- “(10) buys gold, titanium ore, vanadium ore, copper, silver, nickel, zinc, or rare earth minerals from North Korea;
- “(11) sells rocket, aviation, or jet fuel (except for use by a civilian passenger aircraft outside North Korea, exclusively for consumption during its flight to North Korea or its return flight);
- “(12) facilitates a significant transaction or transactions to operate or maintain, a vessel or aircraft that is designated by the U.N. or the Treasury Department;
- “(13) facilitates the registration of, or maintains insurance or a registration for, a vessel owned or controlled by the Government of North Korea.
All of those provisions mirror U.N. sanctions from UNSCRs 2270 and 2321. This is implementing legislation of the kind that our diplomats are currently asking their counterparts in dozens of other countries to enact and enforce. Section 311 also authorizes discretionary sanctions against anyone who —
- “(D) buys coal, iron, or iron ore from North Korea, in excess of the limitations provided in applicable United Nations Security Council resolutions;
- “(E) buys textiles from North Korea;
- “(F) facilitates a significant transfer of funds or property of the Government of North Korea that materially contributes to any violation of an applicable United Nations Security Council resolution;
- “(G) transfers bulk cash, precious metals, gemstones, or other stores of value to or from North Korea;
- “(H) sells crude oil, condensates, refined petroleum, other types of petroleum or petroleum byproducts, liquified natural gas, or other natural gas resources to North Korea (except for heavy fuel oil, gasoline, or diesel fuel for humanitarian use;
- “(I) facilitates North Korea’s online commercial activities, including online gambling;
- “(J) buys fishing rights from North Korea;
- “(K) buys food or agricultural products from North Korea (whose people go hungry while Kim Jong-Un exports what they grow for hard currency);
- “(L) facilitates the exportation of workers from North Korea;
- “(M) engages in transactions involving North Korea’s transportation, mining, energy, or financial services industries;
- “(N) facilitates the operation of any branch, subsidiary, or office of a North Korean financial institution.”
Some of those provisions (the coal cap) mirror U.N. sanctions, while others (food and textile exports) go beyond them. Other key provisions:
- Section 314 imposes a potentially severe sanction on ports that don’t inspect North Korean cargo as required by UNSCR 2270, by authorizing enhanced customs inspections of shipments from those ports. Many shippers might prefer to ship through compliant ports instead of taking the risk that their merchandise might be held up in customs.
- Section 315 imposes a sanction on shipping registries that reflag North Korean ships, in violation of UNSCR 2321. Ships flying those flags of convenience can be banned from U.S. waters. Shipping companies may well switch to other flags of convenience to avoid that consequence. That creates an incentive for registries to avoid North Korea’s business.
- Section 321 allows the President to freeze the assets of companies that employ North Korean forced labor, and to sanction governments that permit the use of North Korean forced labor under the Trafficking Victims Protection Act. Goods made with North Korean labor or materials are presumed to be banned from the United States as products of forced labor, which may cause manufacturers to cleanse North Korean sources from their supply chains.
Most of the media attention is now on whether the President will veto the bill because of the Russia sanctions, but given the veto-proof margins by which it passed, it will probably become law sooner or later.
Before the Senate voted, there was also briefly a threat by Senator Corker to strip the North Korea sanctions out of the bill. Other than my own speculation, which I’ll keep to myself, I really don’t understand how the most popular part of this bill ended up becoming its most controversial part. I can’t credit the notion that “[n]ot a word of the North Korea bill” that the House passed by an overwhelming margin on May 4th “has been looked at” on the Senate side. It was also suggested that the Senate wanted a stronger bill, with resolution-of-disapproval language limiting the President’s authority to lift sanctions without Congress’s consent. But Congress previously wrote strict presidential certification conditions into the NKSPEA, and resolution-of-disapproval language may also be an unconstitutional legislative veto that would not be enforceable, and consequently, not worth fighting about. The only winners of an intra-partisan, inter-cameral fight are America’s enemies.
To the extent that the Senate would also like the House to vote on more of its legislation, that’s a perfectly reasonable request. For example, I hope (and believe) that the House will offer its strong support when Senator Van Hollen and Senator Toomey’s bipartisan BRINK Act comes up for a vote. The BRINK Act is easily the equal of either the NKSPEA or the KIMS Act in its toughness and sophistication, and I’m surprised that it hasn’t attracted the media attention it merits.
But it’s in the areas of human rights and freedom of information where the leadership of the Senate Foreign Relations Committee is now needed most. It will have another opportunity to set the agenda when the North Korea Human Rights Reauthorization Act comes up for a vote this year. A House version of that reauthorization finally made it through committee markup yesterday and now heads for the full House floor. If the Senate amends the House’s bill to add language similar to former Congressman Salmon’s DPRK Act, calling for the administration to step up its information operations in North Korea, I’m absolutely confident that the House would support it.
So, despite this near miss, there is good news in yesterday’s vote. Just as Congress built the legislative framework for Iran sanctions in several layers, it has now added a second layer to its North Korea sanctions, identifying and closing off Pyongyang’s sources of hard currency, loophole by loophole. The third layer, the BRINK Act, is ready when Congress is. So for all the talk of North Korean money launderers’ indefatigable cunning, swiftness, and flexibility, Congress has (however improbably) shown that it can act in a bipartisan way with even greater speed, sophistication, and adaptability than Pyongyang. The greater shock to Pyongyang may be that small knots of sophisticated amateurs and investigative journalists have exposed much of its money laundering network. It is now up to the administration to destroy it.
* For those wondering why new Iran sanctions don’t violate the Joint Comprehensive Plan of Action, take a look at the Treasury Department’s F.A.Q. on this subject. The JCPOA does not affect sanctions on Iran for, among other things, its sponsorship of terrorism, its proliferation, or its support for the Assad regime or the Houthis in Yemen.
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.
This blog has long posited that a nuclear North Korea will not coexist with us and that war with it would be inevitable; that preventing another Korean War will require a focusing an assortment of financial, diplomatic, and political pressures on Pyongyang; and that to deter China’s government and industry from undermining that pressure will require us to pressure China itself. This will carry costs for both economies, and to the relationship between the two governments. Relations with China will have to get worse before they can get better. That is unfortunate, but it is a far better outcome than nuclear war, the collapse of global nonproliferation, or effective North Korean hegemony over South Korea.
Since the Mar-a-Lago summit in April, I’ve worried that President Trump’s tough talk about secondary sanctions against Kim Jong-Un’s Chinese enablers was a bluff. It’s still too early to say that it wasn’t, but the news that Secretary of State Rex Tillerson has dropped China from Tier 2 to Tier 3 under the Trafficking Victims Protection Act — specifically for its use of North Korean slave labor — is a welcome sign that the administration has begun (and hopefully, just begun) to escalate its pressure on Beijing.
“China was downgraded to the Tier 3 status in this year’s report in part because it has not taken serious steps to end its own complicity in trafficking, including forced laborers from North Korea that are located in China,” Tillerson said during a ceremony to release the report.
Tillerson said that forced labor is a key source of illicit revenues for the North.
“An estimated 52,000-80,000 North Korean citizens are working overseas as forced laborers primarily in Russia and China, many of them working 20 hours a day. Their pay does not come to them directly. It goes to the government of Korea, which confiscates most of that, obviously,” Tillerson said.
The North regime receives hundreds of millions of dollars per year from forced labor, he said.
“Responsible nations simply cannot allow this to go on and we continue to call on any nation that is hosting workers from North Korea in a forced-labor arrangement to send those people home. Responsible nations also must take further action,” he said. [Yonhap]
So what does this action mean for China’s economy and trade, in practical terms? For now, not much. Beijing probably doesn’t care if the U.S. denies it foreign assistance or votes against World Bank loans for it. Any of the TVPA’s sanctions can be waived, and often are. But as Erik Voeten writes in the Washington Post, governments really do care about their tier rankings for reasons of national honor and reputation. I don’t think I’m speaking out of school by saying that during my time at the Foreign Affairs Committee, the competing appeals of diplomats and NGOs to raise or lower a government’s tier status in the next TVPA report consumed an inordinate amount of staff time. The Chinese government, being hypersensitive about its own reputation, will care very much about this.
In Beijing, foreign ministry spokesman Lu Kang said the government was resolute in its resolve to fight human trafficking and the results were plain to see. “China resolutely opposes the U.S. side making thoughtless remarks in accordance with its own domestic law about other countries’ work in fighting human trafficking,” he told a daily news briefing. [Reuters]
Beijing is furious, naturally. I expect it to make some ostentatious displays of non-cooperation to punish Washington. It would be especially tragic if China decides to take its anger out on North Korean refugees. Hopefully, the State Department has already gamed out its responses to potential Chinese escalations. Our message to Beijing must be that we’re also prepared to escalate. China, which needs another decade of high growth rates to pay its coming crop of pensions, cannot afford this. Both sides would suffer in an economic war between the U.S. and China, but China’s export-dependent, labor-intensive economy and fragile banking sector would suffer more. That may give us more leverage to press China to expel its North Korean laborers or the U.N.-designated North Korean proliferation and money laundering networks that have operated openly on its soil for years.
The Chinese companies using the North Korean labor will care much less — at first — but they are facing far greater financial consequences, especially if the KIMS Act passes the Senate. (I sense a particularly strong appetite in both chambers of Congress and both parties for secondary sanctions against North Korean forced labor.) Under section 201 of that legislation, the products of those companies may face exclusion from U.S. markets, and their dollar assets may be frozen. (Needless to say, prospective Kaesong recidivists will not find this news reassuring.)
Dropping China to Tier III will have little immediate legal or economic effect. It still isn’t the “maximum pressure” President Trump promised us. It is an escalation and a warning. It is symbolic, but powerfully so. Ultimately, Beijing may care about being listed as Tier III for human trafficking for the same reason that Pyongyang cares about being listed as a state sponsor of terrorism — because to governments obsessed with their images, symbols can be powerful things. One hopes that this will cause more Chinese citizens to see that North Korea is a ball-and-chain on their country’s acceptance into the family of civilized nations and continued economic growth. One hopes that more of them will say that it’s time to take a hacksaw to the chain.
In North Korean prisons (at least, in those from which release is possible at all) when the guards conclude that a prisoner is about to die, they release her and send her away to die at home, so that disposing of her body will be someone else’s problem, and so that the warden can manipulate the camp’s rate of in-custody deaths downward. (Perhaps in some small way, even the wardens of North Korean prisons fear being held accountable, one day, for what they do.) The same is true when North Korean officers conclude that a soldier is about to die of starvation or tuberculosis — the army will send the soldier home to die.
So it was when North Korean diplomats at the U.N. reached out to their American counterparts to inform them that they had an American patient to dump. That the Warmbiers were able to see and touch their son one last time before he died was merely incidental to Pyongyang’s true purpose. It reminds us that Pyongyang has the means to talk to us when it decides that it’s in its interest to do so. Above all, Otto Warmbier’s death should remind us that governments that murder their own people will eventually murder ours. Pyongyang has made the hatred of Americans a national virtue. It indoctrinates its little children to hate and kill us. All that prevents it from murdering us on a greater scale is that it still lacks the means to do so.
This is how Children’s Day is celebrated in North Korea. pic.twitter.com/6zRc3dULTc
— Al Jazeera English (@AJEnglish) June 11, 2017
An autopsy should now be done to determine the precise cause of Mr. Warmbier’s death, to rule out Pyongyang’s explanations of botulism or a drug reaction. Even if this explanation turns out to be plausible, however, it would not excuse holding Mr. Warmbier in Pyongyang in a coma for a year and denying him access to medical care that might have saved him. The coroner should look for evidence of what event put Warmbier into a coma to begin with, whether it was a beating, a suicide attempt, or some other cause. If prompt medical attention might have saved his life, a willful decision to deny him life-saving care would still be murder. And here, the chronology supplies circumstantial evidence of a political motive, and thus, a darker explanation:
- Jan. 2: North Korea arrests Otto Warmbier.
- Jan. 6: North Korea carries out a nuclear test, an event that took weeks of preparation. International condemnation follows; the U.S. calls the U.N. Security Council into emergency session.
- Jan. 12: North Korea arrests a second U.S. citizen, Kim Dong-Chul, a humanitarian aid worker from Fairfax, Virginia.
- Jan. 22: North Korea reveals Warmbier’s arrest publicly for the first time.
- Feb. 5: The House introduces H.R. 757, a North Korea sanctions bill. It advances quickly through Committee to the House floor, where it passes by 418 to 2.
- Feb. 10: The Senate passes H.R. 757 by a vote of 96 to 0.
- Feb. 18: The President signs H.R. 757 into law.
- Mar. 2: The U.N. Security Council approves new sanctions in Resolution 2270.
- Mar. 15: President Obama signs Executive Order 17722, implementing the sanctions in H.R. 757.
- Mar. 16: North Korea holds a show trial for Otto Warmbier and sentences him to 15 years’ hard labor.
In retrospect, then, Pyongyang’s “arrests” of both Otto Warmbier and Kim Dong-Chul appear to have been part of its coordinated plan to test a nuke, and to blunt a U.S. push to sanction it for doing so. It was at this point, shortly after Warmbier’s show trial, that something put him into a coma. This was when Pyongyang had the greatest motive to use Warmbier to punish the U.S. government. (North Korea’s dogma is one of collective rights and collective punishment. It does not recognize the individual as separate from the state. It would be consistent with Pyongyang’s dogma to punish one American to punish the U.S. government.) This was also when North Korea had a political disincentive against sending Warmbier home, lest it show the world a less defiant face or give up the leverage of holding one more American hostage. Shortly before Otto Warmbier passed away, the North Koreans doubled down and said that he got what he deserved.
President Trump reacted to Otto Warmbier’s passing appropriately:
— Donald J. Trump (@realDonaldTrump) June 19, 2017
Ambassador Haley said it best, however:
— Steve Herman (@W7VOA) June 19, 2017
But it is with regard to Secretary of State Tillerson’s reaction where I might offer some help:
— Department of State (@StateDept) June 19, 2017
Presumably, they’re having a good laugh about this in Pyongyang, where crime always pays and there are never consequences. Pyongyang has been getting away with murder for 70 years; why should it be different this time when it still has three American hostages? Perhaps, at some point, the U.S. government will cease to allow Pyongyang to benefit from this tactic. It is not legally terrorism, because it is not carried out by clandestine agents or subnational groups, but it is a use of violence against innocent non-combatants with the apparent intent to influence the conduct of our government. Of course, Pyongyang has done many other things recently that do fit the legal definition of terrorism, so re-listing North Korea as a state sponsor of terrorism would be both well-justified and appropriate. (If you still haven’t read my 100-page, peer-reviewed legal analysis of the evidence, then by all means, feel free to do so now.)
The question of a travel ban will invariably be raised again. Even without legislation, the President has the authority to restrict U.S. passports to prevent them from being used by U.S. citizens and permanent residents to visit North Korea, but such a limited ban would be difficult to enforce in practice — it’s not as if the North Koreans would cooperate by turning paying hostages away just because the State Department wants them to. For reasons I’ve explained before, the President would need legislation to make a travel ban truly effective. The way to do this is to block the North Korean tourist industry’s access to the dollar system entirely. That would have the benefit of making the U.S. designation of Air Koryo more effective by closing a key legal loophole. (Air Koryo has been implicated repeatedly in the smuggling of WMD components and luxury goods, in violation of U.N. sanctions.)
An even more effective ban would include secondary immigration sanctions, by denying recent visitors to North Korea visa-free entry into the United States (section 4, below the fold). That would render North Korea’s recent investments in a ski resort, a water park, and a new airport terminal largely worthless. Yes, journalists, I wrote in a special exemption just for you — you’re welcome.
Don’t get me wrong; I’d be all for passing H.R. 2732 now. I also recognize that Congress is politically hesitant about travel bans for various reasons. The problem is that Pyongyang’s hostage-taking is now endangering other Americans, and the citizens of other countries, by interfering with the execution of a more coherent North Korea policy. In the interests of making the perfect the enemy of the good, then, I offer a text below the fold, of a travel ban that’s conditioned on the President certifying that it’s safe for Americans to travel to North Korea, and that also maximizes the effect of a ban on tourist and commercial travel to North Korea by non-U.S. citizens that is paid for in U.S. dollars. By linking the ban to the release of U.S. hostages, it gives Pyongyang a powerful financial incentive to set them free.
Finally, it’s long past time for the Senate to take up Chairman Royce’s bill, the KIMS Act, to further toughen existing sanctions on Pyongyang. That bill passed the full House 419 to 1 weeks ago. The Senate has yet to introduce it.
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).
Yesterday, Rep. Adam Schiff (D, Cal.) and Joe Wilson (R, S.C.) introduced a bill that would ban transactions incident to travel to, from, and within North Korea. The text isn’t posted on Congress.gov yet, but Schiff and Wilson have issued identical press releases describing what the bill would do:
Today, Congressmen Adam Schiff (CA-28) and Joe Wilson (SC-02) introduced the bipartisan North Korea Travel Control Act, which would require the Treasury Department to issue regulations requiring a license for transactions related to travel to, from, and within North Korea by American citizens. It also provides that no licenses may be issued for tourist travel.
“Tourist travel to North Korea does nothing but provide funds to a tyrannical regime—that will in turn be used to develop weapons to threaten the United States and our allies, as I saw firsthand on a rare visit to Pyongyang,” Rep. Wilson said. “Worse, the regime has routinely imprisoned innocent foreign civilians and used them as bargaining chips to gain credibility with the West. We should not enable them any longer—which is why it is critical to carefully regulate travel to North Korea.”
“In recent years, there has been an increase in tourist travel to the DPRK by citizens of Western countries, including the United States,” Rep. Schiff said. “With increased tensions in North Korea, the danger that Americans will be detained for political reasons is greater than ever. Given North Korea’s continuing destabilizing behavior and their demonstrated willingness to use American visitors as bargaining chips to extract high level meetings or concessions, it is appropriate for the United States to take steps to control travel to a nation that poses a real and present danger to American interests.”
In the past, North Korea has shown a willingness to use American prisoners to seek diplomatic concessions, including securing visits from former U.S. Presidents and cabinet officials. At least seventeen Americans have been detained in the past ten years, despite the State Department strongly warning U.S. citizens against traveling to the DPRK. Currently, at least four Americans remain imprisoned. In addition to security concerns, Western visitors bring with them much needed foreign currency, especially valued in a country facing extensive international sanctions for its illegal nuclear weapons and ballistic missile programs.
It’s hard to offer too many thoughts on a bill whose text I haven’t seen, but conceptually, I agree with all of this. It’s past time to give the President authority to ban (or ban outright) tourist travel to North Korea, the proceeds of which are used for God-only-knows what (although I’m pretty sure it isn’t baby formula). If President Trump’s policy really is going to be “maximum pressure” — and I’ve seen precious few signs of that pressure so far — then this will deny His Porcine Majesty one more source of hard currency. Among other things, it will make the designation of Air Koryo far more effective than it could otherwise be, and will put sharper teeth into Executive Order 13722’s sectoral sanctions on North Korea’s transportation industry.
As I previously explained here, the President can’t sanction travel-related sanctions without special legislation like this, because of the carve-out in section 203(b)(4) of the International Emergency Economic Powers Act. Keep in mind that this ban will not only affect travel by Americans, but any travel-related transactions denominated in dollars, regardless of the nationality of the traveler or the tour company. Much of the news coverage of this bill I’ve seen, which includes the self-interested comments of tour operators, misses that point.
As you know, I have mixed feelings about those who go slumming to North Korea and do stupid things there (starting with the decision to go there at all). I’m all for letting individuals (including stupid ones) make their own decisions, up to the point when their decisions begin to harm other people. My feelings aren’t at all mixed about the unethical tour companies that lie to their customers, tell them that North Korea is a perfectly safe place to visit, and remain willfully blind to the oppression and war that their dollars are really paying for. I wish them a speedy journey to bankruptcy court.
This may be the only sanctions bill for which the State Department might say a silent prayer of thanks. Each hostage taken frustrates our diplomats, sets back efforts to carry out a more coherent policy, and ultimately raises the danger to the rest of us who are smart enough to stay out of North Korea. No, a travel ban won’t stop every imbecile from going to North Korea, but it will reduce the supply. Whoever still believes that underwriting Kim Jong-un’s regime with dollars is plausibly leading to a kinder, gentler North Korea is stuck on that belief for emotional reasons, far beyond the reach of the overwhelming evidence that it is doing precisely the opposite of this. By financing North Korea’s horrific status quo, tourism does the North Korea people more harm than good. By undermining the financial pressure on Pyongyang, tourism helps Kim Jong-un resist pressure to disarm, to change, and to make North Korea a decent place for its people to live.
~ ~ ~
Update: It now occurs to me that if this bill passes, you can forget about reopening Kumgang, at least as a dollar operation.
Here’s the kind of story you hear too seldom in Washington today: A conservative Republican (Cory Gardner of Colorado) has joined forces with a liberal Democrat (Ed Markey of Massachusetts) to write a letter to the new secretaries of State and Treasury, asking them to fully enforce the North Korea Sanctions and Policy Enhancement Act (NKSPEA), which passed Congress with the overwhelming support of both parties last year. (Even Bernie Sanders would have voted for it had he not been campaigning in New Hampshire at the time.)
Gardner emerged as the Senate’s leader on North Korea policy just under two years ago, and went on to lead the Senate’s efforts to pass the NKSPEA. Markey, arguably the Foreign Relations Committee’s most liberal member, has also been keenly interested in North Korea for some time, particularly on human rights and the risk that loose talk about preemptive strikes might lead to miscalculation and war. His decision to become more vocal on sanctions enforcement is welcome, particularly for those of us who believe that human rights must be at the core of our policy.
The senators’ letter drives directly at the very issue I raised in last Friday’s post — it’s no use for Congress to pass new laws unless the President puts enough cops, lawyers, and intelligence analysts on the job to enforce them. The letter asks the new secretaries for detailed reports on how many people they’ve assigned to North Korea sanctions investigations and enforcement, how many investigations they’re currently conducting, how much money they’ve asked Congress for to staff up, and whether they agree that the government should form an interagency task force to enforce the NKSPEA.
I know a few people who’d love to answer those questions. I’ll take a shot at the last one myself: yes, if Trump wants to avoid the paralysis-by-analysis that consumed all eight years of the Obama administration. For years, cabinet departments tripped over one another on North Korea policy for the same reason different parts of the Chinese government are also imperfectly aligned — they deal with different people and prioritize different interests. The difference is that China has exploited our differences skillfully, while we’ve mostly failed to exploit China’s conflicts of interest.
It’s old news that State has taken a deferential approach to China. Treasury is (somewhat understandably) keen to guard its authorities, avoid litigation, and maintain good relations with the banking industry. The enforcement agencies are frustrated that too often, after a great deal of hard work, they aren’t allowed to clean and fry the big fish they think they’ve hooked.
I also suspect that other agencies aren’t taking full advantage of the data the intelligence agencies could add to a shared map of North Korea’s finances. It’s too easy for DNI, CIA, and NSA to become victims of the tyranny of small distances. They’re sited out in northern Virginia or Maryland, which makes it logistically burdensome for them to share classified information with State, Treasury, Justice, and FBI, despite the fact that each may hold the missing pieces that the other might need to perfect cases they’re working on. A task force, as contemplated in NKSPEA 102, isn’t just needed to coordinate priorities at the cabinet and executive levels; smaller inter-agency strike teams are also needed to coordinate possibilities at the working, civil servant level.
When we drafted the NKSPEA, we knew that a fire-and-forget approach wouldn’t work. We knew that Congress’s aggressive oversight would be essential to overcoming bureaucratic resistance and prioritizing enforcement. That’s why it’s gratifying to see Chairman Gardner and his Ranking Member, Sen. Markey, make good use of the law’s oversight provisions.
Read their letter in full below the fold (click “continue reading” –>).
Last Friday’s designations of 11 individuals and one company by the Treasury Department are the first North Korea designations of the new Trump administration. So what do they tell us about the direction of the administration’s North Korea policy?
On the positive side, the designation of a North Korean coal company affiliated with the military should, in theory, send a strong message to its Chinese clients, although they don’t seem to have taken the last hint. Also on the positive side, the designated individuals are mostly front-men for North Korean banks, trading companies, arms dealers, and shippers in Russia, China, and Vietnam. It’s good that North Korean operatives in China — and Russia — aren’t off-limits. As I explained here, those governments are already obligated to expel most of these people by U.N. Security Council resolutions.
These are the kinds of targets we should be focused on to uproot His Porcine Majesty’s proliferation and money laundering networks, particularly in China. The designations will send a strong message to Russia and China to kick them out. They’ll also fill the Treasury Department’s SDN database — and consequently, the anti-money laundering compliance software the banking industry uses — with the names and addresses of North Korean agents and front companies. That will help make it harder for those agents’ bankers to defend their due diligence and compliance later, if and when Treasury files civil penalty cases against them.
On the not-so-positive side, this still isn’t what needs to be done — holding the Chinese banking industry accountable for breaking our laws and laundering North Korea’s money through our financial system. For a critical reaction to the new designations, see Anthony Ruggiero’s tweetstorm. As Anthony notes, all 12 entities designated last Friday are North Korean, so these are not the secondary sanctions we need to make North Korea sanctions effective.
Maybe it was too much to expect that some of North Korea’s Chinese front-men would be designated right before Xi Jinping arrives at Mar-a-Lago. I’ll be very interested in seeing what happens after Xi departs. If Trump really is the corrupt empty suit his harshest critics say he is, Xi Jinping will come to Mar-a-Lago, offer to turn a few Lotte stores into Trump hotels, and do what China always does when under sufficient pressure about North Korea — lie like a cheap rug until our national case of Attention Deficit Disorder sets in again.
Overall, however, I may be slightly less pessimistic than Anthony. For one thing, there is this report on the outcome of the administration’s policy review, which sounds like what I’d expected. For another, I interpret Trump’s statement that he’ll act against North Korea with or without China’s help as a threat to act against Kim Jong-un’s Chinese bankers and freeze his accounts. For another, although I might have expected Treasury to sanction Chinese enablers and trading companies now, I would not expect it to start nuking banks just yet. Instead, Trump’s message to Xi should be that the Bank of China is under investigation by the Treasury Department, soon to be followed by the Bank of Dandong and the 12 other banks that held accounts for Dandong Hongxiang and its many front companies and shell companies.
Finally, Trump can drop a veiled hint that ports that don’t inspect North Korean cargo, as U.N. Security Council resolutions require, can expect to be targeted with extra customs inspections. That could drive shippers away from those ports and damage the economies of those cities. Then, Trump would have someone leak that to the press and watch for signs like this.
As of today, however, it’s possible that none of those banks are under investigation because the investigative agencies simply don’t have enough staff to do it all. We’ll turn to that topic, and to this letter from senators Cory Gardner and Ed Markey, in tomorrow’s post. A full list of those designated last Friday below the fold (“continue reading” –>).
Congress’s sentiment about Pyongyang today equates roughly to Cato the Elder’s sentiment about Carthage. (I mean this figuratively, for now, although I increasingly fear that sanctions are our last plausible strategy to prevent war.) It’s now moving more North Korea legislation than it has in the entire decade leading up to the passage of the North Korea Sanctions and Policy Enhancement Act just over one year ago. I can no longer keep up with all of the bills, amendments, markups, and resolutions in what little spare time I still have.
- H.R. 1644: The Foreign Affairs Committee has moved very quickly in marking up H.R. 1644, the KIMS Act, which toughens the NKSPEA to match or exceed new U.N. sanctions under UNSCR 2270 and UNSCR 2321. It would impose tough new secondary sanctions on foreign ports that fail to inspect North Korean cargo, foreign banks that discreetly connect North Korean banks to the financial system, governments that allow the use of North Korean slave labor, and states that reflag North Korean ships. The Committee Chair, Ed Royce, amended the bill at an action-packed Committee markup earlier this week. I haven’t had a chance to do a line-by-line comparison, although I noticed that the newer version expands a humanitarian exception for North Korean imports of gasoline and diesel fuel.
- H.R. 479: Ted Poe and Brad Sherman’s bipartisan bill to force the Secretary of State to re-list North Korea as a state sponsor of terrorism was amended to look like Ted Cruz and Cory Gardner’s bill. That means the House and Senate are coordinating their efforts and are serious about putting that bill on the President’s desk. I continue to predict that the Secretary of State will act on his own before that happens, but only because that legislation is advancing toward the President’s desk at such a deliberate pace. Frankly, I’m surprised the Secretary of State hasn’t already acted. This bill may be a necessary incentive to focus the administration’s priorities.
- H. Res. 223: Ted Yoho, the new Asia Subcommittee Chairman, says China has been sanctioning the wrong Korea, and has introduced a new resolution calling for Xi Jinping to knock it off. (China’s escalation of this crisis, by waging economic war on South Korea, may call for a deterrent escalation of our own. The closure of a South Korean factory in China gives me the idea that our secondary sanctions against North Korea should focus their impact on regions in China that already have higher rates of unemployment. By joining forces with Japan and South Korea to concentrate the effect of sanctions on those regions, we can raise the political pressure on Xi Jinping. As with Kim Jong-un, it may take a threat to Xi’s political control to influence his behavior, or the behavior of those around him.)
- H. Res. 92: Another bipartisan House resolution condemns North Korea’s missile tests, calls for the quick deployment of THAAD and the improvement of our missile defenses, and calls for the full enforcement of the new sanctions authorities that the U.N. and the U.S. have approved over the last year.
- S. Res. 92: By a striking numerical coincidence, S. Res. 92, introduced by Senator Mike Lee of Utah, is also North Korea-related. It calls on the government to investigate the disappearance of David Sneddon. Members of Sneddon’s family have raised suspicions that North Korea may have been behind his disappearance in China in 2004.
- What’s still missing is a reauthorization of the North Korean Human Rights Act, which has to happen this year or the law will expire. Expect to see that effort begin in the Senate and work its way back to the House later.
If there’s another nuke test in North Korea, you can expect to see a flood of member amendments and resolutions. There is, of course, still more that Congress can do, including:
- tourist travel ban authority,
- provisions that would require the public disclosure of which companies have investments in North Korea,
- immunity and encouragement for fund managers to divest from those companies,
- requiring the public disclosure of any North Korea-related beneficial ownership interests,
- a flat-out ban on access to the dollar system by any bank or person that transacts with North Korea, and
- perhaps most importantly for now, a comprehensive transaction licensing requirement for North Korea, although this loophole would be closed by putting North Korea back on the list of state sponsors of terrorism.
Congress could also name and shame more of the banks and other entities that were dishonorably mentioned by the U.N. Panel of Experts. It could also make its voice heard on Kaesong, which Moon Jae-in has promised to reopen, despite the fact that this would violate multiple U.N. Security Council resolutions. If South Korea violates U.N. sanctions, China, Malaysia, and Africa will draw the conclusion that the world isn’t serious, and a global enforcement coalition will never coalesce.
As with the U.N. resolutions, although there is still more Congress can do to create legal authorities for sanctions, Congress is approaching the point where it will have completed its to-do list, and the focus must shift to enforcement and implementation of the existing laws. Making sanctions work is increasingly about putting enough of the right people into the right positions to make an enforcement program effective. The slow pace of political appointments isn’t encouraging. Many of the necessary improvements to our North Korea policy await those key appointments: how we award grants, what we broadcast to the North Korean people, which refugees we admit, how we exploit the intelligence they provide, who coordinates the broader policy among squabbling agencies, and what we do about foreign governments that violate sanctions, use North Korean slave labor, or repatriate refugees to North Korea.
The vast majority of federal employees, of course, aren’t political; they’re career civil servants appointed under Subchapter I of Title 5. They’re the technocrats and experts who faithfully execute the laws and the President’s policies, regardless of who the president is. Although President Trump’s hiring freeze may be affecting their numbers to some degree, the freeze has broad exemptions for national security and public safety, which most eligible agencies have already invoked. The key enforcement agencies are badly understaffed with the career employees needed to enforce sanctions, but not because of the new hiring freeze. Many are working late nights and weekends out of dedication alone. The simple truth is that North Korea investigations, sanctions, and prosecutions just weren’t a priority for previous administrations, so most career employees were assigned to other duties. If personnel is policy, the new administration hasn’t yet changed that policy. Let’s hope it does soon. The administration says North Korea is a top priority, but so far, I’ve seen little evidence that its actions have matched its words.
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.
The big news yesterday was that Ed Royce, the Chairman of the House Foreign Affairs Committee, has introduced a sequel to the North Korea Sanctions and Policy Enhancement Act, or NKSPEA. You can read the full text here, but briefly, the bill —
- Expands the mandatory and discretionary sanctions in NKSPEA 104 to match the sanctions added by UNSCR 2270 and UNSCR 2321. It also adds a few more, like authorizing Treasury to sanction anyone who imports food from North Korea — a gravely immoral thing when so many North Koreans are going hungry, and when the state obviously isn’t using its food export revenue to buy gbrain to feed them.
- Provides new authorities to ban North Korea from financial messaging networks. Of course, SWIFT is reportedly disconnecting all North Korean banks, but this provision now becomes important to prevent SWIFT’s less reputable competitors from taking that business on.
- Codifies the Treasury Department’s new regulatory ban on providing indirect correspondent account services to North Korean banks.
- Toughens the NKSPEA 203 provisions denying aid to states (mostly in Africa and the Middle East) that buy weapons from North Korea.
- Toughens the NKSPEA 205 provision allowing U.S. Customs to increase inspections of cargo coming from ports that aren’t meeting their UNSCR 2270 obligations to inspect North Korean cargo. It also creates a blacklist of non-compliant ports, including Dandong and Dalian. That could put pressure on those ports to either meet their inspection obligations or shun North Korean cargo altogether. Think of it as the customs equivalent of Banco Delta Asia. But I haven’t even told you the best part yet.
- Creates the authority for secondary shipping sanctions against North Korea by giving the Coast Guard the authority to ban ships, shippers, and flags that violate U.N. shipping sanctions from U.S. ports and waterways. That will make for some lively discussions with the Ways and Means and Transportation committee staffers. It also takes a page from the South Koreans and Japanese who’ve enacted similar measures. That would effectively bring the U.S. into a coalition with those nations to isolate North Korea from the global trade system. Given that this coalition would now include China’s three largest trading partners, that’s potentially quite a powerful measure. And as I’ve noted more than once, let there be no doubt that it was China that started the trade war over North Korea. This is how we stand by our allies and deter economic bullying.
- Increases sanctions against companies that employ North Korean slave labor, and threatens to raise the tier status of those governments under the Trafficking Victims Protection Act.
- Adds a new condition for the suspension of sanctions — that North Korea permit Korean-Americans to have unrestricted and unmonitored meetings with their North Korean relatives before they die.
- Offers rewards to defectors, and maybe other informants, who provide information leading to the arrest or conviction (in any country) of persons involved in North Korean WMD, cyberattacks, or money laundering.
- Piles on more pressure to designate North Korea as a state sponsor of terrorism.
And we still haven’t even seen the member amendments, which promise to be lovely. (On a related note, the Senate is also moving separate legislation to sanction the companies that have participated in China’s island-building in the South China Sea.) This promises to be an action-packed year for all you sanctions geeks out there. The dark circles under my eyes should be proof enough.
~ ~ ~
The other big event yesterday was the first hearing run by the new Chairman of the Asia-Pacific Subcommittee, Ted Yoho of Florida. As of yesterday morning, I hadn’t really viewed Yoho as a thought leader on Asia policy, but after his performance yesterday, I’ve reassessed that view. Yoho ran a tight ship, kept the proceedings on time, and despite this being his debut, projected a sense of calm command of the proceedings. More importantly, both Yoho and new Ranking Member Brad Sherman came in extremely well-briefed on the issue, and in full command of the facts. There was undoubtedly some first-rate staff work behind that. They’ve clearly digested the Panel of Experts’ latest, something that I’m still in the process of doing. You should really watch the whole thing:
Professor Lee’s statement, frankly, is some of his best work. It’s a must-read, not just for its historical insight about the often-strained relationship between China and North Korea and what that doesn’t mean, and not just for its insight into North Korea’s political objectives, but for the beauty of its prose (which Chairman Yoho also praised).
Ruggiero then brings his practical experience and careful research to the often-underinformed discussion of sanctions as a policy tool. And if I had to pick one panelist whose testimony really seems to have broken through to the Committee members, it’s probably Ruggiero, who reformatted their c-drives about a lot of junk analysis about sanctions:
Thanks for that!
Ruggiero also had some choice words for SWIFT, which I’ll let you read on your own.
With the Trump administration about to conclude its policy review and clearly headed in the direction of a harder line that will emphasize sanctions without sparing Chinese violators, this advice will undoubtedly find audiences in the White House, the National Security Council, and the State and Treasury Departments. My guess is it’s going to be a tense dinner at Mar-a-Lago when — or if — Xi Jinping comes around. But as I’ve said before, our relations will China may have to get worse before they can get better.
Ted Cruz, who has emerged as a leading advocate for a harder line against North Korea, has introduced a Senate companion bill to Rep. Ted Poe’s bill, calling for North Korea’s re-listing as a state sponsor of terrorism. According to a press release from Senator Cruz’s office,* Cruz’s bill has six original co-sponsors: Sens. Thom Tillis (R-N.C.), Dean Heller (R-Nev.), Lisa Murkowski (R-Alaska), Marco Rubio (R-Fl.), Dan Sullivan (R-Alaska), and Cory Gardner (R-Colo.).
Compared to the House bill, the Senate bill has a shorter list of North Korean conduct justifying a re-listing, relying almost exclusively on conduct in which U.S. or South Korean courts found the North Korean government responsible for acts of international terrorism. The obvious exception is that the Cruz bill raises the murder of Kim Jong-nam with VX, a persistent nerve agent, in that crowded airport terminal in Kuala Lumpur, which would be the first state-sponsored terrorist attack with a weapon of mass destruction.
The bills also differ in their approaches. The Cruz bill (still no number, but here’s the text) simply asks the Secretary of State to make a determination whether North Korea has repeatedly sponsored acts of international terrorism. The Poe bill (H.R. 479) forces the administration to go through a series of alleged North Korean acts, and then say whether (1) North Korea did it, and (2) whether it’s international terrorism.
Both bills, however, omit the case of the Rev. Kim Dong-shik, a lawful permanent resident of the United States with a family in Illinois, whom North Korean agents kidnapped from China in 2000, and starved or tortured to death (or both) a few months later. In that case, the U.S. Court of Appeals for the D.C. Circuit held that, despite the fact that there were no direct witnesses to Rev. Kim’s death inside North Korea, the evidence was still sufficient to support a judgment against the North Korean government (case number 13-7147), and remanded the case back to the District Court. The District Court then entered a $330 million judgment for Rev. Kim’s family (case number 09-648). In 2005, of Rev. Kim’s kidnappers, Ryu Young-Hwa, was caught and convicted by a South Korean court for his role in the kidnapping. He was sentenced to ten years in prison. Click here to see where Senator Obama signed a letter promising that he would not support removing North Korea from the list until North Korea accounted for Rev. Kim’s fate. Click here to see where presidential candidate Obama reneged on that promise.
Overall, however, both bills make a strong case in favor of a decision that ought to have been made years ago as a matter of the evidence, the law, and the policy reason behind the list — to discourage and deter states from sponsoring terrorism. Indeed, as I argued here, North Korea never convincingly renounced terrorism and never should have come off the list to begin with.
The bills aren’t identical, so there are two ways to reconcile them. If one of the bills passes its respective chamber, the other chamber can pass that bill and send it to the President (easier, and overwhelmingly more likely for a simple bill like this). If both chambers pass their respective bills, they could resolve the differences at a conference committee. The most likely alternative, however, is that the Secretary of State will put North Korea back on the list before either chamber passes its bill. When Congress this clearly wants the Secretary of State to take an action within his discretion that’s well justified by fact, law, and policy, the Secretary of State usually takes that action. John Kerry might not have wanted to do this as a matter of policy, but I doubt Rex Tillerson shares that view. Now that Tillerson is back from his visit to Seoul and Beijing, I’d guess that diplomatically speaking, the decks are clear for this.
While I’m on this topic, I have a few things to say about former State Department official Joseph DeThomas’s 38 North post, arguing against a re-listing. DeThomas starts by conceding that the VX attack on Kim Jong-un might have been an act of state-sponsored international terrorism, which goes a step beyond what another former State Department official said here:
Daniel Benjamin, who served as the US State Department’s counterterrorism coordinator under the Obama administration, says the murder lies in a “gray zone.”
While the suspected use of the deadly VX nerve agent is within the legal parameters of designating the North as a terrorist state, Mr. Benjamin told Voices of America, assassination by itself cannot be interpreted as an act of terrorism.
“So this is a very unusual case,” said Benjamin, now director of the Dickey Center for International Understanding at Dartmouth College. [Christian Science Monitor]
Well. If directing your diplomats and clandestine agents to murder a nonviolent political critic with a persistent nerve agent in an airport terminal crowded with mothers, fathers, babies, and children in a friendly country doesn’t qualify as international terrorism, your definition needs some adjustment.
DeThomas then muses whether North Korea’s sponsorship is “repeated,” a question he could have resolved easily with more careful research. He’s welcome to mine, in fact, but he did cite Bruce Klingner’s excellent summary, which is more than sufficient. But DeThomas’s argument really comes down to this:
However, strategically, there should be no rush to designate Pyongyang. In the larger regional context, the North Korean issue does not need any additional ignition points. Tensions are already running high on the North Korean missile front with its tests of ballistic missile strikes on Japan and with both US and Japanese sources floating stories about preemptive military options to deal with it, not to mention the somewhat more rapid deployment of THAAD than outside observers expected. [….]
While Pyongyang may richly deserve the designation as a state sponsor of terrorism, it would be no sin to follow a deliberative pace in the designation process. A little over a hundred years ago, a state sponsored international terrorist political assassination in a strange city far away lit a spark among major powers that were absorbed in other domestic and international concerns. They unwittingly followed the logic of their responses to the assassination into a global war totally disproportionate to the crime. That war led to the fall of three empires, the death of millions and the end of Europe’s golden age. In the current environment on the Korean peninsula, taking a few weeks or months to sort things through on a terrorist designation will play to the US long-term advantage. [Joseph DeThomas, 38 North]
In other words, let’s not call North Korea a sponsor of terrorism because we’re terrorized. One could make the same argument about the military exercises underway now — those certainly rile Pyongyang. So does the enforcement of U.N. sanctions. So does accepting North Korean refugees and defectors. So does enforcing U.N. sanctions. So does seizing its smuggling ships. So does missile defense. And most of all, so does talking about human rights in North Korea — another issue the State Department spent years trying to downplay or sideline. If all discussions about North Korea policy begin and end with “let’s not rile them,” and if every potential North Korean victim is Archduke Franz Ferdinand, the message Pyongyang will hear is, “Send Gavrilo.” It’s only one example of what Marcus Noland calls “North Korean exceptionalism,” the unique excusal of North Korea from the standards of civilized humanity. If Pyongyang isn’t willing to disarm and you’ve exempted it from consequences that rile it, then your policy is paralyzed at “strategic patience.”
Lest I be accused of taking the views of two former officials as speaking for a department they no longer represent, let’s add this atrocious performance by a State Department witness at a congressional hearing. And for years, the State Department’s argument against a re-listing was, simply stated, a lie: that North Korea is “not known to have sponsored any terrorist acts since the bombing of a Korean Airlines flight in 1987.”
If the State Department now searches in angst for reasons why its influence (and budget) are diminishing in Washington, the opinions of DeThomas and Benjamin are as good an illustration as any. Based on conversations I’ve had with State Department people (in settings that weren’t appropriate for attribution) Foggy Bottom overwhelmingly opposes re-listing North Korea. State Department officials have told me to my face that North Korea doesn’t sponsor terrorism, despite the overwhelming evidence that it does (and there is no excuse for them not to know this). In some cases, they apply a conveniently narrow definition of “international terrorism” that’s at odds with past State Department precedent and with the legal definitions of the term. Or, they say that re-listing North Korea would be merely symbolic.
But if a re-listing would be merely symbolic, why do its opponents think North Korea would care so much? (DeThomas makes both arguments without reconciling the tension between them.)
The first answer is that a re-listing would be financially significant. It would require U.S. representatives to oppose benefits for North Korea from international financial institutions. It would trigger stronger financial sanctions and close an important loophole left by the Treasury Department’s failure to update and republish the outdated North Korean sanctions regulations a year after the passage of the NKSPEA. It would strip North Korea of its immunity from suit for its acts of terrorism. It would trigger SEC “material risk” disclosure requirements for companies that issue stocks and have investments in North Korea, which would trigger divestment by companies fearing shareholder protests.
A second and more significant answer is that North Korea is a state built on symbolism, and on propagating the idea that it holds the world in awe and terror. It tells its people that the world lives in awe and terror of their leaders to send the message that they should live in awe and terror of their leaders. It sends that message because it gives a terrorized, deprived, and shrunken people a reason to draw a sense of esteem, even greatness, from the state that oppresses them. North Korea is obsessed with the power of symbols because it is built on the power of symbols that maintain that awe and terror. That’s why Pyongyang denounced my report with such venom. That’s why it reacted so strongly to “The Interview.” That’s why KCNA is filled with tributes from Juche Study Societies in Equatorial Guinea, Burkina Faso, and Northumberland. It cannot afford for its subjects to know that the world views its leader with contempt and ridicule.
Lastly, re-listing matters because North Korea has repeatedly provided support for acts of international terrorism. Americans should not allow their government to lie to them. That principle may be the most important one at stake here.
N. Korea, Lazarus & SWIFT: Are the white hats closing in? (Update: SWIFT cuts off remaining N. Korean banks)
In the last month, major news stories about North Korea have bombarded my batting cage faster than I’ve been able to swing at them. I’d wondered when I’d have a chance to cover Katy Burne’s detailed story in the Wall Street Journal about the empty half of the SWIFT glass — that despite its recent decision to disconnect three U.N.-designated North Korean banks, it’s still messaging for banks that are sanctioned by the Treasury Department, but not by the U.N.:
The U.S. Treasury-sanctioned banks that remain on Swift include the state-owned Foreign Trade Bank of the Democratic People’s Republic of Korea, the country’s primary foreign-exchange bank; Kumgang Bank; Koryo Credit Development Bank; and North East Asia Bank, according to people familiar with the network. A search on Swift’s website listed active bank identifier codes for the institutions as of Monday.
The U.S. designated for sanctions the Foreign Trade Bank in 2013, saying it facilitated weapons of mass destruction programs in North Korea. The other three were sanctioned in December as the U.S. targeted entities it said supported the North Korean government and its weapons programs following the Asian nation’s September 2016 nuclear test.
The apparent sanctions gap raises questions about how easily North Korea could move currency through alternative banking channels, something the U.N. said it has been known to do in the past through fronting companies. [….]
While based in Brussels and regulated by Belgian authorities, the company intersects daily with U.S. financial institutions, processing tens of millions of payment instructions, including through a large facility in Culpeper County, Va. [WSJ, Katy Burne]
I won’t sugar-coat this; the fact that these dirty and important (to His Porcine Majesty) banks can still use SWIFT is a major hole in our sanctions, and whether Congress and the administration are willing to close it will be a test of how serious they are about stranding Pyongyang’s money.
I can understand some of SWIFT’s likely arguments against that, mind you: first, SWIFT has earned much good will from Treasury for favors it has done them on terrorist financing; second, there may be other potential providers of the same service that may be less responsive to U.S. legal pressure. Fair enough, but whoever takes up that slack in SWIFT’s wake should be sanctioned to swift extinction (yes, intended). For a list of North Korean banks indicating which ones are designated by the U.N. and the U.S., see this post, and scroll down.
Meanwhile, Symantec now claims it has additional evidence that the hacker group Lazarus, which it had previously linked to the robbery of the Bangladesh bank using hacked SWIFT software, is responsible for that attack, and more:
A North Korean hacking group known as Lazarus was likely behind a recent cyber campaign targeting organizations in 31 countries, following high-profile attacks on Bangladesh Bank, Sony and South Korea, cyber security firm Symantec Corp said on Wednesday.
Symantec said in a blog that researchers have uncovered four pieces of digital evidence suggesting the Lazarus group was behind the campaign that sought to infect victims with “loader” software used to stage attacks by installing other malicious programs.
“We are reasonably certain” Lazarus was responsible, Symantec researcher Eric Chien said in an interview.
The North Korean government has denied allegations it was involved in the hacks, which were made by officials in Washington and Seoul, as well as security firms.
U.S. Federal Bureau of Investigation representatives could not immediately be reached for comment.
Symantec did not identify targeted organizations and said it did not know if any money had been stolen. Nonetheless, Symantec said the claim was significant because the group used a more sophisticated targeting approach than in previous campaigns.
“This represents a significant escalation of the threat,” said Dan Guido, chief executive of Trail of Bits, which does consulting to banks and the U.S. government. [Reuters]
Further down, the report suggests that one or more Polish banks may also have been hit, but “Reuters has been unable to ascertain what happened in that attack.” The headline having promised evidence of attribution to North Korea, however, the text of the story itself left me wanting more. It’s not news that Symantec has linked Lazarus to North Korea; Symantec did that almost a year ago. Nothing in Reuters’s report adds evidence to that attribution.
Nor does this story suggest that there’s enough evidence for the feds to act against Lazarus, although it does hint that the FBI is investigating. Jurisdiction shouldn’t be an issue in the Bangladesh case; money moved through the New York Federal Reserve Bank. Attribution is the real question. Depending on what they can prove, the feds would have many potential charging options, including bank fraud, wire fraud, the Computer Crime and Abuse Act, racketeering, and money laundering. Furthermore, there are anti-hacking provisions in both the NKSPEA (section 104(a)(7)) and Executive Order 13722, which means that if the feds could find any of Lazarus’s money, or any assets of Lazarus’s co-conspirators — regardless of whether those assets can be traced to any of these specific acts — the Treasury Department could freeze them, and the Justice Department could forfeit them.
And needless to say, the indictment of a state actor would be a big deal, for a lot of reasons.
So far, I don’t see enough in the open sources to support that, but it’s good news that the white hats are working diligently on this. If they can attribute this to senior officials in the North Korean government — most likely, within the Reconnaissance General Bureau — then it would be our legal basis to go after the RGB’s assets, which we’ve recently learned include some sophisticated and global commercial operations. This story bears close watching.
~ ~ ~
Reuters is reporting that SWIFT will disconnect the remaining North Korean banks:
SWIFT, the inter-bank messaging network which is the backbone of international finance, said it planned to cut off the remaining North Korean banks still connected to its system, as concerns about the country’s nuclear program and missile tests grow. SWIFT said the four remaining banks on the network would be disconnected for failing to meet its operating criteria.
The bank-owned co-operative declined to specify what the banks’ shortcomings were or if it had received representations from any governments. Experts said the decision to cut off banks which were not subject to European Union sanctions was unusual and a possible sign of diplomatic pressure on SWIFT. [Reuters]
Now that SWIFT has gotten itself right with Jesus, I would like to implore everyone, everywhere to lay off SWIFT. It’s absolutely true that if we turn SWIFT into a political surrogate for our sundry political conflicts, the world’s dirtiest banks will just take their business elsewhere. That’s not a trend we want to encourage. SWIFT has usually been a responsible member of the financial community, sometimes at great cost to itself.
My argument all along has been that (1) North Korea deserves to be an exception to that rule because (2) North Korea is a unique threat to the financial system — not to mention, to all of humanity — as documented in (3) seven U.N. Security Council Resolutions, a Patriot Act 311 determination, and a call for “countermeasures” by the Financial Action Task Force. You can’t say that about any other country on earth right now — not even Iran. I can’t reconcile messaging for North Korean banks with any of those authorities. And if any competitor tries messaging for the FTB, it’s especially important that the Treasury Department should have the authority to obliterate them (which is why Congress should still proceed with something like the BANK Act).
Having said all that, I wouldn’t be too quick to assume that diplomatic pressure was the main reason for this most welcome decision. “Operating criteria” could mean a lot of things, but it’s a slightly better fit with “massive global bank fraud” than it is with “diplomatic pressure.” If there are more developments in the Lazarus investigation than the Reuters report makes apparent, and if those developments convinced SWIFT that it had unwittingly helped the North Koreans defraud its more reputable clients by sharing its software with them — and their hackers — that would be a perfectly good (and equally plausible) reason for SWIFT to have cut the North Koreans off.
Yet again, the North Koreans are tactically brilliant criminals. And yet again, they’re strategically moronic. It’s a rare and happy day when someone finally holds them to account for it.
And just like that, crackpot investment advisor Jim Rogers joins the distinguished company of Hyundai Asan, Volvo, Yang Bin, David Chang and Robert Torricelli, Chung Mong-Hun, Roh Jeong-ho, and Orascom’s Naguib Sawaris, all of whom won Darwin Awards in North Korea. I’ve previously written about Rogers and his enthusiasm for North Korea and its worthless currency. That OFK post caught the eye of a New York Times reporter, who has just published a story on the relationship between Rogers and his self-described business partner, a Chinese entity called Unaforte:
“It’s very exciting. The kid has been opening up North Korea,” Mr. Rogers said in an interview, referring to Kim Jong-un, the country’s ruler.
But North Korea can be a murky place to tread — as Mr. Rogers’s experience shows.
A Hong Kong company called Unaforte that is involved in several North Korean businesses named Mr. Rogers as a shareholder a year ago, according to a corporate filing. Investing in a North Korean business like that would probably violate American sanctions if it happened now, though experts say it was legal at the time. [NYT, Patrick Boehler & Ryan McMorrow]
In this case, “experts” means me. Rogers’s investment came just a month before President Obama signed Executive Order 13722, which imposed sectoral sanctions on North Korea’s transportation, mining, energy, and financial services industries. That E.O. was enough to drive investor and fund manager James Passin out of North Korea. Before that, however, our threadbare North Korea sanctions probably didn’t prohibit what Rogers did. Still, staying one step ahead of the law doesn’t mean one isn’t stepping in something.
Mr. Rogers said he gave Unaforte $100 as a token of good will but never expected that it would name him as a shareholder. Asked about his stake in the company in October, he interrupted an interview with The New York Times to call Unaforte and told the English-speaking sister of its founder that the company had agreed he could not be a shareholder.
Speaking into his phone, Mr. Rogers said, “I know I have told you, ‘Never, never, never.’”
Unaforte no longer lists Mr. Rogers as a shareholder in its filings but will not release shareholder records that might show more details about the shares given to Mr. Rogers. Officials at Hong Kong’s corporate registry said they were investigating whether Unaforte is complying with the city’s disclosure laws. Unaforte did not respond to emailed questions for comment. [NYT]
The Times chronicles how Rogers quickly distanced himself from Unaforte once its reporters started asking questions (“I make speeches for hundreds of people.”). At one time, Unaforte featured Rogers prominently in its promotional materials. Its founder, Zhao Chunhui, calls himself “Jim Rogers’s business partner in China.” Then, a Unaforte website marketing its North Korea investments — a bank, an office park, and a stake in a gold mine — “went offline after The Times began to ask about its businesses.” On March 17, 2016, two days after President Obama signed EO 13722, Rogers wrote to Unaforte, asking “that it return his $100 and take back an unspecified number of shares.”
To make matters worse, Unaforte also drew a mention in the latest report of the U.N. Panel of Experts, for setting up a bank in the Rason Special Economic Zone. Sorry, my WordPress installation doesn’t read hanja:
221. A Hong Kong, China, company, Unaforte (?????????), with a Yanbian branch (?????) established the First Eastern Bank (????) in Rason in 2014 as a subordinate enterprise to provide financial support and loans to Chinese investors in mining and real estate projects in Rason (see annex 15-11). The bank is licensed by the Central Bank of the Democratic People’s Republic of Korea (see annex 15-12) and provides loans to Chinese individuals and companies in the Rason area. In its promotional materials, Unaforte claims: “The [First Eastern] Bank is fully independent and does not require proof of identity. It is not subject to the jurisdiction of China or [the] Democratic People’s Republic of Korea and is not required to report to the Chinese government or the Democratic People’s Republic of Korea government!” (see annex 15-13). The Panel notes that foreign nationals holding accounts in banks of the Democratic People’s Republic of Korea would be a violation under resolution 2321 (2016).
Under sanctions adopted by the U.N. Security Council last year, the Far Eastern Bank must now be closed. Specifically, Paragraph 31 of UNSCR 2321, adopted on 30 November 2016, requires Member States to close all existing representative offices, subsidiaries or banking accounts in the DPRK within 90 days. UNSCR 2270, paragraph 33, requires Member States to “prohibit in their territories the opening and operation of new branches, subsidiaries, and representative offices of DPRK banks,” to “prohibit financial institutions within their territories or subject to their jurisdiction from establishing new joint ventures,” except with a U.N. Committee’s advance approval, and requires member states “to close such existing branches, subsidiaries and representative offices, and also to terminate such joint ventures [and] ownership interests.”
Previously, Leo Byrne of NK News also reported on Unaforte’s exports of gold jewelry to Hawaii. The gold was allegedly mined in North Korea; thus, exports to the U.S. could have violated a 2011 executive order prohibiting imports from North Korea, except pursuant to a Treasury Department license. Rogers comes across looking like a fool, a charlatan, and a generally amoral person, but from a strictly legal perspective, not even he can be faulted for ex-post facto sanctions violations. There’s no evidence that Rogers knew of the gold jewelry exports to the U.S., but if he did, that might be his greatest legal risk.
Six Republican senators — Ted Cruz (TX), Cory Gardner (CO), Thom Tillis (NC), Marco Rubio (FL), Pat Toomey (PA) and David Perdue (GA) — have signed a letter to newly confirmed Secretary of the Treasury Steve Mnuchin* calling for improved implementation and enforcement of the North Korea Sanctions and Policy Enhnancement Act (NKSPEA).
As Kim Jung-un has exposed his willingness to increase ballistic missile testing with the ultimate goal of achieving nuclear breakout, the potential for this regime to attain a developed and capable intercontinental ballistic missile (ICBM) poses an imminent threat that cannot be ignored,” the senators wrote. “North Korea’s test of an intermediate-range ballistic missile this past weekend demonstrates advancement in fuel and launch technology, underscoring the necessity of faithfully executing the law to meet this growing threat. [Sen. Ted Cruz]
The letter (the full text is here, and it’s an absolute must-read) proposes ten actions that President Obama never got around to, that would substantially improve the effectiveness of sanctions: (1) designate North Korea’s remaining banks; (2) hire enough cops and lawyers to enforce the sanctions; (3) invoke more Patriot Act special measures to require record-keeping and reporting on North Korean beneficial owners; (4) talk to Rex Tillerson about re-designating North Korea as a state sponsor of terrorism; (5) replace our weak and outdated North Korea sanctions regulations; (6) strictly enforce Know-Your-Customer and reporting rules on North Korean banking transactions; (7) investigate the banks involved in the Dandong Hongxiang and Chinpo Shipping cases; (8) enforce the law against any bank caught providing North Korean banks with direct or indirect correspondent account services; (9) work to cut North Korea out of SWIFT; and (10) show some willingness to impose secondary sanctions on Chinese sanctions violators.
That’s a good list — a very good list. I couldn’t have written it better myself (OK, maybe slightly, but only slightly).
The instigator and drafter of this letter is the man some now refer to as The New Ted Cruz. Although I’m not nearly as conservative as Cruz is on some issues, Cruz deserves commendation for stepping forward to lead on this issue, despite not even being a member of the Foreign Relations Committee or previously showing particular interest in foreign policy. (Tillis and Toomey aren’t Committee members, either; kudos** to them for signing on.) And while we’ve come to know Gardner and Rubio as leaders on North Korea policy, this episode also teaches us the importance of being willing to follow when someone else proposes good ideas. Rubio and Gardner in particular are highly respected in the Senate for their intellect and understanding of foreign affairs. It’s to their credit that they added their heft and gravitas to the letter by signing on. In doing so, they’re shaping the new administration’s policy at an early and malleable stage, when Trump probably needs all the good advice he can get.
Also deserving similar credit is Edwin Feulner, a (the?) founder of the Heritage Foundation and (so I’ve read in various press accounts) a man Donald Trump listens to. Yonhap also calls Feulner a leading candidate to be our next Ambassador to South Korea. Feulner sat down for an interview with Yonhap’s Chang Jae-soon and Shim In-sung, where he expressed similar views to those of the Gang of Six:
“I think anything that happens post January 20, 2017 is a test and is a challenge to President Trump and that President Trump takes anything that happens while he is the President of the U.S. he is going to take it very seriously,” Feulner said of the missile launch.
Increasing pressure on North Korea, including making China, through secondary sanctions, use more of its leverage over Pyongyang as the main provider of food and energy assistance, would be a key part of Trump’s policy on the North, Feulner said.
“Mr. Trump … will be expecting China to do a lot more. The notion of economic pressure on North Korea is one that Mr. Trump understands. Mr. Trump is not going to be reluctant to use his willingness to invoke secondary boycotts, for example, of organizations in North Korea or in China that are pass-through entities for exports from North Korea to cut off even more economic help,” Feulner said.
“Mr. Trump … will not hesitate to employ more significant measures,” he said. [Yonhap]
Also encouraging was Feulner’s call to bring more attention to North Korea’s crimes against humanity, and to appoint a “widely recognized, respected ambassador” for human rights issues, as mandated by the North Korean Human Rights Act (which is up for reauthorization this year, and will be reauthorized).
The rumor of Feulner’s potential nomination as ambassador may be the most encouraging news I’ve heard about the Trump administration so far. Historically, Korea only got the attention it deserved in Washington when ambassadors have had strong political pull and close relationships with the President. And while it’s hard to think of someone with better judgment or public diplomacy talents than Mark Lippert, Feuler’s combination of close ties to Korea, political strength in Washington, good policy instincts, and understanding of the subject matter would make him an outstanding candidate for the job as the North Korea crisis reaches a critical phase.
Most of what the six senators and Feulner said also sounds consistent with what Rex Tillerson, Yun-Byung-se, and Fumio Kishida said after their first trilateral meeting this week, in Germany.
“The ministers condemned in the strongest terms North Korea’s February 12, 2017 ballistic missile test, noting North Korea’s flagrant disregard for multiple United Nations Security Council resolutions that expressly prohibit its ballistic missile and nuclear programs,” the three countries said in a joint statement.
“Secretary Tillerson reiterated that the United States remains steadfast in its defense commitments to its allies, the Republic of Korea and Japan, including the commitment to provide extended deterrence, backed by the full range of its nuclear and conventional defense capabilities,” it said.
The sides pledged to collaborate to ensure that all countries fully carry out U.N. Security Council sanctions on Pyongyang and that violations of Security Council resolutions will be met with an “even stronger international response,” according to the statement.
The top diplomats urged Pyongyang to refrain from provocative actions and “abandon its proscribed nuclear and ballistic missile programs in a complete, verifiable, and irreversible manner” and comply with all U.N. resolutions, the statement said.
“Only in this way can North Korea be accepted as a responsible member of the international community,” it said.
The sides also agreed to continue to draw international attention to the North’s “systemic, widespread, and gross violations” of human rights. [Yonhap]
That latter point is an important one, not only from an ethical or a legal perspective, but from a utilitarian one. Since the release of the Commission of Inquiry’s report, Pyongyang has shown surprising vulnerability to criticism on human rights, to the point where that criticism may be affecting the cohesion of the elites and the stability of the regime itself. It will not be any single vulnerability that convinces the generals there that they have no future on the path set by Kim Jong-un, but a combination of vulnerabilities — financial, diplomatic, and political, both foreign and domestic — converging at once. It’s gratifying to see that the Americans (Update: well, some of them, anyway) who will have the most influence over the future of Korea understand what those vulnerabilities are.
~ ~ ~
* Mnuchin’s confirmation hearing is here. It’s about 5 hours long, in case you have a long weekend coming up and no life.
** Previously said “kudus.” Since corrected, although I wouldn’t mind “kudus” myself. As I can testify from personal experience, kudu is delicious.
As we continue to watch Trump’s trial balloons float by on the selection of his national security cabinet, we still don’t know much about the foreign policy Donald Trump would have as President. On the other hand, most of Congress’s key players on foreign policy will still be around next year, and some of them have already begun to assert themselves. Committee chairs are (on one hand) pushing Trump to adopt more conventional foreign policy views, while (on the other) threatening to use their power to undermine any major policy shifts, specifically toward the Kremlin.
Some of the most powerful foreign-policy makers in the U.S. government are outside of President-elect Donald Trump’s control and are already signaling an early end to the honeymoon period over their fellow Republican’s security and diplomatic stances. [Foreign Policy, Molly O’Toole]
Ed Royce, the California Republican who conceived the North Korea sanctions bill that became law in February, and who stayed mostly quiet on Trump’s candidacy this year, will be back as Chairman of the House Foreign Affairs Committee next year. Hopefully, so will his Senate co-champion, Cory Gardner, at the helm of the Senate Foreign Relations Committee’s Asia Subcommittee. (Gardner’s rising star status was cemented this week by his selection to head the National Republican Senatorial Committee.) After some of Trump’s statements last year cast doubt on the alliance, both Royce and Gardner visited South Korea to reassure its leaders. Paul Ryan has also been supportive of the alliance.
Bob Corker, the current Chairman of the Senate Foreign Relations Committee, remains in the running for Secretary of State. Whether Corker is nominated or stays on as Chairman, he’d be a moderating influence. If Corker does leave the Senate, next in line, in terms of seniority, would be Idaho Senator James Risch, who called voting for Trump “distasteful,” but said he’d do it anyway. If congressional Republicans really want to put their stamp on foreign policy, however, they’ll pick the talented and highly intelligent Marco Rubio, who is fresh off a convincing reelection win.
Also back at the Armed Services Committee is the newly reelected John McCain, who has joined with his close friend, Lindsey Graham, in making clear that any pivot to Moscow will face significant resistance in Congress.
“[Trump] wants to reset with Russia. Maybe he can do it, but here’s my view about Russia: They’re a bad actor in the world, they need to be reined in,” Sen. Lindsey Graham (R-S.C.) said Tuesday, adding that it would be up to Congress to let Russia “know the rules of the road pretty early,” even under a friendlier Trump administration.
“I think [Russia] should pay a price heavier than they’re paying now for what they’re doing in Syria and in eastern Europe,” Graham added. “I will consult with my colleagues what there is appetite for.”
Graham isn’t the only Trump critic who came out swinging on Tuesday on Russian involvement in global affairs. His close friend and colleague Sen. John McCain (R-Ariz.), who chairs the Senate Armed Services Committee, said that “the price of another ‘reset’ [with Russia] would be complicity in Putin and Assad’s butchery of the Syrian people. That is an unacceptable price for a great nation.” [Washington Post, Karoun Demirjian]
What can Congress do, aside from mere words? The Post’s report says that lawmakers are preparing “a battery of legislative measures to hold the line against Russia, regardless of what the president-elect tries to do.” Such as? First, words do matter, and Graham is threatening to hold “a series of hearings about Russia’s misadventures throughout the world” and cyberattacks. Although Republicans balked at holding pre-election hearings into Russia’s meddling in the election, Republicans haven’t dropped the issue, either.
“We cannot sit on the sidelines as a party and let allegations against a foreign government interfering in our election process go unanswered because it may have been beneficial to our goals for the moment,” Graham said Tuesday.
In the House, Royce also said he would be interested in investigating Russia’s connection to the hacking incidents. “I would hope that all federal agencies are investigating,” Royce said. “If we can get evidence, it’s very worthwhile to pursue any information we have.” [WaPo]
Second, Congress can do what it did to force a reluctant President Obama’s hand on North Korea: impose mandatory sanctions. This week, the House passed the Caesar Syria Civilian Protection Act of 2016, which could force the next administration to sanction Assad’s Russian backers, among others. If the name of the bill sounds familiar, that’s because “Caesar” is the code name for the subject of a chilling Ted talk by his former CIA handler, a man who would later become a House staffer and independent candidate: Evan McMullin. Ordinarily, the calendar would make it difficult for the Ceasar Act to pass this Congress, but even Corker says “there’s going to be much more opportunity for bipartisan passage” of bills pertaining to Russia, and that lawmakers “plan to be aggressive” before the year ends. If the bill doesn’t pass this year, expect to see the same text introduced again in January.
“Regardless of perspectives on Syria, there’s some unanimity of opinion in sending a message on this kind of conduct,” House Foreign Affairs Committee Chairman Ed Royce (R-Calif.) said prior to the vote. [WaPo]
Finally, Graham is promising “a package that would help our Eastern European allies better deal with the threats they face from Russia” that includes broad defense aid “to make it harder for Russia to advance beyond where they are today.” If Trump’s rhetoric on cost-sharing helps defray the cost, that aid package may be more palatable in Congress. Ed Royce thinks Trump’s public skepticism about NATO was nothing more than a “very successful negotiating tactic” to persuade NATO allies “to pay their share of the burden” in funding the alliance. Corker claims to have seen an “evolution” in Trump’s views on Russia and NATO.
If Trump can persuade Japan and South Korea to contribute more funds without harming the integrity of the alliance, I’d say all ends well, except that I have no confidence that all ends well if the left wins South Korea’s next presidential election. Another outbreak of anti-Americanism could erode congressional support for the alliance below a critical level, especially if South Korean politicians are seen as feeding or playing into that.
Historically, the President has enjoyed great deference in the conduct of foreign policy. This Congress is already hinting that it means to push the envelope in that historic power struggle. If Trump prefers to prioritize other matters, we may see an early compromise, especially if Trump appoints a more conventional and moderate cabinet. If not, we may see a period of intra-partisan conflict and gridlock between the executive and legislative branches. If Congress prevails, the result could be a historic expansion of Congress’s power over the conduct of foreign affairs.
For those who’ve wanted a compilation of the key U.N. documents, U.S. statutes, regulations, executive orders, general licenses, and third-country sanctions laws, along with a brief explanation of how those authorities work, start here and click your way around. It’s still a work in progress, but the most important authorities are there. I also added section-by-section links to the key provisions of the NKSPEA and an FAQ. Enjoy!