch has frozen North Korean assets, a move of gargantuan significance.

Despite reports, citing a Yonhap interview, that Levy had “warned” South Korea about cash flow from Kaesong, Levy didn’t really do that here:

He said his talks with South Korean officials focused on “general concerns” to ensure that money wasn’t going to North Korea’s weapons buildup. Contrary to some press reports, he said he did not personally raise issues about inter-Korean economic cooperation projects.

Treasury’s spokeswoman Molly Millerwise said during the interview that there was “overreporting” in the press about the U.S. taking issue with inter-Korean business.

Levy went into more detail on his interpretation of Resolution 1695, however, and the effect may be the same in the end:

The undersecretary said the U.S. was discussing with its allies how to properly interpret the Security Council resolution. Some argue that any and all money flowing into North Korea can be misused to bolster its missiles and WMD and therefore even routine business transactions should be severed with North Korea.

Levey said in theory the argument is right.

“Money is fungible so one would have to be careful to make sure that even the best proceeds of routine trade transactions could benefit the WMD or missile programs,” he said. But he added there was “a long way to go” to reach that conclusion.

The Senate has also passed the new North Korea Nonproliferation Act, which I humbly opined here would have little practical effect on the current state of North Korea-related sanctions and law enforcement operations. It’s mainly enabling legislation for Resolution 1695 (the one thing I called wrong here, because I assumed that anything coming out of the U.N. would be meaningless).

If you want to follow the action that matters, keep an eye on Treasury.

Continue Reading