You absolutely must watch this extraordinary work of investigative journalism by Vice, exposing the North Korean slave labor racket in Poland. There are English subtitles available.
That’s enough for the Treasury Department to add all of them to the list of Specially Designated Nationals for violating Executive Order 13722, which prohibits “engag[ing] in, facilitat[ing], or [being] responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea.”
The prime target of designation should be the Korea Rungrado General Trading Corporation, Segori-dong, Pothonggang District, Pyongyang, and the DPR Korea Chamber of Commerce, P.O.Box 89, Jungsong-dong, Central District, Pyongyang, for supplying the laborers. As Vice notes, Rungrado was also implicated in the U.N. Panel of Experts’ most recent report for selling missile parts to Egypt. The Polish nationals and companies that knowingly employ this labor under such exploitative conditions — and who lie about it so blatantly — should also be designated, to make an example for other users of North Korean labor.
Although North Korean laborers in Europe (chiefly, Poland and Malta) are smaller in number than those in Asia and Africa, they also earn the regime more funds per capita than their counterparts in poorer countries. And do you suppose the working conditions for North Korean workers are better in Africa, Asia, or the Middle East? If the Obama Administration is serious about enforcing its new authorities, it should start by watching this report and taking careful notes.
~ ~ ~
Update: On a related note:
North Korean workers are toiling for Chinese factories that make clothes for global labels like Ralph Lauren and Burberry, Radio Free Asia reported Wednesday.
One of their employers is Mei Dao Garment in Hebei Province, a source told the radio station.
Mei Dao first employed 54 North Korean workers via a North Korean trading company from January to July 2012. In April last year it also established another firm in Dandong, Miryong Garment, as a joint venture with another North Korean company.
Mei Dao now employs hundreds of North Koreans, according to the source.
Garment maker Phoenix Gold in Dandong also employs about 1,200 workers, and 800 of them are from North Korea, the source added. [Chosun Ilbo]
That’s specific enough to investigate, either by an outside NGO, or by the retailers themselves.
Last week, I posted about the conflicting reports about China’s compliance with the new sanctions on North Korea. Just after I posted that, I noticed that the Daily NK had also added a report of its own, suggesting that amid a regime mobilization to expand coal production, coal exports were being refused by Chinese ports.
“Recently, we’ve seen a full ban on our [North Korean] ships at the Port of Yingkou in Liaoning Province, where coal trade had been most active with China,” a source from Pyongyang told Daily NK in a telephone conversation on Tuesday. “We’ve also received notice that the Port of Rizhao in Shandong Province will also gradually restrict entry.”
An additional source in the capital corroborated this news.
“The news suddenly arrived as a unilateral announcement from China two days ago, leading to chaos at the commerce ministry,” the source explained. “Cadres have been unable to decide whether to turn around all of the other ships at sea, on top of the coal and iron ore vessels that are still awaiting orders after being refused port entry at Yingkou.” [Daily NK]
Contrary to the predictions of sanctions skeptics, the bad economic news is not causing people to rally to the regime.
This setback was reported to the Central Party, but trade officials have instead chosen to admonish others for not taking action in advance to mitigate the problem rather than consider potential solutions. There has also been indirect criticism of the nuclear test and long-range rocket launch, with questions as to why they need to “clean up a mess made by others,” he reported.
Some cadres are reportedly expressing their concerns over the financial implications of these events, exclaiming, “If we can’t export coal any more, we’re done for.” The question of who will be held responsible for the export blockage also has people on edge, with some reminded of Jang Song Thaek shouldering the blame for the country’s failed currency reform and the stalling of construction for the 100,000 homes project in Pyongyang.
The source added that coal workers are also troubled by the export block after having been excited about the prospect of receiving increased rations as a reward for the “70-day battle” production surge. “Cutting off ration supplies [received from China with remuneration for coal] will negatively affect workers and result in diminished output, and by extension impact power plants, the industrial sector, and other aspects of people’s lives. This may in turn ignite a good deal of anger within the public,” he speculated. [Daily NK]
The export ban will affect the operation of the mines in due course. Last year, mine workers weathered another slowdown in Chinese imports because most of the miners’ wives trade in the markets.There will also be many, varied, and complex effects on North Korea’s industrial capacity, some of them completely desirable, and others that may cause the U.S. and China to agree that a use of the “livelihood” loophole in UNSCR 2270 is appropriate.
There will be impacts on the power supply, which has long been spotty, even in Pyongyang where it is disproportionately allocated. No doubt, this will be a good year for the solar panel trade. One positive impact of the last decades of unreliable government services is that North Korea’s poor have learned to be resilient, resourceful, and independent of the state. That’s why, despite last year’s drought and dire predictions of a new famine, North Koreans managed to avert the worst, probably through private agriculture.
It won’t be possible to completely shield the North Korean people from the impact of sanctions, but it is our obligation to mitigate it as much as we can, while telling the North Korean people the real reason why they suffer. Sadly, some short-term hardship may be North Koreans’ only way to escape a future filled with starvation, oppression, and war. The only escape from that future is to break either the regime, or its will to resist change, peace, and openness.
Two weeks ago, I surveyed the evidence of China’s compliance with new U.N. sanctions and found “mixed, yet hopeful signs.” One area in which the signs has seemed especially hopeful was the enforcement of shipping sanctions. The Philippines had already seized one designated ship, the Sierra Leone-flagged M/V Jin Teng, and detained another, the non-designated, North Korean-crewed, Tuvalu-flagged tanker M/V Theresa Begonia. There was also some evidence that Chinese ports were complying, but we’ll get to that later.
Under the resolutions, all member states are required to seize designated ships, like the Jin Teng, but the reasons for the detention of the Theresa Begonia aren’t clear. A report that an unnamed U.N. member state had cancelled its registrations of North Korean ships could be a clue. If the state in question is Tuvalu, the ship might have arrived in port without a valid registration. North Korea’s reflaggers of choice have been Mongolia, Cambodia, Liberia, Sierra Leone, Tuvalu, and Kiribati.
Since then, however, China has pushed the U.S. into supporting the removal by the U.N. of four ships’ designations — the Jin Teng and three other North Korean ships — on the basis that China “discovered” that they were not owned or controlled by U.N.-designated Ocean Maritime Management Company at all. It’s worrying that this decision doesn’t appear to be based on any finding of the Panel of Experts, but on a unilateral conclusion by the Chinese, who pressured the U.S. to accede.
The U.S. did not accede easily. Reuters obtained several diplomatic messages between U.S. and Chinese diplomats, revealing that China threatened to hold up reauthorization of the U.N. Panel of Experts unless the U.S. agreed to removing the designations. This led to what Reuters called a “frustrated back and forth between Washington and Beijing,” in which Samantha Power accused the Chinese of “blackmail.”
The removal of the Jin Teng‘s designation presumably means that Filipino authorities will allow the ship to depart with its crew after the mandatory inspections are completed. Reuters had previously reported that a U.N. inspection team was on the way to the Philippines to inspect the Jin Teng.
It bears careful watching just how often the U.S. will be willing to cave to Chinese demands like these. On balance, it’s probably better to recognize and adjudicate exemptions, designations, and removals of designations than to just go back to what we all used to do — ignore China’s cheating. But there is also a great deal of confusion over how Chinese ports are enforcing shipping sanctions. According to a detailed report in the Asahi Shimbun, the ports of Tainjin, Yingkou, Rizhao, Penglai, Weifang, and Nantong have all barred North Korean ships from entering.
Sources close to Chinese port authorities and trading firms said the port authority in Yingkou, Liaoning province, initially prohibited the entry of all North Korean vessels to Yingkou port based on verbal instructions from the nation’s maritime affairs authority on March 16.
In addition, local port authorities had imposed a ban on entry by North Korean ships at the ports of Rizhao, Penglai and Weifang in Shandong province as well as Nantong port in Jiangsu province and Tianjin port as of March 21.
The five newly-added ports are all major gateways for China’s imports of natural resources from North Korea, while Yingkou port serves as a major hub for coal imports from the belligerent neighbor.
Port authority sources at Penglai and Weifang ports acknowledged that entry by North Korean vessels is prohibited.
“We received a verbal order out of the blue from the customs authority on March 19, and all North Korean vessels are anchored outside the port awaiting permission to enter,” said an official of the Penglai port authority on March 21. [Asahi Shimbun]
Note well that the sources quoted are all local port authorities and traders, rather than national authorities.
According to officials at trading firms involved in China-North Korea commerce, China’s maritime affairs authority has demanded that the operators of North Korean freighters stranded outside the six ports resubmit documents that are required for a port entry application. [Asahi Shimbun]
As a result, North Korean freighters are reportedly hovering offshore, waiting for the Chinese port authorities to review their documents. If the documents check out, they may be allowed to dock. The delays alone will be disruptive to Pyongyang’s finances. Increased inspections could also have a strong impact on North Korea’s lucrative counterfeit cigarette smuggling industry. NK News adds:
While NK News was unable to get confirmation from port authorities at the time of writing, live shipping data shows irregular groupings of North Korean vessels in anchorage off and in close proximity to the listed ports, a possible indicator that the measures are being implemented.
A group of 10 North Korean flagged ships is clustered around Longkou harbour, which is only 40km from Penglai, with a further five North Korean affiliated ships among them. The North Korean flagged Tong Chon is also in close proximity and is around 9km from the port of Penglai.
Four North Korean flagged vessels are also near Bayuqaun, which is within 50km of Yingkou, and are joined by a further eight North Korean affiliated vessels sailing under foreign flags of convenience.
According to the website of China’s Maritime Safety Administration, Yingkou’s port authority also has jurisdiction over Bayuquan port.
“There are an unusually large number of North Korea linked ships near Bayuquan and Longkou, which indicates they could have been rerouted from other ports,” Leo Byrne, Director of Data and Analytics at NK News said.
Another grouping of five DPRK flagged vessels has been seen near the port of Lanshan within the last 24 hours. Lanshan is 35km from the port of Rizaho, which is also on the alleged list of ports banning North Korean vessels from entering. Several of the North Korean flagged ships have since headed away from the anchorages of Lanshan and Rizaho.
“It’s worth noting that if accurate, the Chinese embargo would go well beyond what’s required in Resolution 2270,” Byrne said.
“But questions remain, it’s unclear why North Korean ships would be barred from those ports, yet not Dalian – the most visited port of call for North Korean ships in the area.” [NK News, Hamish Macdonald]
So what do the national authorities say? Beijing has denied implementing “a blanket ban” on North Korean ships, saying, “The reports have no truth,” and that the media should “not invent stories.”
The accusation is preposterous, typical of China’s hostility toward foreign media, and revealing of the pressure China is feeling. The Asahi and NK News reports are well supported and credible. They aren’t inventions, but they are inconsistent with other reports. Last week, for example, Reuters reported that China had banned only U.N. designated ships, and Yonhap reported that the port of Dandong had turned away a North Korean ship “as part of a broader ban on North Korean ships.” Adding to the confusion is the fact that North Korean ships have been turning off their transponders while at sea to avoid tracking.
As I’ve noted before, a complete embargo is more than either U.N. or U.S. sanctions require. U.N. sanctions bar coal imports except for “livelihood” reasons (whatever that means in practice) and require member states to seize ships owned or controlled by designated entities, such as Ocean Maritime Management and the Reconnaissance General Bureau.
U.S. sanctions authorize U.S. Customs and Border Protection to raise inspection requirements for cargo coming from ports and airports where “inspections of ships, aircraft, and conveyances originating in North Korea, carrying North Korean property, or operated by the Government of North Korea are not sufficient to effectively prevent the facilitation of any of the activities described in section 104(a).” Those activities include arms smuggling and WMD proliferation. They also mandate secondary sanctions against Chinese buyers of North Korean coal and other minerals.
In other words, U.N. and (especially) U.S. sanctions directly threaten the interests of local Chinese ports and traders, which is to maintain unfettered access to U.S. markets and the dollar system. Given the choice of trading with North Korea and trading with the U.S., some ports and shippers may — I stress, may — be choosing the latter. That represents a sharp divergence of the ports’ interests from those of Beijing, which is expending diplomatic capital to limit the harm sanctions do to Pyongyang.
This isn’t the only possibility here. The simplest is that Chinese ports and shippers are themselves getting conflicting and confusing instructions from Beijing. There is also some evidence that undercuts this theory. As recently as last week, some Chinese buyers were still accepting North Korean coal, perhaps believing that the “livelihood” loophole applied to their purchases (but see this). And the reported enforcement of cargo inspections at land border crossing almost certainly was based on instructions from Beijing.
If Beijing is now in a contest with Washington to influence the conduct of ports in northeastern China, then Kim Jong-un has indeed become a serious “strategic liability” for Beijing, just as its economy is slowing. It shows. For example, I’ve never seen the nationalist, anti-American Global Times show so much irritation and pessimism about North Korea. Read that last link. It’s precisely the kind of sentiment the U.S. should be encouraging in China. When North Korea becomes enough of a liability for China, China will rethink its interests, and maybe diplomacy will stand a chance.
After years of extensive, flagrant, and well-documented violations of U.N. sanctions against North Korea, China is finally reaping the consequences. Americans don’t agree on much anymore, but Beijing’s cheating has achieved a political impossibility — it has united 418 representatives, 96 senators, The New York Times, The Washington Post, and the mainstream of North Korea watchers in support of secondary sanctions on the (mostly Chinese) banks and businesses that are propping up Kim Jong-un financially. That policy is now expressed in law, and the U.S. Treasury Department has taken its first steps toward aggressive implementation.
Not surprisingly, China isn’t happy about this.
The so-called secondary sanctions will compel banks to freeze the assets of anyone who breaks the blockade, potentially squeezing out North Korea’s business ties, including those with China.
Asked whether China was worried the sanctions could affect “normal” business links between Chinese banks and North Korea, Foreign Ministry spokesman Lu Kang said this was something China was “paying attention to”.
“First, as I’ve said many times before, China always opposes any country imposing unilateral sanctions,” Lu told a daily news briefing in Beijing.
“Second, under the present situation where the situation on the Korean Peninsula is complex and sensitive, we oppose any moves that may further worsen tensions there.”
“Third, we have clearly stressed many times in meetings with the relevant county, any so-called unilateral sanctions imposed by any country should neither affect nor harm China’s reasonable interests.” [Reuters]
So far, Treasury hasn’t frozen any Chinese and Russian assets, but it’s delivering a message to Chinese banks to stay away from North Korea, and the banks are listening. Even before the U.N. Security Council approved UNSCR 2270, some Chinese banks and businesses began freezing North Korean assets.
“Any so-called unilateral sanctions imposed by any country should neither affect nor harm China’s reasonable interests,” Lu warned. He said Beijing has stressed this point many times.
The new sanctions “up the ante quite significantly,” said Elizabeth Rosenberg, a sanctions expert at the Center for a New American Security, the new sanctions “up the ante quite significantly.”
“It does impose something akin to a full embargo on persons who do business with North Korea,” she said.
Victor Cha, senior fellow to the Bush Institute on North Korea and director of Asian studies at Georgetown University, said these comments show Beijing is concerned about getting caught in the sanction net. In an interview with Foreign Policy, he said China was especially worried about the slave-labor provisions.
“China imports North Korean slave labor,” he said. “That’s the piece the Chinese don’t like the most, the secondary sanctioning.”
“This is a grade up from the level of sanctions that had been in place before,” Cha added. [Foreign Policy, David Francis]
Russia, too, has actively aided North Korea’s violations of U.N. sanctions, and it’s also upset about “unilateral” U.S. sanctions. Its propaganda machine is churning out tired arguments that sanctions will only hurt the North Korean people, although I don’t recall Russian propaganda outlets complaining that North Korea’s last long-range missile test cost enough to fund World Food Program operations in North Korea for 15 years.
Despite Moscow’s ambivalence about sanctioning Pyongyang, Gazprom just cut its ties to North Korea. Oddly enough, the U.N. sanctions don’t even require this. Sure, it’s possible that Vladimir Putin has had a change of heart and decided to pressure Kim Jong-un, but it seems more likely that Gazprom is concerned about the legal risks from Treasury’s sectoral sanctions on North Korea’s energy industry.
The reports on China’s compliance with the sanctions continue to be mixed. Defense Secretary Ashton Carter says, “China could do much more than it has to get North Korea to ‘stop provocations,’” while a senior State Department official recently told the Senate Foreign Relations Committee that China was “ready to work with us on detailed implementation and consultation on a range of issues.” Both of those things could be true, I suppose, but they yield different headlines.
Until recently, cargo had transited the land border between China and North Korea more-or-less unimpeded, but now, according to both Yonhap and the Chosun Ilbo, China has stepped up inspections at its border crossings, too. With respect to maritime cargo, Yonhap cites South Korean government sources who claim that Beijing has directed local governments to bar the 31 U.N.-designated North Korean ships from its ports. The Asahi Shimbun reports that “China has banned the entry of North Korean vessels to Yingkou port in Liaoning province, a major gateway for China’s coal imports” from the North.
As of March 18, two North Korean ships were stranded outside the port, located about 200 kilometers northwest from the border between the two countries. The vessels have reportedly decided to return to North Korea. “China will likely impose a similar embargo at other ports from now on,” a source familiar with the matter told The Asahi Shimbun. [Asahi Shimbun]
Two press reports dated the same day contradict each other about whether China is enforcing the ban on importing North Korean coal. Reuters says that the Chinese government hasn’t told Chinese coal buyers to stop importing North Korean coal; the Joongang Ilbo says it has. To further complicate matters, the U.N. sanctions have a “livelihood” loophole, while U.S. sanctions have much narrower humanitarian exceptions. A reasonable, middle-ground approach that’s completely consistent with both authorities would be to interpret “livelihood” to require payment in food, humanitarian supplies, or donations to the World Food Program or other humanitarian aid programs. It should prohibit payment in gold, dollars, or other convertible currencies.
U.N. sanctions ban mineral imports from North Korea and require member states to seize property of designated entities, including Ocean Maritime Management and the Reconnaissance General Bureau, which also reportedly operates a small fleet of ships . They do not impose a blanket embargo on North Korean trade. U.S. sanctions do not impose a trade embargo, either, but do authorize U.S. Customs to step up inspections of cargo coming from ports that fail to inspect cargo coming from or going to North Korea. This amounts to a secondary sanction.
On the financial front, the Chosun Ilbo quotes “sources” as claiming that the Dandong branch of the U.N.- and U.S.-designated Korea Kwangson Banking Corporation has closed. In 2013, it simply went underground for a while, but this time, it actually appears to have closed. The Chosun also reports that “[a] growing number of North Korean restaurants in northeastern China are closing down.”
Meanwhile, the U.S. and South Korea are meeting this week to “review and discuss ways to maximize pressure on North Korea by effectively applying the three axes of the Security Council resolution, unilateral sanctions imposed by South Korea and the U.S., and pressure by the international community.” In Seoul, Sung Kim, the U.S. representative to the six-party talks, says our government intends to enforce U.N. sanctions with “vigor and energy,” but undercuts that conclusion with this:
Asked if Russian and Chinese companies employing North Korean workers would be subject to the sanctions, Fried said the new executive order provides “very broad authorities” to deal with the issue. “It doesn’t mandate anything in particular, but the authorities are there if needed,” he told reporters, standing next to Sung Kim. [Yonhap]
Ambassador Kim is mistaken. The executive order implements a statute whose sanctions are mandatory. Recently, China has expressed interest in three-way consultations with the U.S. and South Korea about enforcement of the sanctions. Expect those consultations to be tense. The left-leaning Hankyoreh Sinmun reports that the South Korean and Chinese foreign ministers “clashed” over the enforcement of sanctions against the North in a recent phone call. Securing our interests will require firmness and resolve, but it would still be preferable for all involved if China implements the sanctions “voluntarily.”
You all remember Sam Pa, right? He’s the Chinese ex-spy with a history of dubious business dealings in Africa, for which he was eventually sanctioned by the Treasury Department. Pa’s 88 Queensway group also had dealings with Korea Daesong General Trading Corporation, a financial arm of North Korea’s Bureau 39, for which he was not designated. Today, this happened:
HSBC has frozen more than $87m in accounts linked to a Chinese tycoon behind several multibillion-dollar deals in Africa, while it investigates allegations of “serious financial crimes”.
Accounts controlled by Sam Pa and his business associate Veronica Fung were blocked by the bank a year ago, but its internal investigation is still going, court documents have revealed. Last week, a Hong Kong judge declined Mr Pa and Ms Fung’s request that he order HSBC to release the funds, which are “extremely substantial”, according to the ruling. One account alone contains $87m, the documents show.Mr Pa has built a network of interests in oil, minerals and infrastructure by cultivating regimes regarded as among the world’s most repressive and corrupt, from Angola to North Korea — often blazing a trail for Chinese state-owned groups. [Financial Times]
Last November, I put up a post cataloging China’s long and deep history of breaking U.N. sanctions against North Korea. The post, which relied heavily on reports of the U.N. Panel of Experts monitoring North Korea sanctions, attracted a great deal of attention, including from Senate staff as they considered the North Korea Sanctions and Policy Enhancement Act. The new POE report, released yesterday, is almost 300 pages long (including exhibits) and has more than enough material to make a rich sequel to that post. It has almost as much evidence of China’s willful blindness or outright duplicity as the rest of the reports combined.
Yesterday, I singled out one of the most brazen examples, in which the Bank of China told a North Korea-linked customer to hide those links when it processed $40 million in wire transfers through the U.S. financial system (the Chinese government delayed the release of the report because of its objection to that finding).
And there is so much more. For example, multiple U.N.-designated North Korean arms smugglers and proliferators are still operating openly in China. Leader Trading Company and Korea Taesong Trading operate out of Dalian and possibly Dandong (paras. 169-170), while Korea Tangun Trading Corporation still operates out of Shenzhen, under the alias Ryungseng Trading Corporation (para. 174).
They’re keeping busy, too. A cargo of missile-related parts seized on its way to Syria passed through Dalian, despite being linked to Leader Trading Company and Korea Mining Development Trading Corporation, or KOMID (also designated). The North Koreans “used two companies, Dalian Union International Trading Co., Ltd. and Dandong Yongxinghe Trade Co., Ltd. … to procure the items” from China, Hong Kong, Taiwan, and other locations.
Few of the suppliers asked who the end users were, but in the one case when one did, the Chinese middlemen didn’t answer (paras. 62-70). In the annexes, you can see multiple documents associated with Leader Trading and KOMID’s shipments to Syria, listing addresses in China.
In 2013, an unnamed member state intercepted a shipment of SCUD missile parts on their way from Beijing to a trading company in Egypt. (Sharp-eyed readers may wonder if this is the same Egyptian trading company the Treasury Department designated here, under Executive Order 13687 last year. It wasn’t, which suggests that Egypt’s links to North Korea aren’t just a one-off, but an issue that deserves more diplomatic attention than it’s getting.) The North Koreans flew the parts to Beijing aboard Air Koryo. The shipper, Ryongsong Trading Co. Ltd., used the same address as North Korea’s embassy in Beijing (paras. 71-75).
The North Koreans obtained UAVs with military applications from suppliers in China, or from Chinese intermediaries (paras. 78-91). There are many documents on this in the exhibits, mostly from Chinese suppliers.
Remember those special “logging” vehicles the North Koreans bought from Hubei Sanjiang Space Wanshan Special Vehicle Company — quite possibly the world’s only manufacturer of extraterrestrial logging equipment — until they showed up in a parade hauling missiles through downtown Pyongyang? Senator Cruz gave that one an honorable mention in an angry letter he sent to President Obama this year, calling for secondary sanctions on China.
Well, guess what just happened again? This time, Chinese trucks are being used to haul 300-millimeter rockets, which are a serious threat to Seoul, and to U.S. military installations in South Korea (paras. 96-100). China’s defense is that it told the North Koreans to use these $50,000-a-pop trucks strictly for commercial purposes only. (I’m guessing the trucks North Korea actually uses for strictly commercial purposes have somewhat lower Kelly Blue Book values than this.) Except when North Korea lies about end-uses to normal, law-abiding countries, said countries tend to stop selling them those things. Now, UNSCR 2270 prohibits the sale of dual-use trucks.
A Chinese middleman, George Ma, procured at least four armored Mercedez S-Class sedans for His Corpulency. The cars were purchased from Germany and customized in the United States (I’m guessing the services included putting in extra-strong rear springs). There’s no evidence in the reports to suggest that the German supplier or the American customizer knew where the cars were headed, but the U.S. shop appears not to have done its due diligence on the Chinese purchaser (paras. 118-121), which revealed its North Korean connections on its website. Depending on the timing and other factors, this could be a violation of Executive Order 13551.
I wonder how many kids you could feed for what one of those cars cost. Remember, it’s the sanctions that are starving North Koreans. Just keep repeating that until you believe it.
Mirae Shipping, a subsidiary of U.N.-designated Ocean Maritime Management, helped broker the 2013 Cuba arms deal from its office in Shenzhen. From there, things get so unbelievably weird that I’ll just put it out there and let you read it for yourself:
143. Around the time of the designation, in July 2014, Mirae operated several foreign-flagged vessels as charter parties. However, it failed to make its payments, given that it was experiencing financial difficulties. The vessels’ owner companies and mortgagees (“the claimants”) requested maritime courts in Wuhan and Qingdao, China, in August and September 2014, respectively, to arrest and detain several vessels, including the Great Hope and the Benevolence 2. 71
144. In response, the Harbour Superintendence Authority of the Democratic People’s Republic of Korea arrested and detained the claimants’ vessels in the country’s ports on the pretext of “tax evasion” (see annex 87). Another vessel owned by the claimants was already being detained by the country owing to a prior dispute between the charterer and the Korean Ocean Shipping Agency.
145. Subsequently, the Ministry of Land and Marine Transport intervened on behalf of OMM. The Ministry/OMM then led the negotiation by framing the disputes as a single package deal. The negotiations resulted in a set of complex arrangements aimed at achieving the simultaneous releases of multiple vessels among the various parties. The Panel notes the clear influence exerted by the Ministry/OMM over the Harbour Superintendence Authority and the country’s other shipping companies.
146. The negotiations were settled in December 2014 with the release by the Democratic People’s Republic of Korea of the claimants’ vessels in exchange for the claimants’ release from China of the Mirae-operated vessels (see annex 87).72 The settlement’s terms significantly favoured OMM. Mirae was released from outstanding debts. The claimants were forced by the Ministry/OMM to abandon another vessel, which was then transferred to Korea Tong Hung Shipping and Trading (the vessel’s operator) at no cost.
That OMM and the Ministry of Land and Marine Transport, in particular the Ministry’s senior official, Mr. Kim Yu Il, coerced the claimants to transfer to the Democratic People’s Republic of Korea at least two vessels (Benevolence 2 and Great Hope) operated by Mirae (acting on behalf of OMM), which constitutes evasion of the sanctions imposed under paragraph 8 (d) of resolution 1718 (2006) and paragraphs 8 and 11 of resolution 2094 (2013). The Ministry acted on behalf of OMM and assisted in its evasion of sanctions;74
China wasn’t alone in being implicated in the report:
- Para. 30-33. North Korea’s KN-08 ballistic missile looks like a clone of the Soviet 9M79. Unfortunately, the report doesn’t say how the North Koreans got the plans for the missiles, or whether they got them after the U.N. first imposed its sanctions in 2006. The KN-11 submarine-launched missile also looks a lot like a Soviet SS-N-6/R-27, because the North Koreans obtained one from the Soviets in the 1990s and reverse-engineered it.
- Para. 61. Burma continues to purchase suspicious nuclear-related items.
- Para. 94. Eritrea appears to be doing some kind of arms deal with the North Koreans.
- Paras. 101-106. Namibia got busted hiring KOMID to build it a weapons factory. The key North Korean personnel are diplomats posted in South Africa, who shuttle back and forth between the two countries.
- In multiple parts of the report, it’s clear that Syria continues to be a major North Korean arms client.
- Paras. 112-117. Uganda and Viet Nam have both hired North Korean military or police advisors, something that the Panel of Experts thinks was already a violation of past resolutions (me, too), but which is now a definite no-no under UNSCR 2270.
- Para. 123-129. Israel sold North Korea $346,726 in gold, India sold them $1,913,677 in precious metals and stones, Thailand sold them$262,908 worth of cars, and Brazil sold them some unknown amount of jewelry. Once again, with feeling: sanctions starve babies.
- Para. 182-186. A Taiwanese company, Royal Team Corporation, sold pressure sensors to North Korea for its missile program, and not for the first time. RTC has been supplying the North Koreans continuously since 2004, often hand-carrying the merch to Pyongyang through (you guessed it) Beijing and Macau. In 2008, a Taiwanese court even convicted RTC for supplying sensitive technology to North Korea. RTC needs to be sanctioned to extinction. Then, its officials should be locked away Supermax, its factory razed, and the grounds sown with salt.
- Annex 1. The POE is investigating possible attempted North Korean arms dealing involving the UAE, Malaysia, and Ethiopia.
There is also more evidence of North Korea’s abuse of engagement programs to obtain sensitive technology, including from The Centre for Space Science and Technology Education in Asia and the Pacific (para. 46) and the International Astronautical Federation (paras. 55-58 and this post).
Overall, the Panel concludes that North Korea is as determined as ever to acquire nuclear weapons and ballistic missiles, and that sanctions are failing due to member states’ failure to enforce them.
Given the stated intentions of the Democratic People’s Republic of Korea and its continued efforts to enhance the scope of its nuclear and missile programmes and to seek international acceptance and legitimacy for these prohibited programmes, there are serious questions about the efficacy of the current United Nations sanctions regime.
The Panel’s investigations have shown that the Democratic People’s Republic of Korea has been effective in evading sanctions and continues to use the international financial system, airlines and container shipping routes to trade in prohibited items. Designated entities conceal their illicit activities by embedding agents in foreign companies. They use diplomatic personnel, long-standing trade partners and relationships with a small number of trusted foreign nationals. Its designation in July 2014 notwithstanding, Ocean Maritime Management Company, Limited continues to operate through foreign-flagged vessels, name and company reregistrations and the rental of crews to foreign ships. This enables it to obtain access to foreign ports in the region and beyond, as well as maritime insurance, a prerequisite for operation. [….]
All these activities are facilitated by the low level of implementation of Security Council resolutions by Member States. The Panel has consistently highlighted the problems of non-implementation of the resolutions, which allows prohibited activity to continue. The reasons are diverse, but include lack of political will, inadequate enabling legislation, lack of understanding of the resolutions and low prioritization.
The introduction calls out Africa and the Middle East — and certainly, there is evidence of violations there. Indeed, many other states have failed to turn in their compliance reports, or have provided reports of low quality, including non-permanent members of the Security Council. But for the Panel to fail to mention the one state that’s involved in facilitating just about every last one of these violations, either through its banks, intermediaries, immigration authorities, or ports, is telling, especially given the delay in publishing the report. I can only assume that the Chinese representative pressured the Panel to water down this language.
Despite the otherwise excellent investigative work of the Panel, its report shows us that the moral suasion of U.N. alone isn’t enough to make sanctions work. That will require a credible threat of secondary sanctions to get Chinese banks, ports, and businesses to comply, and that will probably require making some examples. For conduct that happens after February 12, 2016, there will be some new rules, and there should also be some very hard consequences.
Today, the U.N. Panel of Experts monitoring (non-)compliance with its North Korea sanctions released its latest report, and it’s a doozy. Including exhibits, it’s almost 300 pages long, and the substance should be material for several posts. Our first installment comes from the December 2015 conviction of Chinpo Shipping over the 2013 Cuba arms shipment. Remember last July, when I asked, “What about the Bank of China?” Well, we have our answer, and from the look of it, the Bank of China had better lawyer up:
190. In a rare proliferation financing prosecution, the Singapore District Court charged Chinpo Shipping Company (Private) and its Director, Tan Cheng Hoe, with providing financial services or transferring financial assets or resources to OMM (see paras. 137-141). On 14 December 2015, the Court found that Mr. Tan had transferred $72,016.76 to a foreign shipping agent for the shipment aboard the Chong Chon Gang in July 2013 (intercepted by Panama).
191. The judge, Jasvender Kaur, stated that Chinpo “had conducted no due diligence whatsoever” before transferring the funds on 8 July 2013. She found that Chinpo had applied for 605 outward remittances totalling $40 million between 2009 and 2013 on behalf of nationals of the Democratic People’s Republic of Korea. The accused described himself as a “payment agent” for OMM.
192. Court documents provide ample evidence of both the implementation and the evasion of targeted financial measures. The documents indicate that, although Chinpo at one time indicated vessel names in its outgoing remittance forms, it ceased that practice in the second half of 2010. According to Mr. Tan’s statement, “more questions were asked by the bank in the United States when the vessel name was included, and some processing banks will reject the transaction after asking for more information”. He then stated that the Singapore branch of Bank of China, from which Chinpo had undertaken the transaction of $72,016.76, “had advised [Chinpo] to leave out the vessel name in transactions, that bank was aware that the remittances were being conducted on the behest of Democratic People’s Republic of Korea entities”.95 Apparently, as a result of that advice, Mr. Tan began to remove vessel names from the payment details. Chinpo similarly advised entities of the Democratic People’s Republic of Korea on multiple occasions not to include such names in inward remittances, further assisting sanctions evasion. An employee stated that she had been instructed to include that reminder in outgoing e-mails. Another employee elaborated that that instruction had been included “partly because Chinpo wanted to get the money and the funds would be blocked by the US if the US knew that the transfers were made in relation to a Democratic People’s Republic of Korea vessel”.96 The Panel notes that such information-stripping is consistent with the evasion practices used by other OMM entities and individuals.
Got that? The Bank of China, in violation of Executive Order 13551, deliberately advised a customer to strip data out of series of transactions with a North Korean puppet, who was doing an illegal arms deal through the U.S. financial system. Whether the BoC knew the ultimate purpose of the transactions is no defense. Its legal obligations were to perform due diligence and know its customers, especially when that customer was linked to North Korea.
Stripping the North Korean affiliations out of a wire transfer gives this story the whiff of straight-up money laundering, not unlike the conduct that cost Barclays Bank a $2.5M hit for moving $3.3M for Zimbabwe, or caused Credit Agricole to eat a $300M fine for violating Sudan, Cuba, and Iran sanctions. Et cetera, et cetera.
Historically, $40 million hasn’t been a trivial amount of money to the Treasury Department’s Office of Foreign Assets Control, especially when the data-stripping is willful. It is, to use the technical legal term, a “B.F.D.” This may be the point when we figure out whether the Obama Administration is finally serious about enforcing the law against North Korea or not.
~ ~ ~
Update: Yup, called it:
In the Bank of China’s case, Beijing’s diplomats have privately raised concerns about the panel’s decision to name the Chinese bank. They have argued that the only evidence comes from a Singaporean court and that the experts should have relied more on the word of Chinese authorities. [Foreign Policy, Colum Lynch]
Read the whole thing.
After the President signed H.R. 757 into law, but before the U.N. Security Council approved resolution 2270, sanctions skeptics predicted that the new U.S. law would complicate diplomatic efforts to get China to enforce U.N. sanctions. Events thus far have refuted that view. After the President signed the new law, China, which had inflexibly opposed new U.N. sanctions for weeks, reversed course and voted for the strongest North Korea sanctions resolution so far. Even before China’s official retreat, China’s banks had already begun to freeze North Korean accounts. What explains this shift? The editors of The Washington Post offer this guess:
SECRETARY OF State John F. Kerry emerged frustrated from a meeting with China’s foreign minister in late January after proposing new U.N. sanctions on North Korea. Beijing balked, saying it was not willing to take steps that risked destabilizing the regime of Kim Jong Un even after the regime conducted what it claimed was a hydrogen bomb test. On Wednesday, China seemingly reversed course, joining a unanimous U.N. Security Council in imposing the toughest sanctions applied to North Korea in more than a decade.
What prompted this welcome change? Mr. Kerry and his State Department team spent weeks negotiating with their Chinese counterparts — and North Korea’s launch of a long-range rocket last month over Beijing’s objections may have spurred a U.S.-Chinese convergence. Our guess, however, is that China’s switch had a lot to do with steps taken by South Korea and Congress.
In Seoul, the government of President Park Geun-hye, which Beijing has been courting, decided to move forward on plans for deploying a U.S. missile defense system that China regards as a threat. Meanwhile, Congress adopted new U.S. sanctions that could penalize Chinese companies and banks that do business with North Korea. In other words, the Chinese leadership finally was forced to consider tangible consequences for its coddling of the reckless and increasingly dangerous North Korean ruler.
The result is sanctions that, on paper, could have the most damaging impact in Pyongyang since the George W. Bush administration succeeded in locating and freezing the regime’s foreign financial assets in 2005. The new resolution orders the inspection of all cargoes entering and leaving North Korea, bans its export of some minerals and import of arms, and mandates a shutdown of its international banking activities. It also cuts off supplies of most aviation fuels and expands the list of luxury items the elite cannot receive. [Editorial, Washington Post]
In other words, and as I argued last month, the new U.S. sanctions law actually gave the Obama Administration more leverage to succeed in its diplomacy with China. As I argued last week, U.S. and U.N. sanctions are not contradictory, but complementary and mutually reinforcing. Indeed, the timing of the Chinese banks’ actions suggests they may be more responsive to Washington than they are to Beijing. I can’t overstate my doubts that China has had a willing conversion, and has decided to enforce the spirit and letter of U.N. sanctions. But the evidence increasingly shows that whether or not China’s government can be persuaded to enforce sanctions, its banks and ports can be.
In what could be the latest financial hit to Pyongyang, Yonhap reports that an important Chinese customer has stopped buying coal from North Korea:
A Chinese company in the northeastern border city of Dandong has been ordered by China’s commerce ministry to halt its coal trade with North Korea starting next month, according to a state-run Chinese newspaper Wednesday.
Citing an unnamed Chinese businessman who operates a coal business with North Korea, the state-run Global Times newspaper said the order appeared to be linked to a measure against North Korea’s nuclear test last month.
“A relevant department of the Commerce Ministry and the General Administration of Customs issued the order and, as far as I understand, the Liaoning provincial government received the information,” the newspaper quoted the Chinese businessman as saying.
The report, however, did not identify both the businessman and the Chinese company. [Yonhap]
If the report is true — I emphasize, if — this could be a very big deal. By most accounts, coal is one of North Korea’s most important exports, if not the most important. Combined with the reported freezing of North Korean bank accounts, the loss of Kaesong revenue, and (of less significance) the drop-off in the restaurant business, multiple factions within the North Korean government may have just lost their main sources of revenue. The loss of that revenue could cause some factions to turn on each other for cash. It would also be a blow to Kim Jong-un, who needs cash to consolidate his power, and who faces a major party conference in May:
North Korea’s Kim Jong-un regime may face resistance from its military should the armed forces grow disgruntled at its bungled economic policy under the communist party-centric politics, a government-commissioned report showed Tuesday. [….]
[T]he military could call for reshaping the political order in its own favor if Kim fails to shore up the country’s debilitated economy and ensure sustainable military expenditures, the report pointed out.
“The stability of the Kim regime and party-military relations hinges on the country’s economic growth and continued military spending,” the report said.
“In the event of an economic failure, a shift in the Kim regime could emerge as the military — rather than regular North Koreans — would first demand a shift in party-military relations or call for a military-centric order.” [Yonhap]
The fact that China is taking credit for this arouses my suspicions, as did the reports that China ordered its banks to freeze North Korean bank accounts. Such an action would be welcome, of course, but seems questionable in light of China’s public and private opposition to financial pressure on North Korea. Further fueling those suspicions is the possibility of an alternative explanation, in section 104(a)(8) of the new sanctions law.
(a) Mandatory Designations.—Except as provided in section 208, the President shall designate under this subsection any person that the President determines—
(8) knowingly, directly or indirectly, sells, supplies, or transfers to or from the Government of North Korea or any person acting for or on behalf of that Government, a significant amount of precious metal, graphite, raw or semi-finished metals or aluminum, steel, coal, or software, for use by or in industrial processes directly related to weapons of mass destruction and delivery systems for such weapons, other proliferation activities, the Korean Workers’ Party, armed forces, internal security, or intelligence activities, or the operation and maintenance of political prison camps or forced labor camps, including outside of North Korea;
I take no credit for this paragraph, by the way. The first suggestion of this idea I saw came from none other than Senator Marco Rubio. And here are the consequences of that designation:
(c) Asset Blocking.—The President shall exercise all of the powers granted to the President under the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) to the extent necessary to block and prohibit all transactions in property and interests in property of a designated person, the Government of North Korea, or the Workers’ Party of Korea, if such property and interests in property are in the United States, come within the United States, or are or come within the possession or control of a United States person.
We know for a fact that North Korea mines coal and other minerals in its prison camps — just look at the satellite imagery. It mined coal in Camp 22 and Camp 18, still mines it in Camp 14, and mines copper in Camp 12. It mines gold in Camp 15, and probably other camps. That means that Chinese mineral buyers have real exposure here. As with other recent reports, it bears close watching.
Good morning, Vice-Minister Chen. I hope you enjoyed sampling our great country’s authentic cuisine at lunch today. If not, I keep a bottle of Pepto in my desk. As you know, the new Trump Administration is all about cutting government spending, although we know how to invest, too. The neon signage and gold-leaf bathroom fixtures have been a yuuge morale boost here at Foggy Bottom. And yes, those are real diamonds on my pinkie ring. That was my annual bonus for giving the State Department the class it sorely needed. They love all the changes around here. They tell me so every time I ask them.
The new President, my boss and former client, certainly has made some unconventional personnel selections, but hey, who am I to complain? This is a nice change of pace from schmoozing those goombahs on the Gaming Commission, staring down those sanitation union goons, and haggling settlement agreements with slip-and-fall sharks.
These guys who work for me now may lack in style, but we’ve come to understand each other a little better. A few of them are pretty smart, and for a guy who graduated from the night program at Thomas Cooley, I think I surprised them with what a quick study I am. They’ve schooled me on a few things, and I think I can translate our differences into plain English, which is the only kind I speak. I want to get down to brass tacks on North Korea and close a huge deal. It’s going to be a win-win for you, for me, and for Korea. You’re going to love it, I promise. I won’t even ask you to pay for it.
Let’s start with the elephant in the room. Our economy isn’t great, but at least it’s recovering. Your economy is terrible, and it’s going to stay terrible at least as long as Japan’s did. Your stock market crashed last year because for years, you ignored some deep structural flaws in your economy. For all those years, you made policy decisions that seemed “safe.” In your workplace, it isn’t such a good idea to point out that the safe decisions the boss supports are covering up big problems. It’s so much safer to just go along and keep your head down. But unsustainable trends eventually end. And when they do, the longer they’ve gone on, the more likely they are to end very badly. Eventually, the big shots will come looking for those who allowed the crisis to build. And I don’t have to tell you what a bitch accountability can be in China.
You could say all of this about your North Korea policy, too. It’s a crisis we’ve both spackled over for years while the termites ate away at the beams and the rats ate the insulation off the wires. Their system is unsustainable. It might even be unstable. The little guys know the system is screwing them, just like the little guys in your country knew they were getting screwed in the 1930s. They see the rich getting richer and they hate it, but they have to hold their hate inside. The smart ones keep their heads down and scrape together whatever dough they can on the side, on the down-low. At least that gets them off the state’s dole, which they know they can’t count on anymore. They’re also getting wise about the outside world, and how good we have things compared to them. But they can’t protest it, they can’t vote out the people who are keeping them down, and it’s almost impossible for them to escape, so their anger just builds.
A few years ago, a lot of people starved there. I used to ask myself why they didn’t overthrow that government, but then, the last thing a starving man thinks about is wasting energy he doesn’t have to fight the system. Plus, over there, everyone rats everyone else out.
Mao got a lot of things wrong, but one thing he got right is that hunger doesn’t bring down a system, envy does. What makes people overthrow governments is figuring out that a few people are getting rich and keeping them down. A lot of us think the same thing here, as a matter of fact, but every two years, we get an engraved invitation to line up and overthrow our government at the polls. Is this a great country or what? Maybe that’s not your thing, but it’s a lot cleaner without the guns and pitchforks.
We know there are limits to how much pressure any closed container can hold. Eventually, the container explodes. Ever notice how these things tend to start with the little stuff, and aren’t really about politics when they first start? But once they do start, they spread fast. Then, things tend to get political. Of course, people have been saying this about North Korea for a long time. It hasn’t collapsed, but don’t tell me it hasn’t decayed.
We’ve had it with this punk, the South Koreans have had it with this punk, and we’re ready to give him and his whole system a good shove. I gotta hand it to him for getting this far. He cracked a lotta heads. But being a tough punk doesn’t make you smart. His top guys are all scared of him, but that doesn’t mean they respect him, and they sure as hell don’t trust him. Deep down, you don’t think he’s so smart, and neither do we. His caporegimes and consigliori aren’t going to simply wait their turn to get whacked, along with their families. Eventually, they’ll have no choice but to whack him first. Wouldn’t you like to get ahead of that?
Allow me to be blunt about something else — we’ve had it with you, too. We know your game. Every time this fat calzone does something that pisses us off, you rope-a-dope us by voting for some U.N. resolution, and then turn right around and break it to prop this guy up. Even John Kerry, who has to be the biggest freier of all those Harvard feinshmeckers, finally got wise to you. Knowing when you’re being played isn’t the kind of smarts they teach at Harvard, but I’ve seen a hundred guys try it with the Gaming Commission. No one in this town is going to be strung along by you anymore — not Congress, and not me. The more nukes the North Koreans get, the more likely they are to sell them. We’re not going to let this get to the point where they can drive nukes to Atlantic City in a submarine or a shipping container.
So what can we do about it? For one thing, payback. You know how much you hated it when we sold Taiwan all those PAC-3 Patriot missiles and Aegis cruisers. I wanted to sell them gas centrifuges and krytrons, but the pinstripes here almost passed out and begged me not to. We tabled that one, at least for the time being, but I gotta tell you, just between us, the idea of Taiwan, Japan, and South Korea having nukes doesn’t exactly keep me awake at night.
OK, now, you really should take me up on that Pepto. No? You sure? OK, if you say so.
Maybe this will relax you a little — we’re not going to invade North Korea. All they have up there is coal and meth, and if we wanted more of those things, we’d invade Wyoming! Besides, why play to an adversary’s strength when they have so many weaknesses we can exploit far more cheaply? Even the geniuses who let North Korean go nuclear in the first place can see what those weaknesses are — money and legitimacy. My guys here think they can use those weaknesses to put a lot of pressure on Kim Jong-un, and maybe even overthrow him without firing a shot.
You’re already seeing that between the South Koreans and our banking wizards, we can do some damage to those guys. Your bankers are his bag men. They hold the money that buys his swag, pays his army, and pays the goons that keep everyone in line. They’ve started freezing his accounts because they know we can do some major damage to them. This would be bad for us both, but it would be worse for you — much worse. Your banks aren’t looking so solid these days. Even the collapse of a small bank in China is going to mean a lot of angry depositors. Things could get ugly for you. There could be a ripple effect, even a panic.
We can stir things up inside North Korea, too. For a long time, that government has invested a lot of scratch in keeping its people ignorant and keeping the news out. You can argue about what those people would do with the truth, but the government over there is obviously pretty scared about that prospect. Things there aren’t as calm and content as I used to think they were. The North Koreans aren’t robots. Just imagine how things would change if we found ways to give them cell phones, smartphones, and the internet. When that happens, well, the possibilities are endless.
You can’t want this to get chaotic. That’s a dead end for you. Sure, violence might allow Kim Jong-un to survive in the short term, but there are a lot of guns over there, and parts of the army are corrupt and demoralized. In the long run, if he takes the violent path, you’ll have another Syria right on your border. The more brutal Kim Jong-un is, the more outrage there will be, and the more of it will stick to you. We’ll keep bringing it to the U.N. until you agree to help us disarm him peacefully.
Now, look — just take the Pepto. OK, feel better yet? Good. This is the part you’re going to love. We can avoid all of that unpleasantness. Let’s close a deal instead.
You want this guy Kim Jong-un out, but you’re afraid things could get out of hand. But the surest way for things to get out of hand is to just wait for them to play out. We want him out, too. So do the South Koreans and the Japanese. If we join forces to cut off the money and the swag, we both know he can’t last. All you have to do is stop buying his coal and minerals, and follow the U.N. sanctions for a change. Inspect his cargo and make sure nothing illegal gets through. Freeze the bank accounts you know are dirty. We can share information about the iffy ones. Maybe Kim Jong-un will take the hint and deal. Or maybe, we’ll just arrange some friendly meetings with some of those North Korean generals you’ve been schmoozing, who want to live to see their great-grandchildren. Surely there are some reasonable men among them we can do business with.
Play ball with us, and there’s something in it for you, too. We can keep Japan and Korea from going nuclear. And if you don’t want the U.S. Air Force building new runways and setting up THAADs all over North Korea, I’m sure we can work something out.
Not even a week after President Obama signed the North Korea Sanctions and Policy Enhancement Act into law (full disclosure), a South Korean newspaper is reporting that a number of Chinese banks, including China’s largest bank (and the world’s largest, in terms of assets) have frozen the accounts of their North Korean customers.
It has been confirmed that some Chinese banks in northeastern China, including the Dandong, Liaoning Province branch of Industrial and Commercial Bank of China (ICBC), the country’s largest bank, have suspended cash deposit and transfer services for accounts owned by North Koreans since December last year. The effectuation of new and tougher U.S. sanctions on North Korea on Thursday will likely affect Chinese businesses and financial institutions ever more. [Donga Ilbo]
Although the Treasury Department’s direct regulatory authority is limited to dollar-denominated transactions, the breadth of the secondary sanctions language in section 104(b) of the new law is sweeping enough to have shut down transactions in other currencies, including the Renminbi.
In telephone conversations with the Dong-A Ilbo on Thursday and Friday last week, an employee of ICBC’s Dandong branch said that the measures started in late December, adding that the bank had suspended all deposits and transfers of foreign currencies, including the Chinese yuan, in and out of those accounts. Dandong is located in a border area with North Korea. More than 70 percent of North Korea-China trade takes place in the city.
The banks’ actions have already begun to cause pain for the North Korean government.
A source quoted a Chinese entrepreneur in Shenyang, Liaoning Province as saying that a Chinese bank he was doing business with recently informed him that it would not take deposits in or make cash transfers from North Korean accounts. The businessman, who invested in several mines in North Korea, had paid for minerals from the mines imported to China through the bank. His North Korean partner is urging him to send money quickly, according to the source. [….]
Chinese companies operating plants in the border area and employing North Korean workers are restless, as the U.S. and South Korea have cut off Pyongyang’s financial sources for the nuclear and missile development by the U.S. sanctions law and the shutdown of the Kaesong Industrial Complex.
“If we trade minerals with North Korea and make transactions of the United Nations-designated contraband goods, our business will be hit hard by the U.S. sanctions law,” another Chinese businessman said. “Many entrepreneurs are worried because their major importers such as the U.S., Europe and South Korea will likely block imports of Chinese products manufactured by North Korean employees.”
The claim that the banks began freezing accounts in December introduces some doubt that the new U.S. sanctions law is the cause of the banks’ actions. In December, the bill was crawling through the Congress at a snail’s pace. True, Senator Gardner had introduced his bill in the Senate in October and had pushed it hard, but it wasn’t until the January 6th nuclear test that it hit the fast track. One Chinese source, apparently speculating, suggested that the account freezes may have been related to the Moranbang Band fiasco.
“After the Chinese government started some measures to put pressure on Pyongyang, it could have further expanded and strengthened the sanctions following a series of provocations such as the nuclear test and the missile launch (February 7),” the expert said. It is possible that Beijing, which participated in some of the international sanctions on the North following the third nuclear test in February 2013, has broadened the scope its sanctions on the North.
It’s also possible that the banks really didn’t start “the measure” in December at all. There were no reports of account freezes in either December or January, and plenty of reporters — and bloggers — keep a close eye on these things. This could be disinformation by Beijing to save face. China has also taken a beating in the U.S. and South Korean press for its failure to put pressure on Kim Jong-un. Back-dating the actions to December could be China’s way of taking credit for pressure it had no real hand in exerting. It’s unlikely that these banks acted in December and that we’re only hearing these reports two months later, and it’s too coincidental that we’re only hearing them after President Obama signed the new law.
So does this mean the law is already working? Not yet, but if the law is working as intended, this is the kind of report I’d expect to see in these first weeks. It means that the bigger Chinese banks, which have more exposure to the financial system, have gotten the message. The big Chinese banks also shunned North Korean business in 2013, under pressure from Treasury, but that pressure wasn’t sustained, and so it wasn’t decisive.
To make the law work as intended, Treasury will first have to publish new regulations in Title 31 of the Code of Federal Regulations, so that banks everywhere — but especially in Europe — must apply for licenses for dollar transactions with North Korea. It must also demonstrate its seriousness about enforcement by going after smaller banks like the Bank of Dandong and Orabank, non-bank institutions like 88 Queensway, and to the extent we can identify them, North Korean money launderers in Guangdong and Macau.
One wonders how many companies like Orascom Telecom will now face plunging share values because of their exposure to North Korea. It’s further evidence that sanctions risks associated with North Korean investments are “material,” and that the Securities and Exchange Commission should require those investments to be disclosed in public filings.
South Korea said Monday that North Korea is believed to be relying on cash delivery or borrowed-name bank accounts in a bid to avert China’s possible financial sanctions.
A local media company reported that Chinese banks in areas bordering North Korea have begun to freeze accounts held by North Koreans apparently in response to the North’s latest nuclear and missile test.
The Unification Ministry said that it is checking the validity of the report.
“But the North is thought to directly deliver cash or use borrowed-name bank accounts when it comes to its external trade (with China),” said Jeong Joon-hee, a ministry spokesman at the regular press briefing. [Yonhap]
Inevitably, there will be small leaks like this, but you can’t run a country of 23 million on gym bags filled with cash. So while the new law may already be having an impact — and in light of the closure of Kaesong, that impact may be a substantial one — I’m also worried that Treasury still hasn’t issued any implementing guidance about exempting food and medicine transactions. They need to publish that immediately.
Yonhap reports that the U.S. and China have made progress toward an agreement on a draft U.N. Security Council resolution. Although we’ve seen few hints about exactly what sanctions China is willing to sign up for — much less enforce — China is paying lip service to the notion that North Korea must pay a “necessary price” for its behavior. Has Xi Jinping relented in his unprecedented stubbornness, or was it always China’s plan to relent after stalling us, in the hope that with time, the pressure on it would subside? But the pressure has built, not subsided, and the Washington Post‘s Simon Denyer sees signs that this pressure, including the deployment of the THAAD missile defense system, may be causing China to re-think its “paternal benevolence” toward North Korea.
New sanctions legislation may have also played a role, and the State Department is already using the threat of secondary sanctions in its talks with China. This threat has deep political backing in Washington. Everyone with a megaphone is in a foul mood toward China — Congress, presidential candidates, Korea scholars, and the editorial pages. In recent weeks, The Washington Post and The New York Times have both called for the President to use new legislation to apply secondary sanctions to North Korea’s Chinese enablers. Here’s hoping we’ll keep that pressure on until China acts responsibly.
This new leverage will be helpful if it gets us to a new U.N. resolution that includes (and enforces!) useful measures, such as —
- Above all: requiring member states to report North Korean property, accounts, and transactions to the U.N. Panel of Experts;
- Shipping sanctions prohibiting the provision of insurance, bunkering, and reflagging services to North Korean ships, thus forcing North Korea to rely on foreign ships for its maritime trade;
- Designating Air Koryo, thus closing off another avenue for North Korean arms and luxury goods smuggling;
- Expanding designations to include more North Korean banks, government agencies, and senior officials involved in violating the resolutions; and
- Prohibiting the use of North Korean forced labor.
Would accountability for North Korea’s crimes against humanity be too much to hope for? Probably, but we should keep demanding it — publicly — until China relents, even if it takes years.
Other ideas in circulation cause me more concern that policymakers could lose the plot and take sanctions too far, or in the wrong direction. For example, the U.N. should not (and almost certainly, would not) indiscriminately cut off all trade between China and North Korea. That would be counterproductive, ineffective, and inhumane. Sanctions are meant to retard and punish proliferation and show Pyongyang that defiance is a losing proposition. They can be targeted to defund the state’s military and security forces, force cadres to turn to corruption and smuggling for a living, and by default, shift North Korea’s internal balance of power from the men with guns to those without. If properly targeted and administered, they might even force reforms.
Freezing the regime’s trading companies, hard currency businesses, and offshore slush funds serves this goal; hunger in the provinces does not. On the contrary, circumstantial evidence has long suggested that the regime uses food as a weapon to control its subjects. After all, by any reasonable reckoning, North Korea has more than enough money to feed all of its people, but has willfully chosen not to. Perhaps Pyongyang sees liberation from the state’s rations as a first step toward economic liberation, intellectual liberation, and eventually, political liberation. Perhaps it is, which is why we should catalyze precisely this progression inside North Korea.
That’s why sanctions should avoid attacking the trade networks that support the jangmadang markets that are feeding most North Koreans. When regime-controlled networks also supply these markets, they should be assigned a secondary priority for sanctions targeting, until non-regime-controlled networks are capable of supplanting them.
Fortunately, I’ve seen no serious proposals to impose a trade blockade on North Korea, despite North Koreans’ fears of one. North Koreans may not understand how modern sanctions work. You can hardly blame them for this when hardly anyone in Washington, Seoul, or Brussels does either. But those who don’t live in Chongjin or Sinuiju and think “sanctions” means trade sanctions are stuck in the 80s.
There are, however, serious proposals circulating in South Korea for a fuel blockade against North Korea. Some in Seoul believe that this would cause North Korea’s collapse, although I’m not sure why that’s so. China is opposed to a total fuel cutoff because of its potential “impact on the ordinary North Korean people.” I haven’t lost sight of the humanitarian benefits of the collapse of this regime, but here, I find myself in rare sympathy with China’s position on the basic principle. After that, things get more complicated.
First, I’m not sure that China is still exporting crude oil to North Korea, or that North Korea still has the capacity to refine it (I’d welcome the opinions of informed readers). China does export refined petroleum products, such as gasoline, diesel, jet fuel, and heavy fuel oil to North Korea, some of which is pilfered from state stocks and sold on the black market. All of these products have different impacts on the North Korean economy. To add further to the confusion, China has sometimes omits fuel exports from its official trade statistics. Marcus Noland smells a rat, and I also suspect that China is disinforming us to take pressure off itself.
Proponents of a fuel blockade should remember that gasoline and diesel don’t just fuel military vehicles; they also fuel vehicles used to plant, grow, and transport food. (Although many North Korean farmers still use oxen to plow fields, or use wood-gas-powered trucks to transport food.) Often, the same vehicles are used for both purposes.
Heavy fuel oil is used to heat homes in cities. In small towns and in the country, people heat their homes with coal, charcoal, and firewood. Cutting off fuel oil would make a lot of people cold, and perhaps reinforce their xenophobic hatred of us, but His Corpulency would never freeze.
There is, however, one category of fuel that China should stop selling to North Korea — jet fuel. Cutting off the supply of jet fuel would ground the North Korean Air Force and deny its pilots the flying hours they need to stay ready. It would ground Air Koryo, which is effectively under military control, as the U.N. Panel of Experts has noted. It would improve enforcement of the arms trade and proliferation bans, because Air Koryo is known to have used its fleet of (mostly Il-76) transports to smuggle weapons and other contraband. It would improve enforcement of the luxury goods ban, because Air Koryo passengers carry prohibited luxury goods from China to North Korea on its flights. Finally, it would deny Pyongyang some of the revenue it earns from tourism.
I don’t yield to anyone in my wish for Götterdämmerung in Pyongyang, but let’s keep a few things in mind. First, we must never back the regime into a position where war becomes an acceptable alternative or a necessary deterrent. Pressure on the regime must be steady and firm, but calibrated such that good-faith negotiation is always a safer alternative for Pyongyang than either war or the status quo. The strategy must be to convince Kim Jong-un — or those around him — that time is not on their side, and that the path to survival lies through a negotiated disarmament, peace, and reunification. If it becomes necessary to prevent war, we may even have to make the painful choice to grant safe passage, or some form of amnesty, to people who have committed horrific crimes against their own people.
Second, hard-liners should remember that the same soft-liners who never raised a peep as Pyongyang sanctioned and starved its own people are always waiting to pounce and blame them for starving North Korean babies. It’s unfair and disingenuous, but the world has never been fair. No policy can endure for long without the support of the political mainstream.
More fundamentally, we can’t solve the North Korea crisis without a much more sustained and methodical effort to win over the North Korean people. Sanctions will play an important role in changing North Korea, but as I’ve said all along, they are not a complete policy. South Korea, as the only legitimate Korean government, must also devote serious thought, creativity, technology, and political will to breaking through the digital DMZ, and giving North Koreans the means to speak freely to other Koreans from Paektu-san to Halla-san, and spread a message of rice, peace, and freedom to Koreans north of the DMZ.
Yesterday, I posted about hunger in North Korea, the fact that Kim Jong-un is spending the nation’s lunch money on missiles and ski resorts, and the importance of helping the North Korean people make that connection though a comprehensive information operations strategy. The New York Times has bolstered the evidence of North Korean and Chinese culpability for this tragedy with a detailed report on North Korea’s purchase of the equipment for its ski resort through China.
Previously, NK News revealed that the Masikryeong Ski Resort was filled with foreign-sourced equipment, and identified most of the manufacturers (if you aren’t a subscriber, there’s a version here, at The Telegraph). The question left unanswered, however, was whether the North Koreans obtained the equipment directly from the manufacturers, or through China. The Times found evidence in China’s own customs data proving that it was the source of at least some of the equipment.
The cable cars for the Masikryong ski resort, which are at least 30 years old and out of fashion on European ski slopes, were made by Doppelmayr, an Austrian company, and used for years in Ischgl, a skiing town in Austria. After the resort decided to install new cable cars, the old ones were sold to an Austrian secondhand dealer, Pro-Alpin, according to Ekkehard Assmann, head of marketing at Doppelmayr.
Pro-Alpin, in turn, sold the cable cars to an unidentified Chinese company, according to Pro-Alpin’s website. The Chinese company then arranged for the equipment to be shipped to North Korea. [NYT, Jane Perlez & Yufan Huang]
The Times also examines China’s lame and risible excuses for ignoring the U.N. luxury goods sanctions it repeatedly voted for at the Security Council.
By almost any estimate, the sale of such items appears to violate the intent of United Nations sanctions meant to punish the North for its nuclear weapons program — specifically, sanctions targeting luxury goods, intended to cover products like Champagne and caviar, yachts and expensive cars.
But China, whose companies were involved in providing the equipment for the Masikryong ski resort, which opened in 2013, told a United Nations panel that those sanctions did not apply because skiing is a “normal activity” in North Korea, a country where most of the population is impoverished and food shortages are common. “Skiing is a popular sport for people, and ski equipment or relevant services are not included in the list of prohibited luxury goods,” the Chinese said, according to last year’s annual report from the United Nations panel, which monitors sanctions violations. [….]
The luxury goods sanctions have a glaring loophole: Each country is permitted to define what it considers luxury goods. The United States has published a detailed list, down to such items as vanity cases, binoculars and television sets larger than 29 inches. The European Union says “articles and equipment for skiing, golf, diving and water sports” are luxury goods and bans them from export to North Korea. [NYT]
But China has failed to publish such a list and has not honored those of other countries, the documents of the United Nations panel show. Because it has never said what it considers to be luxury goods, China can argue that cable cars for Mr. Kim’s prestige resort were permissible, even justifying them as equipment for the masses.
“China appears impervious to shame,” said Marcus Nolan, of the Peterson Institute for International Economics in Washington, who said there were no penalties for flouting the luxury goods sanctions. [NYT]
The Times also traces the genesis of Xi Jinping’s obstructionist policy toward sanctions enforcement generally.
The Chinese hope to prevent tougher sanctions for fear that the North will become a hostile neighbor, a policy that diplomats said appears to have been shaped by President Xi Jinping last summer. In talks last week with his Chinese counterpart, Foreign Minister Wang Yi, Secretary of State John Kerry made little headway in persuading China to toughen sanctions against North Korea, and he warned that the United States would most likely move ahead on its own. [NYT]
The policy isn’t entirely a new one. Diplomatically speaking, Xi is more openly obstructionist than his predecessors, but China has a longstanding pattern and practice of violating sanctions against North Korea related to proliferation, arms sales, deceptive financial practices, and luxury goods.
Tougher sanctions legislation is moving through Congress that, among other things, would target Chinese banks that do business with North Korea. The administration has been reluctant to call for such sanctions, known as secondary sanctions, and it is not clear what the White House would do about the legislation, American experts said.
“Given the broad and variegated bilateral relationship between the United States and China, U.S. officials have been reluctant to confront and economically punish China with secondary sanctions in case it should undermine other key priorities in the bilateral relationship,” said Elizabeth Rosenberg, senior fellow at the Center for a New American Security. [NYT]
The Times also gives us some absolutely breathtaking data on what Kim Jong-un is wasting on luxury goods, while most of his subjects are food-insecure, malnourished, stunted, or starving.
Chinese customs data showed that North Korea imported $2.09 billion in luxury goods between 2012 and 2014, according to recent congressional testimony by Bonnie S. Glaser, senior adviser for Asia at the Center for Strategic and International Studies. Among the items that have slipped through the sanctions are Mercedes-Benz S-Class cars, photographs of which appeared in last year’s United Nations report. An unidentified American company armored the cars, the report said. It also said that a luxury yacht worth as much as $6 million, made by a British company, Princess Yachts International, made it into North Korea and has been used by Mr. Kim.
In 2014, China exported $37 million worth of computers; $30 million of tobacco; $24 million of cars; and $9 million of air-conditioning equipment to the North, according to trade statistics from the United Nations Department of Economic and Social Affairs. In all these categories, China was the top exporter, the United Nations said. [NYT]
As the Times notes, “luxury goods may seem a relatively minor issue,” but “they help to ensure the loyalty of the tiny elite around” His Corpulency, thus helping to preserve its cohesion. Their availability also sends a signal inside Pyongyang that the regime is financially secure, bolstering the confidence of the elites in the regime’s survival.
There is also another, more important, reason why luxury goods sanctions matter. It bears repeating that the World Food Program’s operations in North Korea cost just $100 million a year, to feed just 2.4 million women and children, a figure that undoubtedly includes substantial salary and overhead costs. If the period from 2012 to 2014 is inclusive, that’s a three-year period, and an expenditure of almost $700 million a year — an even higher estimate than the one I cited here.
Yesterday, I posted evidence that for many North Koreans, the food situation remains desperate. No government has a sovereign right to steal and waste the wealth of its people when the people are hungry. Viewed this way, North Korea’s luxury goods imports and missile tests aren’t just a sanctions violation, they’re a crime against humanity. What’s especially frustrating is that it’s a crime the world has the power to prevent, by putting North Korea’s assets into financial receivership. The world’s financial regulators should put Kim Jong-un and his minions on notice that their offshore bank accounts are available to buy food, medicine, and humanitarian supplies, but not for ski resorts and luxury cars.
Kim Jong-un’s Groundhog Day message to the world was the announcement of a long-range missile test, and as you’ve no doubt heard, he has since made good on that threat. Like the movie “Groundhog Day,” this provocation cycle has been a variation on an endless loop. In 2006, 2009, and 2013, the missile test came before the nuke test, but if reports that His Corpulency is preparing yet another nuclear test are true, that will still technically be the case.
Otherwise, events have played out much as they did then: emergency meetings at the U.N., shuttle diplomacy, calls by the U.S. for tougher sanctions, and calls by China for everyone to just chillax and talk it out.
The Obama Administration is pushing China to push North Korea, but China has pushed back, stalled, and obstructed. For all the talk about a downturn in relations between Beijing and Pyongyang, Xi Jinping is being exceptionally stubborn in shielding Kim Jong-un from the consequences of his provocations. As the Brookings Institution’s Jonathan Pollack observes, “The sense of silence from China on this issue is really quite extraordinary.” It’s no great wonder why. Our President has done little of consequence to pressure Pyongyang or Beijing, so naturally, Xi and Kim have learned not to take him seriously. Whenever President Obama sees Kim Jong-un’s shadow, our State Department makes six more weeks of empty threats.
Will this time finally be different? Maybe so.
Thanks to quick action by a united and bipartisan Congress — and how often do you read those words anymore? — the U.S. now has leverage with China that it didn’t have before. President Obama and the State Department may have been caught off-guard by Kim Jong-un’s nuclear test on January 6th, but Congress wasn’t. Since 2013, Ed Royce, the Chairman of the Foreign Affairs Committee, had been preparing a North Korea sanctions bill (full disclosure) and quietly building a bipartisan coalition to support it in the House and the Senate. Six days after the test, Royce pounced. Now, the administration isn’t even waiting for the bill to pass the full Senate (projected next Wednesday, if there are no “poison pill” amendments) to use its secondary sanctions provisions as leverage over the Chinese.
Mr. Kerry warned the Chinese that if they didn’t toughen their response to the North the U.S. might have to use secondary sanctions or deploy an advanced U.S. missile defense system to the region, according to U.S. officials. [WSJ, Jay Solomon & Josh Chin]
Separately, the New York Times quotes Deputy Secretary of State Antony J. Blinken as saying that “[t]he United States and its allies will bolster sanctions and go on the defensive against North Korea in ways that China may not like” if it doesn’t put the screws to His Corpulency.
Some of those steps “won’t be directed at China, but China probably won’t like them,” he said. Mr. Blinken refused to go into detail. But he said that “everything is on the table,” including so-called secondary sanctions, of the type the United States most recently used against Iran, which would target third-party countries doing business with North Korea. [N.Y. Times, Choe Sang-hun]
As you’d expect, that discussion and the exchanges between State and the Foreign Ministry since then have been contentious. They needed to be. North Korea’s financial links are concentrated in China. Despite China’s new propaganda meme that it really can’t control North Korea, most of North Korea’s money is in Chinese banks, and the vast majority of North Korea’s trade is with China.
That means the new sanctions could fall heavily on Chinese firms, which current and former U.S. officials have long accused of complicity in Pyongyang’s military development. [WSJ, Jay Solomon & Josh Chin]
The Chinese government says it’s opposed to “any efforts to unilaterally impose sanctions on North Korea.” So they’re unhappy. Which is sort of the idea here.
Sen. Cory Gardner (R., Colo.), who sponsored the North Korea legislation that was approved Jan. 28 by the Senate Foreign Relations Committee, said it aims to “send a strong message to China and others that the United States will use every punitive economic tool at its disposal to punish the regime and its enablers, wherever they may be.” [….]
“China is the place we really want to send a signal to,” said a congressional official working on the North Korea sanctions. [WSJ, Jay Solomon & Josh Chin]
President Obama has since called Xi Jinping personally “about how to coordinate efforts in response to North Korea’s provocations.” If the new sanctions legislation didn’t come up in that conversation, it surely hovered in the background. According to the WSJ, not only is the bill “unlikely to meet with a White House veto,” but the administration is threatening to do something unprecedented — enforce the law.
Senior administration officials said they were receptive to vigorously enforcing the unilateral sanctions being developed by the Congress, despite some technical concerns.
Congressional officials working on the legislation said they’ve sought to replicate elements of the financial campaign the Obama administration used against Iran. Those sanctions cut by more than half Tehran’s crude oil exports and largely froze Tehran out of the global financial system.
The North Korea legislation aims to sanction any foreign firms aiding Pyongyang’s nuclear and cyberwarfare programs. It also is designed to block North Korea’s ability to export minerals, a key foreign exchange earner, and blacklist its entire financial system for its alleged role in illicit businesses. [WSJ, Jay Solomon & Josh Chin]
The administration is sending a clear message to China through various channels.
The United States would clearly prefer that China actively cooperate on a much fuller spectrum of measures. But Washington’s message to Beijing is clear: America will act with or without China’s concurrence.
The United States has long believed that China has the means to more decisively oppose North Korea’s nuclear and missile development, including restrictions on China’s financial, economic, and energy assistance to the North. By sharpening the choices confronting Beijing, Washington shows it believes that equivocation or indecision by China is no longer acceptable. [Jonathan Pollack, Brookings Institution]
Don’t be surprised if, when the next provocation cycle comes, Congress is ready to pounce again.
In the end, I don’t expect Xi Jinping to agree to significantly tougher U.N. sanctions. He’ll try to wear us down, weaken any draft resolution, and eventually, if only to let us save face, agree to a watered-down resolution that nominally increases sanctions. Then, within a few months, China will go right back to violating them. (We’ll almost certainly see further evidence of China’s pattern and practice of non-enforcement when the U.N. Panel of Experts monitoring North Korea sanctions releases its next report in March — sooner if one of you leaks me a copy). He’ll also fight the new sanctions law tooth-and-nail, such as through barter and yuan-based transactions, although I have to wonder how many Chinese companies are interested in that kind of business.
What happens next depends on whether the Obama Administration (a) puts the new bill on a shelf for the next President to find, like both George W. Bush and Barack Obama did with the North Korean Human Rights Act of 2004, or (b) actually enforces it, like it wants us (and the Chinese) to believe it will. If the answer is (b), there may not be much Xi Jinping can do about it. In practical terms, even small Chinese banks and companies can live without access to North Korean markets, but not without access to ours. Even companies that don’t deal directly with the U.S. market need banking services, and banks won’t touch them if they’re designated. When China’s banking system is as shaky as it looks right now, no sane bank manager is going to risk secondary sanctions over transactions with North Korea. Once they see that the Treasury Department is serious, Chinese bankers will drop North Korean customers like so many hot potatoes.
~ ~ ~
How will we know that the administration is serious? I can think of several signs to watch for. First, the Treasury Department could finally declare North Korea, a notorious counterfeiter and money launderer, to be a jurisdiction of primary money laundering concern, and impose harsh special measures on its banks. This is the single most powerful tool in the President’s arsenal.
Second, it could declare North Korea to be a state sponsor of terrorism, which would immediately invoke the tougher transaction licensing regulations at 31 C.F.R. Part 596, thereby closing a major sanctions loophole. If nothing else, that would help to appease Congress.
Third, it could launch criminal indictments against North Korean entities that have committed crimes. The government has expressed “very high confidence,” for example, in North Korea’s culpability for the Sony cyber attacks, which are violations of 18 U.S.C. 1030. An indictment would allow the government to issue an Interpol Red Notice for Kim Yong-chol, the assassin and terrorist who formerly headed Unit 121, until his recent promotion. Another potential basis for action could be that big meth smuggling conspiracy in New York, if any of the defendants have cut deals with DOJ and implicated North Koreans. More importantly, a conviction would allow the Justice Department to use 18 U.S.C. 981(k) and 982 to forfeit any North Korean assets involved in any crimes for which defendants were convicted, right out of the correspondent accounts through which those assets flow.
Fourth, it could take civil enforcement actions against entities that are propping up Pyongyang financially. The extraordinary reporting of George Turner at Finance Uncovered, for example, shows us that Orascom’s Naguib Sawaris, while building a cell phone network for the North Korean government, also set up a bank, Orabank, in partnership with North Korea’s Foreign Trade Bank. The U.S. Treasury Department blocked the FTB in 2013 for WMD financing. Turner’s article implies that Treasury knew less about Sawaris than he did, including Sawaris’s U.S. citizenship and links to a major defense contractor. If Sawaris or his companies are designated under Section 104 of the new sanctions law, they and their subsidiaries could face the blocking of their assets, civil and criminal penalties, and debarment from receiving government contracts. Sawaris’s U.S. citizenship is not a prerequisite to Treasury blocking his dollar assets, but if the Justice Department finds evidence that he broke the law, his U.S. citizenship will make it much easier for DOJ to assert personal jurisdiction over him. Another potential target is China’s 88 Queensway, which worked in direct partnership with North Korea’s money laundering agency, Bureau 39. Even the Bank of China has reason to be nervous.
Fifth, the President could direct the Securities and Exchange Commission to require issuers with investments in North Korea to disclose those investments in their public filings. The reputational risks associated with investments in North Korea could have the effect of driving investors out of North Korea, if those investments become a matter of public record. And given what happened with Orascom’s catastrophic gamble on Koryolink, who can seriously argue that the risks of investing in North Korea aren’t “material?”
~ ~ ~
One last question: did the North Koreans consider the potential impact of this before going through with these provocations? After all, they have the experience of Banco Delta Asia behind them. Of course, with the amount of turnover inside the regime since His Corpulency’s succession, there may be plenty of people in his inner circle who don’t remember Banco Delta Asia. Maybe the North Koreans don’t think President Obama dares touch them. Maybe the explanation is mostly psychological. Mabye Kim Jong-un’s domestic pressures are forcing him to take risks despite the consequences. Most likely, given Kim Jong-un’s record of brutality toward his inner circle, his advisors don’t dare try to restrain him. If Treasury enforces this law, the reality won’t set in until the checks start to bounce. That’s when the hard part comes — knowing how to use that pressure, and if and when to relax it for the deal Beijing and Pyongyang will inevitably offer us to get the sanctions relaxed.
When I was in high school, my favorite TV show was “Miami Vice.” Until it jumped the shark in Season Three, I’d count the minutes until each episode began. One of its best episodes was called “Golden Triangle,” in which the show developed the main characters’ boss, Lieutenant Castillo, played by Edward James Olmos in his breakout role. Olmos played Castillo deep and dark. To me, at that age, Castillo personified cool.
In this episode, Castillo revealed his past as a DEA agent in Thailand, where he’d gone native, learned to speak Thai, met and lost his life’s great love (played by the delectable Joan Chen), and then barely survived a deadly ambush at the hands of his nemesis, a Nationalist Chinese general turned Golden Triangle drug lord named Lao Li.
Lao Li’s character was played by the late, great Keye Luke, an actor who deserved vastly more memorable roles than were available to Asian-Americans for most of his long life. Luke played this role brilliantly, with an impeccably icy sagacity. (Watch the whole episode below if you doubt me). In his career, Luke was probably most famous for playing Master Po in “Kung Fu,” but I’d have remembered him for the talent he showed in this one “Miami Vice” cameo if he’d never done anything else.
This being a blog about North Korea, you may be wondering whether I will be making a topical point. We’re coming to that; trust me. In this episode, Castillo learns that his old nemesis, General Lao Li, has decided to move his smuggling operation to Miami by posing as a respected retiring businessman, putting down strong roots in the community, and gaining the favor and patronage of the political establishment. (Yes, Joan Chen is there, too.) To do this, he gives strict orders that his subordinates behave like paragons of legality, maintain low profiles, and avoid attracting the attention of law enforcement — and especially of Lieutenant Castillo — at all costs.
Lao Li soon learns that his grandsons have defied him and are driving around in a Lamborghini. Most unforgivably, they have been selling heroin. Castillo is watching, and his men arrest the grandsons. This is a risk, and a defiance of his authority, that Lao Li cannot accept. In terms of its plot, acting, and production values, this episode could have been a movie, but the scene that illustrates my topical point starts at 41 minutes.
[If only one of the grandsons had been fat. Really fat.]
That Lao Li’s character happens to be Chinese is as incidental to the analogy as the fact that Castillo’s character doesn’t. Xi Jinping may not inhabit a higher moral plane than the fictional Lao Li, but he almost certainly inhabits a lower intellectual one. Xi may have a predator’s instinct for weakness, but he’s also a cumbrous, boorish nationalist who has managed to turn most of his democratic Asian neighbors against him. His legacy may yet be an Asian analogue to NATO that contains several newly-minted nuclear powers in an arms race with his ally (and him), along with a lot more port calls by the U.S. Navy.
Xi may not see this, but anyone can see that he has been humiliated by the perception that he cannot control his lawless dependent. That perception may be nothing more than a disguise for a more duplicitous agenda, but the perception itself is costly. Xi has greater schemes in mind, but his (metaphorical) grandson threatens to upset his plans by causing his neighbors to mobilize their defenses. His paternal benevolence should end here. It won’t. And that means Kim Jong-un will continue to be costly for Xi Jinping.
History will probably record that North Korea’s fourth nuclear test did more damage to the Obama Administration’s North Korea policy than it did to the the geology under Punggye-ri. In doing so, it also obliterated China’s credibility here. One of the more devastating criticisms of the administration’s policy came from The Washington Post‘s David Nakamura, who effectively accused the administration of outsourcing its policy to China. No wonder the State Department is feeling burned by China:
In a striking public rebuke of China, Secretary of State John Kerry warned Beijing on Thursday that its effort to rein in North Korea had been a failure and that something had to change in its handling of the isolated country it has supported for the past six decades.
“China had a particular approach that it wanted to make, and we agreed and respected to give them space to be able to implement that,” Mr. Kerry said a day after North Korea’s latest nuclear test, after a phone call with his Chinese counterpart, Wang Yi. “Today in my conversation with the Chinese I made it clear: That has not worked, and we cannot continue business as usual.” [N.Y. Times, David Sanger and Choe Sang-hun]
If China’s quiet duplicity surprised the Secretary, it was because no one was giving him read-outs of the excellent reports of the U.N. Panel of Experts monitoring those sanctions. Those reports added to a considerable body of evidence that China was willfully violating the sanctions for years. In the short term, this is a big setback for the Obama Administration, but in the longer term, we can hope that a tougher, more engaged, and more realistic North Korea policy will be to the administration’s advantage as it winds down its affairs and transitions to the next one.
For China, the consequences may be more adverse and enduring. It stands to lose influence regionally because of North Korea’s actions. Its adversaries have taken steps to resolve the differences that divided them, and are now effectively allied against it. South Koreans even speak openly of acquiring their own nuclear weapons. As well I would, too, if I were South Korean, Japanese, or Taiwanese.
It also stands to lose credibility globally. As William Newcomb, a former member of the U.N. Panel of Experts, told the AP, “China uses the sanctions committee’s consensus rule ‘to renege on what it agreed to do in the Security Council as well as to block proposed designations.’” Now, the U.S. and China are fighting about both the substance and enforcement of U.N. sanctions. More voices in the U.S. are calling for secondary sanctions that hit Chinese targets. Some South Koreans are also blaming China:
North Korean leader Kim Jong-un went ahead with the fourth nuclear test because it will not cause China to abandon the North, said Kim Hwan-suk, a senior analyst at the Seoul-based Institute for National Security Strategy.
“North Korea used brinkmanship because it knows that China won’t abandon it, given its strategic value,” Kim said. “North Korea does not expect China to fully support sanctions against the North by the U.N. Security Council.” [Yonhap]
The strongest words came from South Korea’s Foreign Minister:
Foreign Minister Yun Byung-se on Sunday called on China to prove its “firm” opposition to the North’s claimed hydrogen bomb test after the North’s largest ally denied responsibility in curbing Pyongyang’s nuclear ambitions.
“The Chinese government must clearly follow through with its promise made to the international community when it votes for the United Nations Security Council resolution,” Yun said on “Sunday Diagnosis,” a KBS current affairs program, on Sunday morning.
“That’s important to stabilizing the Korean Peninsula, Northeast Asia and the international community. It would prove that China hasn’t made empty promises.” [Yonhap]
China, for its part, is pushing back and blaming the U.S. for Kim Jong-un’s decision to test a nuke, thereby revealing much about its fundamental hostility to U.S. interests and utter disregard for the welfare of North Koreans:
In a commentary, China’s state-run Xinhua news agency said, “The U.S.’s combative approach has in effect deepened Pyongyang’s sense of insecurity and prompted the country to go further in challenging non-proliferation restrictions.”
“The Western media and some politicians have piled blame on China for failing to halt the DPRK’s nuclear program,” the Xinhua commentary said, using an acronym for North Korea’s official name.
“But any hasty conclusion to identify China as the crux of the ongoing nuclear crisis on the Korean Peninsula is as absurd as it is irresponsible,” it said.
Another state-run newspaper published by China’s ruling Communist Party also blamed what it calls a “hostile policy” by South Korea, the United States and Japan towards North Korea for the North’s fourth nuclear test.
In an editorial, the state-run Global Times newspaper appeared to defend North Korea’s defiant pursuit of nuclear weapons, saying there will be “no hope” for Pyongyang to give up its nuclear ambitions unless South Korea, the U.S. and Japan change their policy toward the North.
“There is no hope to put an end to the North Korean nuclear conundrum if the U.S., South Korea and Japan do not change their policies toward Pyongyang,” the editorial reads. “Solely depending on Beijing’s pressure to force the North to give up its nuclear plan is an illusion.”
Lu Chao, a research fellow of Korean studies at the Liaoning Academy of Social Sciences, told the Global Times newspaper on Saturday that North Korea has developed nuclear weapons because of a “hostile policy” by the U.S. against the North. [Yonhap]
This sort of rhetoric will not play well in Washington, and will not advance China’s interests. Instead, it will inflame opinions on Capitol Hill and among American voters. In an election year, it will set off a contest among candidates to promise the most anti-Chinese policies. A few of those promises might even be kept. So why does China say such silly things? For the same reason Donald Trump says silly things — because of his emotions, and to exploit the emotions of other mediocre minds.
Historically, China has been an empire that either absorbed or dominated its neighbors. States that remained independent were required to send ambassadors to the Forbidden City to kowtow and give tribute. Chinese political culture is a hierarchical and status-conscious one in which you’re either above or below. Those above condescend and exploit. Those below fawn and obey. With this realization, I suddenly understood the appeal of Maoism. In comparison, Korean society seems positively egalitarian. I certainly know who I’d rather drink with, or have on my side in a street fight, but then, I’m an assimilated wasicu.
Because of status-based and institutional arrogance, and because China’s leaders aren’t held accountable by a critical press or free elections, they overestimate their own competence and don’t weed out incompetent or corrupt officials. That’s true everywhere, but it’s especially true in dictatorships. Job security is more closely related to getting along with others, and showing the right deference to superiors. That drives China to make “safe” decisions by continuing with what has worked before, or seemed to. If what worked before stops working, the new plan may come too late, and may be the work of not-very-competent people. See, e.g., the recent performance of the Shanghai Stock Exchange.
The leaders of China are rational, but they’re also operating with limited information, because of both groupthink and censorship. So when Chinese elites say that sanctions won’t work or human rights problems in North Korea aren’t really that bad, they probably believe that, mostly. That’s both because they don’t know, and also because they don’t care that much. To Chinese elites, Koreans are a “down” people, and that goes double for North Koreans. They may be extremely adept at weighing of costs against benefits, but groupthink and institutional resistance are high obstacles to a careful reconsidation of the bubble that’s building beyond China’s northeastern border.
In the case of North Korea, we may yet persuade China to shift course. There might yet be a chance for a face-saving soft landing that avoids regional war and protracted chaos, and protects China’s basic security interests, ours, and those of our allies. For now, that still seems unlikely. That’s unfortunate, because the interests of China, the United States, and a united Korea could be reconciled by skillful diplomacy. I’m not sure if Beijing really agrees, but a nuclear North Korea is bad for China — very bad. To get to that realization, however, China will have to feel enough of a cost to shift its incentives. That means that U.S.-China relations may have to get worse before they get better.
UPDATE: Now, the South Korean semi-official news agency, Yonhap, reports that Chinese are complaining that their government needs to take a harder line.
In one opinion poll of some 42,500 people by the state-run Global Times, 81 percent say the North’s nuclear test poses a threat to China’s security.
In another poll of 4,900 people by the same paper, 82 percent responded that they support new sanctions by the U.N. Security Council against North Korea.
Some Internet users posted comments about North Korean leader Kim Jong-un on the newspaper’s website, likening him to an “extremely crazy guy.”
Other users say China must cut its aid of oil and food to North Korea.
China is North Korea’s top trading partner and supplies almost all of the isolated ally’s energy needs, but many analysts believe that China’s Communist Party leadership won’t exert enough leverage on North Korea because a sudden collapse of the North’s regime could threaten China’s own security interests. [Yonhap]
That’s the first thing resembling an opinion poll I’ve seen measuring Chinese sentiments about North Korea policy. The 82 percent support for new U.N. sanctions is stunning, and at striking variance with elite opinion in China. Yonhap also reports “growing public resentment” of North Korea, and that “some social media users criticizing their government for not taking a tougher response to the North’s test.” Imagine how they’ll feel if sanctions start to have collateral effects on China’s fragile economy. What this means is that Xi Jinping’s North Korea policy is probably causing harm to his domestic support, in addition to the harm it’s doing to his international credibility.
In 2013, Panamanian authorities seized a huge haul of surplus Cuban weapons, including MiG fighters and surface-to-air missiles, aboard a North Korean ship at the entrance to the Panama Canal. Multiple U.N. Security Council resolutions prohibit North Korea from buying or selling most weapons, so the Cuban stevedores covered the weapons with sacks of sugar. An investigation by the U.N. Panel of Experts found that a North Korean shipper, Ocean Maritime Management (OMM), owned the ship, and that the regrettably named, Singapore-based Chinpo Shipping handled the financial transactions behind the shipment. According to multiple open-source reports, Chinpo used its account in the local branch of the Bank of China for those transactions.
After lengthy delays by the U.N. bureaucracy, a Security Council-appointed committee and the U.S. Treasury Department designated OMM. Since then, Treasury has designated multiple OMM offices, agents, and enablers. Chinpo was neither designated nor blocked, but the authorities in Singapore charged it with violating a local law codifying U.N. Security Council sanctions against North Korea, and for running an illegal money transmitting business without meeting the financial due diligence requirements that apply to such businesses. Now, Reuters and the AP are reporting that the court has convicted Chinpo:
In announcing the verdict, Singapore District Judge Jasvender Kaur said the firm, Chinpo Shipping Company, could have contributed to the nuclear-related programs or activities of North Korea.
The company was also found guilty of running a remittance business without a valid license for more than four years.
Chinpo had wired $72,017 from its Bank of China account to a Panama-based shipping agent in July 2013 for the return passage of the MV Chong Chon Gang through the Panama Canal. [….]
Chinpo violated a United Nations law adopted by Singapore that prohibits the provision of financial services, assets or resources to North Korea that “may be reasonably be used to contribute to the nuclear-related, ballistic missile-related, or other weapons of mass destruction-related programs or activities.” The maximum sentence is a fine of 100,000 Singapore dollars ($71,000) and five years in jail. [AP]
If you’ve read all of the links I so laboriously embedded in those first two paragraphs, there isn’t much question that Chinpo willfully facilitated the North Korean shipment using deceptive financial practices.
That shouldn’t be the end of the story, however, because financial institutions like the Bank of China are supposed to have compliance and know-your-customer programs in place to ensure that they don’t service illicit transactions. In the specific case of North Korea, the Global Financial Action Task Force has called for “countermeasures” against its money laundering and arms dealing for years.
You would think, then, that one of the world’s largest banks would employ compliance officers competent enough to detect such suspicious activity, which (if denominated in dollars, and in this case, it was) must be reported to the Treasury Department. In fact, the Treasury Department’s Financial Crimes Enforcement Network has published specific guidance on the reporting of suspicious North Korea-related transactions.
The U.N. Security Council’s adoption of specific financial measures to address this conduct reinforces long-standing Treasury Department concerns regarding North Korea’s involvement, through government agencies and associated front companies, in financial activities in furtherance of a wide range of illicit activities. These activities include currency counterfeiting, drug trafficking, and the laundering of related proceeds. FinCEN has previously noted such conduct, most recently in 2007.4 The Treasury Department remains especially concerned about the use of deceptive financial practices by North Korea and North Korean entities, as well as individuals acting on their behalf. Such deceptive practices may include North Korean clients’ suppression of the identity and location of originators of transactions; their practice of arranging for funds transfers via third parties; repeated bank transfers that appear to have no legitimate purpose; and routine use of cash couriers to move large amounts of currency in the absence of any credible explanation of the origin or purpose for the cash transactions. [….]
FinCEN notes that with respect to correspondent accounts held for North Korean financial institutions, as well as their foreign branches and subsidiaries, there is now an increased likelihood that such vehicles may be used to hide illicit conduct and related financial proceeds in an attempt to circumvent existing sanctions. Financial institutions should apply enhanced scrutiny to any such correspondent accounts they maintain, including with respect to transaction monitoring. [….]
Consistent with the standard for reporting suspicious activity as provided for in 31 C.F.R. part 103, if a U.S. financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution shall then file a Suspicious Activity Report. [FINCEN Advisory, June 18, 2009]
FINCEN and FATF have both renewed their North Korea advisories repeatedly in recent years. And yet, from the fact that the transactions went through unimpeded, we can infer that nothing here seemed suspicious to the Bank of China’s compliance officers:
Chinpo had applied for a total of 605 outward remittances totaling $40 million from 2009 to 2013 on behalf of North Korean entities. Chinpo’s director, Tan Cheng Hoe, also heads associated companies Tonghee Shipping Agency and Great Best Trading.
When The Associated Press visited Chinpo’s listed address, another company said it has occupied the premises for more than a year. The case was adjourned until Jan. 29 to give prosecution and defense lawyers time to make submissions. [AP]
As one immediate consequence of this conviction, Treasury will almost certainly designate Chinpo Shipping, and possibly some of its officers. I’d expect to see those designations this week, if not today.
But Chinpo Shipping is a small fish, and no one should view that result as the end of this story. This isn’t the first time the Bank of China has come under suspicion for shady North Korea-related transactions, after all. Just as Treasury has recently taken enforcement actions against other big banks, such as BNP Paribas, Credite Agricole, and Commerzbank, for evading sanctions against other countries, Treasury should investigate whether the Bank of China violated the Bank Secrecy Act by failing to file Suspicious Activity Reports on Chinpo, and perhaps other North Korea-linked customers.
We’ll soon know just how serious the Obama Administration is about enforcing the Security Council’s sanctions by the message it sends — or doesn’t — to the Bank of China.
China arrests 10 N. Korean refugees, including a family with a baby; protest tomorrow at Chinese embassy
A group of North Korean defectors who were being smuggled across the China-Vietnam border have been detained, and are at risk of being repatriated to North Korea.
A South Korean government official who spoke to News 1 on the condition of anonymity said 10 defectors in total were taken into custody in the Mong Cai region of northern Vietnam. All have been sent back to China, and 9 of the 10 are at risk of being repatriated to North Korea, South Korean outlet Newsis reported. [….]
The group includes a captain of the North Korean army, and a family of three that includes a 1-year-old child, the source said. It is likely the group was seeking asylum in South Korea through an embassy in Vietnam. [UPI, Elizabeth Shim]
If these people are sent back to North Korea, they’re in grave danger of being executed or sent to a political prison camp. A United Nations Commission of Inquiry has condemned China for sending these refugees back to North Korea, instead of allowing them to travel on to South Korea, which gives them asylum.
43. Despite the gross human rights violations awaiting repatriated persons, China pursues a rigorous policy of forcibly repatriating citizens of the Democratic People’s Republic of Korea who cross the border illegally. China does so in pursuance of its view that these persons are economic (and illegal) migrants. However, many such nationals of the Democratic People’s Republic of Korea should be recognized as refugees fleeing persecution or refugees sur place. They are thereby entitled to international protection. In forcibly returning nationals of the Democratic People’s Republic of Korea, China also violates its obligation to respect the principle of non-refoulement under international refugee and human rights law. In some cases, Chinese officials also appear to provide information on those apprehended to their counterparts in the Democratic People’s Republic of Korea. [UN COI]
The NGO No Chain has announced that it will hold a protest at the Chinese embassy tomorrow, Saturday, November 21st, from 1 p.m. to 2 p.m. The address is 3505 International Place NW, Washington DC 20008. Bring your own signs, placards, and banners. Details here.
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