For Beijing, a sharper choice on N. Korea: accord and prosperity, or discord and chaos

Writing in Foreign Affairs this week, Zhu Feng sketched out a vision of the thinking in Beijing from the perspective of a person more reasonable than Xi Jinping has been, so far. Zhu’s piece suggests the outlines of an agreement with Beijing to defang Kim Jong-Un and manage North Korea’s transition to peace. Alas, Zhu Feng is not in charge in Beijing, and Xi Jinping is. Suspend your paranoia that this essay is only an artifice to persuade us that Beijing will be reasonable, if only we stay our hands on secondary sanctions another year or two (years we no longer have). The piece is well worth reading in its entirety, if only for what it tells us about the thoughts of those in Beijing whose influence we should seek to weaken or strengthen, and whose fears we should seek to exploit. 

In this regard, Trump needs to understand the complexity of China’s thinking on North Korean policy. Getting China to take more responsibility on North Korea requires both a gentle and a hard push. The Trump administration has made it clear that it will not tolerate a nuclear North Korea—but Beijing has heard this before. Despite the rhetorical flourish, to the experienced Chinese diplomat, the Trump administration’s policy sounds quite a lot like those of Presidents George W. Bush and Obama: a desire to achieve denuclearization but an unwillingness for this to come at the cost of war on the peninsula. Chinese President Xi Jinping is similarly bound by the strategic logic of China’s long-standing approach to its petulant neighbor—avoiding the dangers and uncertainty of war and instability by looking past the present consequences of North Korea’s actions. Xi’s view of North Korea is still dominated by the fear of a reunified Korea under Seoul, which may want U.S. forces to remain in the country. This is a legitimate concern, but it is possible, given Trump’s isolationist stance, that he might consider not stationing U.S. troops above the 38th parallel or deploying offensive capabilities to a unified Korea. [Zhu Feng, Foreign Affairs]

I can envision how an agreement with Beijing might work: China would enforce the U.N. Security Council resolutions — no more and no less. It would import no more than $400 million worth of coal, and it would not buy coal or anything else from any entities designated by the U.N., that were associated with Pyongyang’s weapons programs, or that were reasonably suspected of contributing to those programs. It would freeze the assets of North Korea’s proliferators and their front companies and put their agents on the first Air Koryo flight home. It would also freeze any accounts of North Korean nationals or trading companies until it ensured, in accordance with UNSCR 1718, paragraph 8(d), that those funds could not be used for WMD programs or other prohibited purposes. For good measure, it would also expel any North Korean workers. It would keep those measures in place until Pyongyang was fully disarmed. That, in turn, would almost certainly require the removal of Kim Jong-Un, but coordinated economic strangulation of the regime — which should carefully avoid impeding the trade in food — would likely cause the elites to lose confidence in him. By many accounts, that confidence is already shaky.

In return, the U.S. would agree not to station forces inside the borders of what is now North Korea (something that we should not do under any circumstances anyway). We might even discuss a timetable for the withdrawal of U.S. ground forces, which would no longer be needed in Korea. We would agree to suspend sanctions, year by year, provided Pyongyang was making progress toward the conditions described in our laws, toward a more humane and open society whose disarmament we could actually believe in. This state would be neither a militarized totalitarian cult nor a Jeffersonian democracy, but a state that was evolving from totalitarianism to one that was merely authoritarian, along the lines of what we see in Burma today. Great change takes time. North Korea and its people would need time to evolve into a self-governable society, ready to take its place in the world.

Once North Korea was disarmed and the artillery was removed from the bunkers along the DMZ, Korea could be reunified in all but name. Korean families would be reunited, a new pan-Korean culture would be reborn, and commerce would flow freely across the nature reserve formerly known as the DMZ. An agreement with Beijing and Seoul might preserve a fig leaf of separation for an agreeable transitional period, excluding any foreign forces and ensuring friendly relations with all of Korea’s neighbors, friends, and trading partners, to assuage Beijing’s security and economic concerns. South Korea would assume responsibility for controlling the China-North Korea border and caring for the poor and dispossessed North Koreans who might otherwise cross it. The consequent economic revitalization, including access to refurbished North Korean seaports, would be a boon to China’s northeastern rust belt. The political status of North Korea after this transitional period — say, ten years — would be for the people of both Koreas to decide. Enough of foreign powers drawing lines through a nation that ought to be able to decide its own fate. A unified Korea would be no threat to China.

Of course, if Beijing does not cooperate, things might have to take a darker turn.

The real difference that Beijing and Washington must overcome, however, is China’s fear of chaos in North Korea spilling over its own borders. Such instability could spell an unmanageable situation involving all sorts of crises: civil war, famine, and mass displacement, not to mention the danger of fissile material and biological weapons falling into even more unstable hands. Of course, some Chinese hardliners take this view even further, suggesting that it would be foolish for China to take the North Korean burden off the back of its greatest competitor. They argue that, considering that the United States is in many ways a thorn in the flesh to Chinese interests in areas such as Taiwan and the South China Sea, it would be against China’s national interests to release the United States from this problem.

Today, many within China believe that Beijing must reevaluate its relationship with both Koreas, which essentially means abandoning Pyongyang. It is both the strategic and the moral choice. Choosing South Korea, a democracy with a strong economy, will place China on the right side of history. China’s lack of clear direction on this issue is beginning to negatively affect its reputation, with Beijing seen by the international community as reluctant to cooperate or behave responsibly. These are not traits that behoove a rising power. [Zhu Feng, Foreign Affairs]

I can also envision how things would have to work if China does not cooperate. The alternative would be China’s greatest fear — chaos. It would have to be. Pyongyang insists that its nuclear program is non-negotiable. Even assuming that, under extreme duress, Pyongyang eventually said otherwise, it will never be possible for a prudent person to believe in the denuclearization of a society as closed as North Korea’s, or to trust the words of a regime as mendacious as Pyongyang’s.

Because of all the years wasted by Bill Clinton, George W. Bush, and Barack Obama, we may, for a while, be stuck with the option of trying to deter a nuclear North Korea. This option is only slightly less terrible than war, and anyone who has watched how Pyongyang has behaved in recent years knows that this isn’t sustainable. We are always laying down red lines we think Pyongyang wouldn’t dare cross. Our calculations are invariably miscalculations, and Pyongyang crosses our red lines like so many cracks in a sidewalk. Can we deter a regime that built a reactor in Syria, used VX in the middle of the crowded Kuala Lumpur Airport terminal, or uses cyber attacks to terrorize us, smother own freedom of expression, and rob banks? Can we deter a regime that has carried out multiple armed attacks, cyber attacks, and assassination attempts in South Korea since 2010, killing at least 50 people? Can we deter a regime that sells chemical weapons technology to Assad and MANPADS to terrorists? How do you deter Pyongyang once it thinks it can nuke Seoul, Tokyo and New York? Will Pyongyang become more restrained when it thinks we think it can, or might?

Eventually, Pyongyang will go too far and we will be at war. Deterrence will fail. That’s why the Trump administration is right to turn down the idea of a freeze — not that Pyongyang is interested in one anyway. Pyongyang can’t be allowed to have nukes, or even nuclear technology to sell to others. But no one believes it is possible to take these things away from Pyongyang without a fundamental change in the regime’s character.

~   ~   ~

The cold, hard truth that too few of us are willing to confront is this — there is no peaceful solution to the North Korea crisis as long as Kim Jong-Un remains in power. The syllogism is a simple one: if Kim Jong-Un won’t disarm, and if we can’t live with Kim Jong-Un (or he won’t live with us) if he doesn’t disarm, then Kim Jong-Un must go. The question then becomes a matter of finding the least-risky option to achieve that result.

Once we conclude that Pyongyang won’t disarm under pressure, what it means for sanctions to “work” shifts. Then, the focus of sanctions also shifts, from creating economic pressure on Pyongyang to supporting political subversion of the regime by targeting its immune system — the border guards, the army, Ministry of State Security, the State Security Department, the Reconnaissance General Bureau, and the Propaganda and Agitation Department. In a country whose political and economic models are fragile and possibly unsustainable, change can take many forms. Certainly, it should not take the form of invasion or decapitation unless that’s our only protection against a grave and imminent threat to ourselves and our allies. It could mean sudden collapse if the elites turn on Kim Jong-Un, but our influence over such an event would be indirect at best. Don’t get me wrong — we should do everything within our power to prepare the Pyongyang elites for it, if only to make the right people in Pyongyang and Beijing nervous, and most urgently, to discourage North Korean troops from killing their brother and sister Koreans in the event we can’t prevent war.

The change we can do the most to catalyze, however, is a slow-motion revolution in the countryside. Our strategy should be to use sanctions and information warfare to degrade the regime’s capacity to repress, even as we use economic engagement and information warfare help an informed, enriched, and empowered people rise. This would not be regime change, exactly, but regime decline and regime replacement by dozens of local shadow governments. As the security forces lost their foreign sources of income due to sanctions, their members would desert, turn to corruption, or allow themselves to be coopted by the rising merchants and shadow warlords. Officers patrolling the markets could not shake the people down without fear of resistance or reprisal. Inside the jangmadang, they would become prisoners of the people. Inside their stations, they would be besieged, isolated, and ineffective. As the state’s power melted away and flowed back down the songbun scale, information operations would tell the elites that Kim Jong-Un’s days are numbered, that they should not support him, and that they should disobey any orders to kill their brothers and sisters. Implicit in the slow degradation of a totalitarian state is the historical inevitability that it can decline only so much before it can’t contain an explosion. That is, it must change or perish. Political change tends to happen like bankruptcy: gradually, then suddenly. Who is to say when regime decline might become the people’s revolution that Thae Yong-Ho has predicted? Beijing and Pyongyang should certainly worry about this.

For poor North Koreans, this would mean freedom of trade, freedom from fear, and freedom from the confiscation of their land and their crops. It might also mean chaos along China’s border. China would have to deploy troops to seal that border. Dandong, Dalian, and other cities involved in cross-border trade would face the concentrated effects of secondary sanctions, and even a loss of access to trade with America, that might plunge them into recession and unemployment. If the propaganda circulating in the jangmadang harnessed North Korea’s nationalism in an intensely anti-Chinese direction, it could make North Korea an unsafe place for Chinese investments for years to come. Even after reunification, Chinese goods would face steep fees for the use of North Korean ports. China would be offered no guarantees about the future disposition of U.S. forces (though we’d be smart to leave the pacification of North Korea to the Koreans). Chinese investments — particularly those found to violate U.N. sanctions — might be confiscated, or written off as odious debts. Refugees would flood across the Tumen, and Seoul and Washington would be powerless to stop that flood. To prevent Pyongyang from proliferating, we might have to impose a naval blockade, and an economic air blockade.

All of this is a much more chaotic alternative than an agreement to enforce the sanctions Beijing already voted for at the U.N. Security Council, but for us, it’s far better than the collapse of global nonproliferation or a coerced capitulation of South Korea. If Beijing is blithe about (or applauds, or encourages) our greatest security fears, then our response should be to identify and exploit its greatest fears in return.

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China finally pays a (symbolic) price for its North Korean slave trade

This blog has long posited that a nuclear North Korea will not coexist with us and that war with it would be inevitable; that preventing another Korean War will require a focusing an assortment of financial, diplomatic, and political pressures on Pyongyang; and that to deter China’s government and industry from undermining that pressure will require us to pressure China itself. This will carry costs for both economies, and to the relationship between the two governments. Relations with China will have to get worse before they can get better. That is unfortunate, but it is a far better outcome than nuclear war, the collapse of global nonproliferation, or effective North Korean hegemony over South Korea.

Since the Mar-a-Lago summit in April, I’ve worried that President Trump’s tough talk about secondary sanctions against Kim Jong-Un’s Chinese enablers was a bluff. It’s still too early to say that it wasn’t, but the news that Secretary of State Rex Tillerson has dropped China from Tier 2 to Tier 3 under the Trafficking Victims Protection Act — specifically for its use of North Korean slave labor — is a welcome sign that the administration has begun (and hopefully, just begun) to escalate its pressure on Beijing.

“China was downgraded to the Tier 3 status in this year’s report in part because it has not taken serious steps to end its own complicity in trafficking, including forced laborers from North Korea that are located in China,” Tillerson said during a ceremony to release the report.

Tillerson said that forced labor is a key source of illicit revenues for the North.

“An estimated 52,000-80,000 North Korean citizens are working overseas as forced laborers primarily in Russia and China, many of them working 20 hours a day. Their pay does not come to them directly. It goes to the government of Korea, which confiscates most of that, obviously,” Tillerson said.

The North regime receives hundreds of millions of dollars per year from forced labor, he said.

“Responsible nations simply cannot allow this to go on and we continue to call on any nation that is hosting workers from North Korea in a forced-labor arrangement to send those people home. Responsible nations also must take further action,” he said. [Yonhap]

Tillerson’s decision reflects rising anger within the administration that Beijing is (sit down for this) still not fully implementing U.N. sanctions against North Korea.

So what does this action mean for China’s economy and trade, in practical terms? For now, not much. Beijing probably doesn’t care if the U.S. denies it foreign assistance or votes against World Bank loans for it. Any of the TVPA’s sanctions can be waived, and often are. But as Erik Voeten writes in the Washington Post, governments really do care about their tier rankings for reasons of national honor and reputation. I don’t think I’m speaking out of school by saying that during my time at the Foreign Affairs Committee, the competing appeals of diplomats and NGOs to raise or lower a government’s tier status in the next TVPA report consumed an inordinate amount of staff time. The Chinese government, being hypersensitive about its own reputation, will care very much about this.

In Beijing, foreign ministry spokesman Lu Kang said the government was resolute in its resolve to fight human trafficking and the results were plain to see. “China resolutely opposes the U.S. side making thoughtless remarks in accordance with its own domestic law about other countries’ work in fighting human trafficking,” he told a daily news briefing. [Reuters]

Beijing is furious, naturally. I expect it to make some ostentatious displays of non-cooperation to punish Washington. It would be especially tragic if China decides to take its anger out on North Korean refugees. Hopefully, the State Department has already gamed out its responses to potential Chinese escalations. Our message to Beijing must be that we’re also prepared to escalate. China, which needs another decade of high growth rates to pay its coming crop of pensions, cannot afford this. Both sides would suffer in an economic war between the U.S. and China, but China’s export-dependent, labor-intensive economy and fragile banking sector would suffer more. That may give us more leverage to press China to expel its North Korean laborers or the U.N.-designated North Korean proliferation and money laundering networks that have operated openly on its soil for years.

The Chinese companies using the North Korean labor will care much less — at first — but they are facing far greater financial consequences, especially if the KIMS Act passes the Senate. (I sense a particularly strong appetite in both chambers of Congress and both parties for secondary sanctions against North Korean forced labor.) Under section 201 of that legislation, the products of those companies may face exclusion from U.S. markets, and their dollar assets may be frozen. (Needless to say, prospective Kaesong recidivists will not find this news reassuring.)

Dropping China to Tier III will have little immediate legal or economic effect. It still isn’t the “maximum pressure” President Trump promised us. It is an escalation and a warning. It is symbolic, but powerfully so. Ultimately, Beijing may care about being listed as Tier III for human trafficking for the same reason that Pyongyang cares about being listed as a state sponsor of terrorism — because to governments obsessed with their images, symbols can be powerful things. One hopes that this will cause more Chinese citizens to see that North Korea is a ball-and-chain on their country’s acceptance into the family of civilized nations and continued economic growth. One hopes that more of them will say that it’s time to take a hacksaw to the chain.

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Make Korea China Again? Xi Jinping confirms colonial ambitions for Korea.

As regular readers of this site know, China is opposed to unilateral sanctions, except when it isn’t. In the case of North Korea, China is also opposed to the multilateral sanctions it voted for in the U.N. Security Council; consequently, North Korean missiles ride on Chinese trucks, North Korean proliferation networks operate openly on Chinese soil and launder their money through Chinese banks, North Korea’s weapons are made from components and technology procured from or through China, and those weapons are imported or exported through Chinese ports. North Korean abduction squads kidnap refugees and murder activists on Chinese territory, and North Korean spy rings operating inside South Korea meet in safe houses on the outskirts of Beijing.

China’s answer to these charges, as near as I can make sense of them, is that it only violates the sanctions it voted for because sanctions never work and it’s afraid they’ll work and it has no influence over North Korea anyway and also, it isn’t violating them. But China’s unilateral sanctions to disarm South Korea, which are clearly calculated to leave it prostrate to Pyongyang’s (and Beijing’s) blackmail, put the lie to all of this.

Thus, two weeks ago, I drew the unavoidable conclusion and advanced the inflammatory theory that China’s failure to reign in North Korea’s nuclear program might not be a failure at all. Perhaps North Korea’s nuclear program is a proxy for China to disarm, isolate, Finlandize, and control both Koreas. After all, one could excuse a few lapses in North Korea sanctions enforcement as oversights by a fundamentally corrupt state, but it isn’t plausible that the same people, front companies, and networks could have escaped the all-seeing eye of the world’s most efficiently intrusive surveillance state for decades. And now that Xi Jinping is revealed to have spoken the words that the peoples of Asia fear most — “part of China” — Koreans’ worst fears are confirmed. For the full interview, go here. Here is the quote in context:

But we had a really good meeting [with Chinese President Xi Jinping], and it was supposed to be 10 minute session and then you go into a room with hundreds of people, you know all different representatives, and the meeting was scheduled for 10 to 15 minutes, and it lasted for 3 hours. And then the second day we had another 10 minute meetings and that lasted for 2 hours. We had a — just a very good chemistry.

He then went into the history of China and Korea. Not North Korea, Korea. And you know, you’re talking about thousands of years …and many wars. And Korea actually used to be a part of China. And after listening for 10 minutes I realized that not — it’s not so easy. You know I felt pretty strongly that they have — that they had a tremendous power over China. I actually do think they do have an economic power, and they have certainly a border power to an extent, but they also — a lot of goods come in. But it’s not what you would think. It’s not what you would think. [WSJ]

If South Koreans are worried and outraged, both sentiments are well justified. The scars left by South Korea’s occupation by a certain other predatory neighbor are still raw and painful to South Koreans, and I would argue that the legacy of China’s influence over North Korea has been far worse than the legacy of Japan’s occupation — including war, famine, gulags, smothering thought control, and exploitation of women on a scale and severity comparable to Japan’s exploitation of wartime sex slaves.

In most news outlets, this story is being reported as a Trump faux-pas, which it certainly was to the extent Trump seemed to credit Xi’s imperialist narrative. But that is not the real story, because (1) the world already discounts Trump’s words in ways that it did not discount the words of other presidents, and (2) there are men and women in the White House who are smart enough to disabuse Trump of this nonsense, clean it up, and make the appropriate assurances to South Korea, despite that damage that has been done. Those assurances are going to be very, very important when we are three weeks out from an election in South Korea, when South Koreans are already wondering if we are still a reliable ally.

But in another sense, we should silently thank Donald Trump for (however unwittingly) telling us the real story, which the media seem to be missing entirely. The real story is that Xi Jinping just tipped his hand about his colonial ambitions to control all of Korea. Xi Jinping, after all, does not tweet. He does not ramble, muse, or offer idle, half-considered thoughts. He is nothing if not deliberate and calculating. He went to Mar-a-Lago with meticulously premeditated plans to influence the President of the United States in certain directions, to achieve a certain ambition.

The historically accurate truth is that Korea was never a “part” of China, but was a tributary nation under substantial Chinese influence or control for centuries. Put another way, there is no more historical basis to Xi’s claim than there is to the Northeast Asia Project or Xi’s claim that the South China Sea is a part of China now. Who believes that Xi Jinping will let either truth or law get in his way when he senses that the time has come to make his move? If I were living in South Korea, I’d want missile defense and nuclear weapons now more than ever. I’d also want a president with the greatest possible influence over the United States, and the backbone to stand up to Xi Jinping. In other words, I’d want a choice I don’t have — so I’d pick the lesser evil who can still win.

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Will China cooperate on North Korea sanctions? That depends on which “China” you mean.

I often talk about the importance of pressuring China to pressure North Korea. When I do, people sometimes cock their heads like my dog would do when he heard a new sound, and ask me whether China would cooperate with that. I answer this question with a question of my own: “Which China?” China, for all its top-down authoritarianism, isn’t a monolith. Like most societies, it has different constituencies with different views that fear different risks and pursue different interests. That’s why my answer to the first question depends on the answer to the second.

If you mean the Chinese defense establishment, which is constitutionally hostile to the United States and sees itself as in a zero-sum, Cold War competition against us, the answer will always be “no.” That China is our enemy by its own choice. Its default is to view anything that’s bad for America as good for China. Its attitude is probably hardening.

If you mean the Chinese foreign policy establishment, the answer will also be “no,” but its obstructionism might be tempered by strategic compromises or interrupted by some temporary feints at compliance (currently, the so-called coal ban). It’s almost as hostile to us as the defense establishment, but it pursues its ambitions more intelligently. It may despise Kim Jong-un, or it might just be pretending to, but either way, it probably despises us even more. Still, it recognizes the value of playing us, and it does that very well.

If you mean the Chinese businesses that willingly deal with North Korea, the answer will be “no” as long as North Korea’s checks clear, and it will be “yes” the instant they don’t, and it will be “yes” the instant the businessmen learn — to their abject horror — that some other businessman who deals with North Korea just had his bank accounts frozen and couldn’t make the payments on his Buick and that America can really do that.

If you mean the Chinese Finance Ministry, it will be “no” until we raise the cost of non-cooperation to unsustainable levels, by threatening to depress the levels of growth it must sustain to pay pensions for its aging population and maintain economic stability. That is its mission. And interestingly enough, China’s terrible reputation for financial integrity is a growing threat to that mission. I’ll explain in a moment.

If you mean the Chinese banks, it will be “no” until subpoenas start to rain down on their New York branches and their lawyers tell them that the only way to avoid the fate of BNP Paribas is to cooperate with the feds and settle for reduced civil penalties and deferred prosecution.

It’s a misnomer to refer to a “Chinese” banking industry that relies on access to foreign finance, and thus subjects itself to foreign regulation. Going global can cause some culture shock for banks that are used to China’s lax Anti-Money Laundering (AML) regulation. For the last few years, Treasury’s AML focus has been on European and Middle Eastern banks dealing with Iran, so Chinese banks have had a (mostly) free ride from the feds. But New York and EU regulators haven’t been as laissez-faire about AML compliance and have been handing them some stiff fines. That’s why People’s Bank of China officials recently “pledged a tougher fight against money laundering.”

Behind this clarion call by Beijing’s bank supervisors was an unnerving realization that some of the nation’s biggest banks had left themselves vulnerable to anti-money-laundering sweeps by regulators abroad.

This vulnerability stems from ambitious overseas expansions in recent years by the Bank of China (BOC), the Industrial and Commercial Bank of China (ICBC) and other powerful, state-owned lenders. As of June, according to official data, China’s biggest bank, the ICBC, was operating 412 branches in 42 countries, while the BOC had 564 branches in 46 countries. China Construction Bank (CCB) counted 140 overseas branches, and Agricultural Bank of China (ABC) had 17. [Caixin Global]

Here comes the culture shock.

At home, according to banking experts who spoke with Caixin, Chinese banks have been operating in a regulatory environment that’s generally soft on money laundering rules for financial institutions. Some of these banks have thus learned the hard way that many regulators outside China not only diligently enforce rules designed to prevent dirty transactions, but are also eager to slap violators with heavy fines and even imprisonment.

And also, don’t usually take bribes.

The BOC, the nation’s fourth-largest lender, reportedly agreed on Feb. 17 to pay 600,000 euros ($634,000) to settle a money laundering case involving its branch in Milan, Italy. The branch had been targeted by Italian investigators since June 2015 who had looked into whether BOC helped clients transfer to China about 2 million euros linked to criminal activity.

In addition, a judge in the Italian city of Florence on the same day handed four BOC-Milan branch employees two-year suspended prison sentences after they were convicted of breaking Italy’s anti-money-laundering laws.

A Hong Kong-based expert on money laundering who declined to be named said while the fine against BOC-Milan was comparatively “moderate,” the criminal convictions were “surprising.” The decisions in Italy followed a November decision in the United States by New York state’s Department of Financial Services, which fined a local ABC branch $215 million for illicit money transfers.

By now, it has become reasonably clear that the Trump administration will soon revoke the sub rosa immunity the Obama administration had given Chinese banks to launder North Korea’s money. Not only will Chinese banks have to worry about EU and state regulators, they’ll have to start worrying about the Treasury Department, too.

That isn’t just a worry for China’s smaller, shadier banks. Some of the biggest banks in China were servicing North Korean customers until at least early 2016. Others were named in the Dandong Hongxiang case for doing so months later. Some of those banks have branches in New York. Those without still depend on U.S. correspondents to process their payments through the financial system, just as Banco Delta Asia once did.

The correspondents, in turn, have legal duties to comply with Know-Your-Customer (KYC) and AML regulations, which will require them to ask questions about the names, nationalities, and passport numbers of their customers; whether they’re sanctioned by the UN, Treasury, or the EU; and whether their business addresses are, say, shell companies in the British Virgin Islands, or empty offices next door to the local North Korean embassy. Treasury expects banks to hire qualified compliance specialists, employ highly specialized compliance software, and implement AML and KYC compliance procedures.

If Treasury begins to enforce those rules, banks will skimp on AML and KYC compliance (such as) at their own peril. If you click those last two links, you’ll see that I just cited examples of Chinese banks that got away with lax compliance in the past. The Agricultural Bank of China (ABC) is an example of one that didn’t:

After the branch opened in August 2012, Yu worked to boost the ABC’s interbank-transaction business through trade financing and other services. His goal was to quickly expand assets at the branch, which was ABC’s only operation in the United States.

But Yu’s strategy apparently exposed the branch to compliance risks, as his favorite businesses involved transactions executed on behalf of other banks’ customers. And ABC had limited access to information about those customers.

Yu maintained his strategic focus despite a 2014 warning by the central bank pointing to risks associated with overseas banking services.

Until a whistleblower came along, anyway.

But that same year, Taft’s allegations landed on investigator desks at the New York Fed, triggering a probe that led to a Fed order in September: ABC was given 60 days to deliver a plan for fixing risk management flaws and enhancing money controls at the New York branch.

The fines were levied two months later after New York state regulators determined ABC had deliberately failed to scrutinize dubious money transfers.

Now for the part where the bank rolls over, cooperates, and promises to get its compliance act together to reduce its penalty.

Sources close to the matter said an original fine of $500 million was eventually cut by more than half following negotiations between regulators and ABC-New York. The branch also agreed to hire an independent, regulator-approved monitor to assess its business.

“After the incident, ABC (headquarters in China) held several meetings emphasizing managing overseas branches and subsidiaries,” said a source at the bank.

Nevertheless, the bank’s reputation had taken a major hit. In November, for example, the credit rating agency Moody’s said the regulatory penalty had highlighted oversight failures at ABC and would have a negative effect on the bank’s credit rating.

Political subversion and human intelligence can be another wedge to incentivize banks to make better choices. Every arrest or defection of a North Korean diplomat or financier has the potential to expose more parts of Pyongyang’s financial network and implicate the banks that skirted the law to do business with them. If banks begin to see North Korea itself as unstable, more of them will begin to see North Korean customers as legally risky. The best possible way for a bank to mitigate that risk? File a Suspicious Activity Report with the Treasury Department and cooperate.

All of which is a long way of saying that China’s generals and diplomats almost certainly won’t cooperate on North Korea, at least not voluntarily — and not yet. That will make it harder to enforce sanctions (especially trade sanctions) but by no means impossible, because the Chinese banking industry has to cooperate. China’s generals and diplomats may not want commercial banks to be AML compliant, but China’s central bank does. Banks in Malaysia, Russia, Vietnam, Singapore, and Tanzania will face the same choice, of course, but China is the lynchpin, the Abbottabad of North Korea’s illicit finance. That finance is absolutely essential to Kim Jong-un’s capacity to buy, sell, import, export, pay, fuel, repair, and sustain. The Workers’ Party almost certainly keeps most of its money in Chinese banks. After all, what are you going to buy with all the money in Pyongyang, especially now that correspondent relationships with North Korean banks are banned by both the U.N. and the U.S.? Answer: stuff imported from China, bought with dollars held on deposit in a Chinese bank.

Freeze those dollars and Pyongyang is living on borrowed time. Sure, you can smuggle bulk cash a few million dollars at a time. Sure, you can run uninsured rust-buckets across the Yellow Sea with their lights and transponders turned off, carrying away whatever wares that cash buys, at least until all the (uninsured) ships smack into rocks, get T-boned by oil tankers, or get seized at the entrance to some canal or another. Drug cartels can run that way for years, but that isn’t a sustainable model for ruling over 23 million increasingly informed and resentful people.

Now that I’ve laid this foundation, you’ll understand the legal and policy implications of my upcoming post about what U.N. Panel of Experts report, and what it just told us about China, North Korea, and money laundering.

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UN report finds extensive evidence that China hosts N. Korea’s proliferation networks

A new report from the Wall Street Journal, quoting “U.S. and Asian officials,” says that the Trump Administration is considering “increasing financial penalties on Chinese companies in response to growing evidence of their support for North Korea’s weapons programs.” Such as:

In a case that particularly alarmed the Trump administration, a North Korean businessman attempted to use Pyongyang’s embassy in Beijing to export a lithium metal that is used to miniaturize nuclear warheads, according to the U.N. report. [Wall Street Journal, Jay Solomon]

As for that “growing evidence,” this year’s report from the U.N. Panel of Experts monitoring the (non-) enforcement of sanctions against North Korea is packed with so much of it that I couldn’t even jam a Cliffs Notes summary into one post. This post will cover the evidence that China is allowing known, U.N.-designated North Korean proliferators to operate from its territory, often openly. We’ll turn to China’s tolerance for (and abetting of) North Korean money laundering later this week, as soon as I find the time to write it up. Bear in mind, this post itself is a sequel to other posts I’ve written in previous years, also documenting China’s flagrant cheating on the sanctions, or its simple refusal to enforce them.

[“Logging vehicles” made by a state-owned company in China, via the U.N. Panel’s 2013 and 2015 reports]

Solomon’s report also adds to the leaks I discussed here, suggesting that the Trump administration will opt for a harder line, including secondary sanctions, against Chinese companies that aid and abet those violations.

But Trump administration officials have signaled there will be even greater financial pressure placed on Beijing if it doesn’t cut off North Korea, a step that risks Chinese retaliation. “We are putting the world on notice: The games are over,” Commerce Secretary Wilbur Ross said while announcing the sanctions on ZTE last week. [….]

U.S. officials said Mr. Tillerson would be discussing North Korea at all his stops in Asia, including the issue of “secondary” sanctions against non-North Korean companies that have been aiding Pyongyang. “All of the existing tools that we have to try to bring pressure on North Korea are on the table, and we’ll be looking to try to see what the most effective combination is,” said a senior U.S. official briefed on the Asia trip.

Republican senators wrote Treasury Secretary Steven Mnuchin last month and called for an investigation into the Bank of China and other Chinese firms for their alleged roles in helping North Korea. [Wall Street Journal, Jay Solomon; link to senator’s letter here]

More on that here, via the New York Times. To be clear, some of this cheating is willful, but most of it is what I’d call willful blindness, where the Chinese authorities knowingly permit North Korean proliferators to operate on their territory, even when the front companies and their agents were designated by the U.N. years ago, and often long after being put on clear notice by the U.N. Panel. In a few cases, China clings to obtuse interpretations of the resolutions to avoid complying with them. What all of these cases have in common is that U.N. experts were able to find violations on Chinese soil, in plain sight, that Chinese government officials somehow could not.

Nuclear Proliferation

Kumsan Trading. Member states are supposed to freeze the assets of, and expel the representatives of, companies involved in North Korean nuclear, missile, and other WMD proliferation. According to the Panel, the Korea Kumsan Trading Corporation is a front for North Korea’s General Bureau of Atomic Energy and helps it procure materials and fund its operations. Kumsan advertises itself online openly as dealing in sanctioned products, including vanadium and precious metals, with locations in both Moscow and Dandong. (Paras. 18-20.)

Korea Mining Development Trading Corp. (KOMID) is North Korea’s main arms dealer. It was designated in 2009 for WMD proliferation, but probably earns most of its revenue through violations of an embargo on conventional arms sales, by selling to governments in Africa and the Middle East. KOMID operates through multiple front companies that do business more-or-less openly in China. China is required to expel the representatives of these companies, but it almost never does. When one of them is exposed, it may revoke a business license or registration, but the operative goes right back into business under a new name at a new address. The Panel also found that at least nine KOMD representatives traveled through China in 2016, despite a requirement that member states deny them entry. (Table 8, Page 68.)

One of KOMID’s fronts is Namchongang Trading, which was designated by the U.N. in 2009 for procuring nuclear-related items. It operates openly in Beijing and Dandong, China, through several Chinese commercial websites. (Para. 156.) Namchongang has also operated as (or in cahoots with) Taeryonggang Trading, Namhung Trading, and Sobaeksu United Corporation, which operates in Beijing, Yingkou and Dandong. The EU designated Sobaeksu in 2010 for “the research and acquisition of sensitive products and equipment.” The Panel suspects that this entire network is involved with KOMID. (Paras. 156-59.) KOMID also does business through a front company called Beijing New Technology. (Para. 163.)

Another KOMID front, Korea Heungjin Trading, which was designated in 2012, for nuclear, missile, and other WMD proliferation, also operates openly in Dandong and Dalian. A North Korean diplomat posted at the embassy in Beijing serves as its director. (Para. 187-89.)

Green Pine Associated was designated by the U.N. in 2012 for its involvement in North Korea’s nuclear, missile, and other WMD programs. It’s still doing business openly in both Beijing, Shenyang, and Hong Kong as Green Pine, Natural Resources Development Investment Corporation, King Helong International Trading, Korea Unhasu Trading Company, and Saeng Pil Trading Corporation. (Paras. 166-83.) Green Pine is the company behind the attempted sale of the lithium from … guess where:

24. The Panel investigated the 2016 attempted online sale of lithium metal by the Democratic People’s Republic of Korea. The enriched lithium-6 isotope, and products or devices containing it, are on the list of prohibited nuclear-related items adopted by the Security Council (see annex 4-4). According to IAEA, lithium-6 is used to produce tritium, an isotope found in boosted nuclear devices. This sales attempt suggests that the Democratic People’s Republic of Korea has access to remaining quantities of the material.

25. Li-6 is advertised for sale by a company of the Democratic People’s Republic of Korea, General Precious Metal, which the European Union has identified as an alias of Green Pine Associated Corporation (Green Pine). Mr. Chol Yun was listed as the contact person of General Precious Metal for sale of the mineral and has an address and phone numbers in Beijing (see annex 4-5). The same name appeared as third secretary of the embassy of the Democratic People’s Republic of Korea in Beijing on an official diplomatic list dated 24 September 2012 (see annex 4-6). The Panel notes a pattern whereby the Democratic People’s Republic of Korea has accredited Green Pine overseas representatives as diplomats. The Panel continues to investigate this diplomat’s involvement in prohibited activities and his possible connection with another prohibited activity (see para. 91).

Korea Ryonha Machinery Joint Venture was designated in 2013 for WMD proliferation, mainly for buying, selling, and manufacturing machine tools used for making both conventional weapons and WMDs. It shows up in POE reports year after year because it continues to operate, and to display its wares at trade shows, in both Russia and China. In 2016, a Chinese company exported several machine tools to North Korea, and the Chinese government was reportedly investigating (!) Ryonha’s involvement. (Para. 196.)

[From the U.N. Panel’s 2014 report]

Training of scientists. The resolutions ban member states from training North Koreans in sensitive technology that could be used for North Korea’s WMD programs. The North Korean universities that train the country’s nuclear and missile scientists have exchange agreements with universities in Russia and China. The Panel asked the Chinese universities to explain, but they never responded. (Para. 135.)

Missile Proliferation

Kwangmyongsong missile parts. Someone, presumably the U.S. Navy, recovered the pieces of a Kwangmyongsong missile North Korea launched in February 2016 and found that it contained “ball bearings and engraved Cyrillic characters … identical to those from the 2012 Unha-3, and a “camera [and] EMI filter” from a “Chinese manufacturer, Beijing East Exhibition High-Tech Technology Co. Ltd.” (Paras. 57-58.) That “someone” also discovered the Pyongyang had imported pressure transmitters from the U.K. and Ireland, via the manufacturer’s distributor in China, via middlemen in China. (Para. 59.) This suggests several layers of violations — China’s failure to expel North Korean representatives of sanctioned entities, to enforce export controls, or to inspect cargo going to North Korea.

Shipment of Scud parts to Egypt. Paragraphs 71-77 of last year’s report discuss a shipment of Scud missile parts to Egypt. Since then, the Panel has determined that the whole scheme was run out of the North Korean embassy in Beijing. (Paras. 88-89.) The shipper was Ryongsong Trading Company, and the seller was Rungrado Trading Company, which you may remember for its human trafficking in Europe. Rungrado was designated by the Treasury Department last year for “the exportation of workers” from North Korea to earn foreign currency for Pyongyang, some of which went to North Korean agencies that were designated for supporting WMD programs. South Korea considers Rungrado to be an alias for Ryongsong. (FN.99.) Although the U.S. Treasury Department routinely designates aliases, it has not designated Ryongsong.

Weapons Trafficking

North Korea is subject to a U.N. embargo on the import, export, sale, or purchase of weapons, including weapons components, technology, services, training, and dual-use items. Since March, China has been required to inspect all cargo “that has originated in the DPRK, or that is destined for the DPRK, or has been brokered or facilitated by the DPRK or its nationals, or by individuals or entities acting on their behalf or at their direction, or entities owned or controlled by them, or by designated individuals or entities, or that is being transported on DPRK flagged aircraft or maritime vessels.”  (Para. 18.) Pretty clearly, that isn’t happening.

Syria rocket shipment. You’ve already read my post on this, right? Last August, Egyptian authorities seized a record haul of North Korean weapons, mostly PG-7 antitank rockets, hidden under iron ore aboard the M/V Jie Shun. I guessed that Syria was the destination because of the geography, but it’s possible that the client could have been Hamas or Hezbollah (which have also been Pyongyang’s arms clients).

This transaction also relied heavily on North Korean agents based in China. The bill of lading lists a shipper whose address is a hotel room in Dalian, a city often used by North Korean operatives. (Para. 63.) The holder of the ship’s compliance document was one Fan Mintan. A second man, Zhang Qiao, was its emergency contact, arranged for the ship’s insurance, and registered the ship’s operator in the Marshall islands. (Paras. 65-66.) Zhang is also involved in the coal trade with North Korea (para. 68), and thus played a role in violating UNSCR 2270 and 2321. He is also linked to another suspected North Korean smuggling ship, the M/V Light. A third man, Li Anshan, whom the Panel links to Ocean Maritime Management, a North Korean shipping company designated by the U.N. for arms smuggling, helped arrange for the Jie Shun’s Cambodian registration.

Eritrea radios shipment and Glocom. I previously posted about Glocom, the Reconnaissance General Bureau front company that manufactured sophisticated military radios and was based in Malaysia. Glocom made headlines after it was exposed just after the assassination of Kim Jong-nam. Starting at Paragraph 72 of its report, the Panel described how Glocom shipped radios to Eritrea. According to the Panel, that shipment “originated in China.”

75. The air waybills listed the shipper as Beijing Chengxing Trading Co. Ltd. According to the Chinese business registry, the company is still active, mainly trading in electronics, mining equipment and machinery (see annex 8-3). Mr. Pei Minhao (???) was listed as a legal representative until 26 February 2016 and still owns most shares in the company (see para. 164).

Glocom had North Korean representatives based in both Malaysia and China; had bank accounts, front companies, and procurement agents in both Malaysia and China; used mostly Chinese suppliers; and shipped its components to Beijing or Dandong for assembly (the report didn’t specify where). (Para. 77-84, 164.) Glocom did most of its business in U.S. dollars or euro through a sanctioned bank, Daedong Credit Bank, “to transfer funds to a supply chain of more than 20 companies located primarily on the Chinese mainland; in Hong Kong, China; and in Singapore.” (Paras. 233-25.)

Naval vessel repair & construction. Last year, the Panel reported that Green Pine had refurbished military patrol boats for Angola in violation of the arms embargo. The parts were shipped from China, the Panel has asked China for an explanation, and China still hasn’t given one. (Para. 103.)

North Korean UAV that crashed in South Korea. A Beijing company, Microfly Engineering and Technology, made it. After that, the trail leads to another Chinese company and two middlemen, who either point fingers at one another or deny all involvement. The Panel asked China to investigate, but China hasn’t responded. (Para. 107.)

Conclusion

When reporters try to make sense of China’s inconsistent and shifting explanations for why it won’t enforce sanctions against North Korea, they often settle on the consensus that China doesn’t really want North Korea to have nukes, but that it’s afraid that strict enforcement of sanctions will cause North Korea to collapse. This evidence should cause us to question that consensus. When China hosts all of these entities that spend scarce North Korean resources on nuclear components instead of food and consumer goods that might stabilize the regime, you have to look beyond regime preservation to explain China’s motives. Frankly, I can’t buy the consensus that Beijing doesn’t want North Korea nuked up when I see this much evidence that it’s helping to make that happen. Maybe the scholars our scholars are talking to don’t want a nuclear North Korea, but I’m not sure those scholars necessarily speak for China’s defense establishment.

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China is waging economic war against S. Korea. We must stand by our ally.

Less than two years ago, I wrote of the coming Korea missile crisis. That crisis has now arrived. As I’ve documented at this site, that crisis is, in large part, a crisis of China’s making. North Korean missiles are made in part from Chinese technology, in large part from components purchased in or smuggled through China, and that are almost always procured by North Korean agents who operate more-or-less openly on Chinese soil. North Korea’s missiles ride on Chinese trucks. North Korea’s nukes and missiles were paid for by dollars laundered through Chinese banks, by commerce (much of it illicit) that passed through Chinese ports. 

Now that those missiles have matured into a grave threat to our allies in South Korea and Japan, and to the Americans (and their family members) stationed on allied soil, the U.S. has deployed defensive missiles to both countries. Now, China has the unmitigated gall to object to South Korea defending itself against a made-in-China threat from North Korea, presumably because missile defense weakens China’s own capacity to bully those allies, Taiwan, and perhaps even the United States.

Since 2006, China has voted for seven U.N. Security Council resolutions (1695, 1718, 1874, 2087, 2094, 2270 and 2321) and proceeded to violate all seven of them almost immediately. Why? Probably because China’s long-term strategic objective was to use North Korea to intimate South Korea, drive a wedge into the U.S.-South Korean alliance, push U.S. forces out of Korea, and then apply the same strategy to Japan. China probably realizes that by backing Kim Jong-un it’s riding a tiger, but it still prefers coddling a Caligula with nukes to allowing one free Korea to arise on its border. China’s grand strategy stands a strong chance of succeeding. Many South Koreans would sacrifice some of their personal freedom and national independence for fear of war or recession. Right now, the people of South Korea are looking to us. They wonder if they can still count on us.

That’s because China, which is opposed to unilateral sanctions except when it isn’t, has just started a trade war with South Korea to disarm the wrong Korea — the one that’s trying to defend itself against the missiles it helped North Korea build. China is closing South Korean stores on administrative pretexts, canceling group tours by Chinese tourists to South Korea, imposing pretexual inspections on South Korean agricultural products, and disrupting other South Korean investments in China. Militarily, we are standing by our ally. THAAD, though by no means a defense against all of North Korea’s threats to Seoul, can stop the largest missiles that carry the most dangerous (read: nuclear) warheads. Diplomatically, we’re saying we stand behind South Korea, and the Secretary of State has just announced a visit to Seoul. Those are good first steps toward showing U.S. resolve in standing by its ally. But if the U.S. isn’t just as prepared to stand by its ally economically as it is militarily and diplomatically, South Korea may well be finlandized as a Chinese satellite under a future President Moon Jae-in, who is no friend of America

To prevent this, the U.S. must send Beijing a strong message of economic deterrence. A trade war with China would be bad for both countries, but worse for China, with its heavy reliance on exports to the U.S. and the dollar economy. Beijing is using its economic power to attack U.S. security interests and those of our allies. We can’t stand for this. As with any other war not of our choice, economic war would come with costs. The question is whether the costs of not fighting back exceed the costs of fighting back. In this case, the cost of not fighting back could include the breakdown of the security system that has freed and enriched billions of people in northeast Asia, the U.S., and (indirectly) around the world. It would include a significant setback in our efforts to prevent North Korea from irreversibly defeating the cause of global nonproliferation. Measures to mitigate the impact on South Korea are only a partial answer. We must also deter a China that is testing a new president’s resolve with a strategy that is at least as dangerous as anything it has done in the South China Sea. That is worth bearing significant economic costs. And there are ways we can, and should, respond.

1. The first and most obvious target should be the Chinese banks that are breaking U.S. law to finance Kim Jong-un’s proliferation. That’s something we should be doing regardless of China’s bullying of South Korea, so arguably, it doesn’t belong on this list at all. Still, China’s bullying might affect the strategy we use and the aggressiveness with which we implement it.

2. U.N. Security Council resolutions require all ports to inspect cargo going to or coming from North Korea. China’s ports clearly aren’t doing that. Under section 205 of the NKSPEA, Customs and Border Protection has the authority to increase inspections of cargo coming from those noncompliant ports. Ports in China’s economically depressed northeast, particularly those that import coal in violation of U.N. sanctions, should be at the top of our target list (but only one or two smaller ports, initially). The effect of such a sanction would be greatly magnified if the South Korea and Japan join it; after all, the U.S., South Korea, and Japan are China’s three largest trading partners. As they might say in New Jersey, it’s time for some traffic problems in Dandong. 

[Hey, it’s Donald. I think I have a job for you after all.]

3. China’s protectionism, censorship, and hacking make its IT companies good targets for sanctions, particularly through a more aggressive posture by the Committee on Foreign Investment in the U.S. and the aggressive policing of technology transfers. Yesterday’s actions against ZTE industries, which included the imposition of a $1 billion fine, are an example of the actions the U.S. could take to prevent China from stealing and selling U.S. technology to our enemies. Importantly, those actions suggest that the Trump administration has revoked China’s de facto immunity from the consequences of breaking U.S. law. As with our money laundering laws, we should enforce our export control and intellectually property laws regardless of how China treats North Korea, but China’s behavior against South Korea can influence our prosecutorial discretion in how aggressively we enforce those laws.

4. As mentioned, the U.S., South Korea, and Japan are China’s top three trading partners. Does China really want a trade war against all three of those economies when its banking sector is teetering under mountains of debt, when it’s trying to deflate a real estate bubble, and when it’s struggling to retain control of its currency and its stock market? Again, a trade war would be bad for everyone; the strategy is to deter China and force it to retreat by making sure it knows it would get the worst of one. The three allies share a strong interest in keeping the U.S.-Korea alliance strong to protect them from a common North Korean threat. For Japan, joining that economic alliance would have the advantage of balancing its villainous image in South Korea with the reality that it can also be a strong ally for South Korea’s security. By identifying appropriate targets in China for sectoral sanctions and combining their economic weight, the three allies can force China to back down and behave reasonably. Some of those targets might include products that include North Korean labor or materials, including seafood, textiles, and precious metals. Targets should be chosen to cause the maximum amount of economic and social unrest in China.

South Korea’s response to China has a political component, too. Its political right should play the anti-China nationalist card as shamelessly the political left played the anti-American nationalist card in 2003. It has criticized the left for cozying up to China in the midst of China’s economic bullying, and should intensify that criticism, making any preemptive capitulation to China an election-year liability for the political left. Both sides in Korea have long played the anti-Japan nationalism card, which continues to put distance between two natural allies over events that concluded 72 years ago. Not one comfort woman can still be saved from the predations of imperial Japan, but thousands of (North) Korean women who are sold as sex slaves in China still can be. I wonder if it might finally occur to Beijing that its bullying is backfiring if human rights activists put a statue of one of those trafficked women in front of the Chinese Embassy in Seoul. At the very least, it might make a few South Koreans stop to think about how China treats North Korean women, and whether that treatment is a metaphor for what China thinks of Koreans generally.

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China’s latest cheating on North Korea sanctions is a test for Trump

Like most people, I would prefer that the new President of the United States refrained from conducting diplomacy by Twitter. Without endorsing the medium, I gave a qualified endorsement to the message President Trump sent to China when he accused it of not helping to reign in His Porcine Majesty. Trump was right about this, of course. Over the last several years, the U.N., no less, has published a wealth of evidence that China has (almost certainly willfully) violated the North Korea sanctions it voted for in the Security Council. Here’s the latest example:

26. Decides … that the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, coal, iron, and iron ore, and that all States shall prohibit the procurement of such material from the DPRK by their nationals, or using their flag vessels or aircraft, and whether or not originating in the territory of the DPRK, and decides that this provision shall not apply with respect to:
. . . .
(b) Total exports to all Member States of coal originating in the DPRK that in the aggregate do not exceed $53,495,894 or 1,000,866 metric tons, whichever is lower, between the date of adoption of this resolution and 31 December 2016 …. [UNSCR 2321, Nov. 30, 2016]

Just eight weeks later, the inestimable Leo Byrne cites customs data showing that China imported twice the amount of North Korean coal permitted for the remainder of 2016:

Customs figures show Chinese traders imported over 2 million tonnes of coal in December, up from 1.9 million the previous month. North Korea’s received $168 million for the commodity, a figure over three times that outlined in Resolution 2321. [NK News, Leo Byrne]

So yesterday, a reporter asked the Chinese Foreign Ministry’s mouthpiece to explain herself.

Q: [I]t is stipulated in Resolution 2321 of the UN Security Council that the imported coal from the DPRK by 31 December 2016 should not exceed one million ton or 54 million US dollars. Statistics recently released by China’s customs shows that China’s volume of coal imports from the DPRK in December 2016 exceeded the cap. What is China’s comment on that?

A: On your first question, it is a shared obligation of UN member states to implement resolutions of the Security Council. According to Chinese laws, it is required for the Chinese government to issue a statement for actions taken to implement Resolution 2321. This is a regular practice of the Chinese side. The statement by relevant Chinese ministries is one such step. The list of dual use items and technologies annexed to the statement is a verbatim quote of the list in the resolution.

The mouthpiece is referencing this belatedly updated list of things Chinese companies aren’t supposed to export to North Korea, unofficially translated here, at NK Pro.

On your second question, let me point out that Resolution 2321 should be implemented in a comprehensive and balanced manner. And it is not only China who should implement the resolution. The resolution called for solving the issue of the Korean peninsula through political and diplomatic means. I would like to ask, what efforts have been made by other relevant countries? [ChiCom Foreign Ministry]

The mouthpiece implies that China’s compliance with the sanctions resolutions is conditioned on “other relevant countries … solving the issue of the Korean peninsula through political and diplomatic means.” But the resolutions impose no such obligation or condition. The argument is spurious. It’s also circular, because North Korea’s first demand in negotiations will surely be that we stop enforcing sanctions, meaning that China’s de facto position is that it won’t comply with sanctions unless we lift sanctions.

Specifically on your question, competent authorities of China issued a statement on 9 December, immediately after the adoption of Resolution 2321 by the Security Council, ordering the suspension of coal imports from the DPRK until 31 December 2016. The Chinese side have taken measures in line with the requirements of the resolution and fulfilled its own international obligation. [ChiCom Foreign Ministry]

China’s obligation under Resolution 2321 does not end with issuing a statement and then forgetting about it. Surely China, which can have Jingjing and Chacha at a dissident’s doorstep 20 minutes after an offending Weibo post, can’t expect us to believe that it can’t enforce its laws. Surely China, whose customs authorities know how to detect and hold up shipments when doing so serves Beijing’s interest in bullying its neighbors, can’t expect us to believe that it can’t enforce its customs laws. When confronted with evidence of a violation of a U.N. sanctions resolution China voted for eight weeks ago in a clear, blue question, China’s mouthpiece gave a vague, red answer. That answer shows contempt for the United Nations and the United States.

For eight years, Barack Obama mostly kowtowed in the face of a whole course of aggressive Chinese conduct. Obama’s passivity pleased many “China hands” in academia, but worried our military, shook the confidence of our allies, and yielded some grave setbacks for peace and security in an economically vital part of the world. The most menacing of these is Kim Jong-un’s alarming progress toward nuclear breakout. Beijing acts as if it does not understand the risk of war if sanctions fail, or the risk that this war would involve China. Either that, or China sees a nuclear North Korea as useful for China’s plans to dominate northeast Asia.

For all that was wrong with the Obama administration’s North Korea policy, the former President did lay down a marker in blocking the assets of the North Korean military-controlled companies responsible for most of the coal exports. To the extent that Chinese importers purchased from those designated suppliers or failed to limit North Korean coal imports as required under U.N. resolutions and Chinese law, the U.S. has the authority to freeze the Chinese importers’ dollars. Alternatively, it could invoke section 205 of the NKSPEA to increase the inspection of cargo arriving at U.S. ports from Chinese ports that facilitated violations of the coal cap. This is a test for the new Trump administration. We’re about to find out if Donald Trump’s tough talk is more than just talk.

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Trump’s tweets show the right instincts on North Korea.

Kim Jong-un’s New Year speech turned out to more interesting than I’d predicted. No, he isn’t going on Atkins; he’s threatening to fire an ICBM that can hit the United States with a nuke. One wonders how the usual suspects at 38 North will spin this speech into predictions of glasnost and perestroika, but for now, consistent with another prediction I made, Kim Jong-un’s transition-year provocations are molding the President-Elect’s policy at a critical moment, and not to Kim Jong-un’s advantage:

For the last several months, Korea watchers have speculated which Donald Trump we’d see making our North Korea policy. Would it be the deal-maker who, in one breath, suggested he’d withdraw our troops from South Korea, sit down with a mass-murderer over hamburgers, and cut a deal? Or would it be the one who, in the next breath, called His Porcine Majesty “a maniac” and suggested that China should kill him? The two tweets Trump posted last night have given us the clearest vision of his North Korea policy since Election day. 

Whatever you may think about trade policy, Trump is unquestionably right about North Korea. China has done much less than nothing to help us in North Korea; it has actively undermined sanctions against it. Its companies sell North Korea the trucks that haul its missiles, its ports let WMD components and weapons pass through on their way to the Middle East and Africa, and its banks are laundering the money that ships North Korean weapons and enriches North Korean proliferators. If the Chinese government hasn’t been willing to help until now, it isn’t going to help unless it faces a much higher cost for its conduct. In fact, it probably won’t be swayed to help at all, but China’s banks and trading companies can be. In the short term, they should be our first targets.

In the long term, our strategy should be to put the North Korean government into something like financial receivership. We should identify and freeze every North Korean account, releasing only as many dollars as necessary for North Korea to import food, medicine, fertilizer, and humanitarian necessities. That strategy must be pursued unblinkingly — subject only to temporary and partial waivers — either until North Korea’s disarmament is verified and it makes fundamental humanitarian reforms, or until the regime no longer exists. We cannot afford to repeat the errors of 1994 and 2007 by throwing away our leverage before North Korea is disarmed, one way or another.

Lest anyone accuse me of proposing a “sanctions-only” policy — and I have never proposed one — our next targets should be the North Korean elites in Pyongyang. We must persuade them that they have no future with Kim Jong-un — that their salvation from purges and a bleak future for their children lies in reunification. How, exactly? Well, read this strategy paper.

We must also reach out to North Korea’s poor, beyond the limits of Pyongyang. We should advocate for their human rights at the United Nations, bilaterally, publicly, and at every opportunity — and we should tell them we doing so. We should help them build the clandestine banks, churches, schools, unions, factories, farms, clinics, newspapers, relief agencies, and police forces — a clandestine civil society that could also become the political foundation of both a national resistance movement and a reunified Korea.

Finally, if North Korea goes through with launching that missile, Trump should tell the military to shoot it down.

Before Donald Trump even ran for President, my wife and I had an involved conversation about what makes presidents effective. We concluded that Reagan was effective, whereas Obama and Carter, despite being much more intelligent men, were not. Why? Because an effective president doesn’t necessarily have to master the details of policy. All an effective president really needs are good instincts about policy, good judgment about appointees, the decisiveness to pick policies and stick with them, and the judgment to know when he’s about to cripple himself with a bad ethical or policy decision. To my liberal friends, and to my friends who are reluctant conservatives, hold that last thought. In fact, hold all of them until we see what the new cabinet and policies look like.

For now, in two tweets, Donald Trump has shown better instincts about the nature of our problem in North Korea, and how to address it, than Barack Obama (undoubtedly a fine man and a highly intelligent one) displayed in eight years in office. When Trump decides to make policy of the instincts he displayed in his tweets, the first man he should turn to is Senator Cory Gardner.

While the Obama administration has implemented portions of the North Korea Sanctions and Policy Enhancement Act, I encourage the Trump administration to continue with the full implementation and more importantly, the enforcement of the sanctions outlined in the legislation.

In particular, I urge the new administration to utilize the so-called “secondary sanctions,” which target outside entities, or companies, that help Pyongyang engage in illicit behavior. Many of these companies are based in the People’s Republic of China, and the US must not be afraid to anger Beijing by going after them. While the Obama administration has sanctioned and indicted four Chinese nationals and one Chinese-based company for its business tied to North Korea’s weapons program, there are many more that the Treasury Department can — and should — target with financial sanctions. [CNN]

Whether you voted for Trump or not, you should be rooting for him to get North Korea right. So much depends on that. We only get one president at a time. For the next four years, this is the president we are going to have. At this point, if Trump has any designs on making a North Korea deal, the indications are pointing more toward the parody I wrote nearly a year ago than “just another walk in Central Park.”

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The U.S. may (finally) be serious about capping North Korea’s coal exports

For almost three months after North Korea’s fifth nuclear test, the U.N. Security Council remained deadlocked over how to respond, with the U.S. and its allies pressing to limit Kim Jong-un’s access to hard currency and China trying to shield its belligerent protectorate from the consequences of its behavior.

Among the most hotly debated questions was how to limit North Korea’s coal exports to China, one of His Porcine Majesty’s most important sources of hard currency. Although UNSCR 2270, passed in March after the fourth nuke test, banned most of Pyongyang’s mineral exports, there was a gaping loophole allowing exports of coal, iron, and iron ore for “livelihood” purposes. Unfortunately, it soon became clear that “livelihood” translated into Chinese means “whatever.” The exception soon swallowed the rule, and coal exports did not fall; they rose … by a lot. By September, China’s coal imports from North Korea had risen 12.8 percent over the same period last year, to a record high. The Obama administration clearly felt that China was cheating. (See also my posts from March, July, and October and Stef Haggard’s post from yesterday.)

The eventual compromise the U.S. and China reached in UNSCR 2321 was disappointing, to say the least. Rather than take any plausible steps to ensure that Pyongyang really used its coal money to provide for the livelihoods of its hungry people, the resolution simply capped coal exports at $400 million or 7.5 million metric tons a year, whichever is less. (In 2015, North Korea exported $1 billion worth of coal to China) On paper, Chinese power companies were also prohibited from buying any amount of coal from entities associated with North Korea’s WMD programs.

The flaws in this “solution” are obvious. How will we know how much coal North Korea exported, and at what price? By relying on Chinese customs statistics? How will we know which North Korean entities really sold the coal? And more fundamentally, given that cash is fungible and North Korean despots have consistently prioritized their arsenals and their own high lifestyles over the survival of their people, how can anyone verify how the world’s most financially opaque society spent the money? If China really gave a whit about the “livelihoods” of North Koreans — in fact, it holds the lives of North Korean men, women, and children in utter contempt — it would have agreed to pay for “livelihood” coal in the form of food, or to the World Food Program. An unverifiable cap is a license to cheat.

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But Treasury’s announcement last week of bilateral sanctions against certain North Korean coal exporters, who Treasury believes “may benefit the Government of North Korea or the Workers’ Part (sic) of Korea,” could go far to swallow the “livelihood” cap exception to the coal ban that swallows the rule.

OFAC designated Daewon Industries and the Kangbong Trading Corporation for having sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea, metal, graphite, coal, or software, where revenue or goods received may benefit the Government of North Korea or the Workers’ Part of Korea.  The Kangbong Trading Corporation’s parent is the Ministry of People’s Armed Forces.  Daewon Industries also operates in the energy industry in the North Korean economy, and may be subordinate to the Munitions Industry Department, which is sanctioned in UNSCR 2270, designated by the U.S. pursuant to E.O. 13382, and responsible for overseeing the development of North Korea’s ballistic missiles, including the Taepo Dong-2. [U.S. Treasury Dep’t Press Release]

With that action, Treasury’s clear message to Chinese buyers is that certain North Korean sources are off limits, cap or no cap. The recent example of the Dandong Hongxiang indictment and forfeiture complaint hovers over all of this, posing a credible threat that Chinese buyers could have their dollar assets frozen. And in case anyone thinks Dandong Hongxiang was a one-off, our diplomats have said it isn’t.

The United States has warned China it will blacklist Chinese companies and banks that do illicit business with North Korea if Beijing fails to enforce U.N. sanctions against Pyongyang, according to senior State Department officials. The tougher U.S. approach reflects growing impatience with China and a view that it has not strictly enforced existing sanctions to help curb Pyongyang’s nuclear program, which a U.S. policy of both sanctions and diplomacy has failed to dent.

U.S. Deputy Secretary of State Antony Blinken gave the message to Chinese officials in meetings in Beijing in October after North Korea conducted its fifth and largest nuclear test, the officials said. U.S. National Security Adviser Susan Rice and Secretary of State John Kerry stressed the importance of choking off financial flows to Pyongyang during a meeting with Chinese State Councilor Yang Jiechi in New York on Nov. 1. [Reuters]

There are some early signs that Chinese industry may have gotten that message, although it’s typical for Chinese companies to slow their trade with North Korea temporarily after the U.N. passes new sanctions. As I’ve pointed out here more than once, there is undeniable evidence that China has violated North Korea sanctions frequently and flagrantly for years. China will not wait long to resume its cheating and test our resolve. With demand for North Korean coking coal high, we’ll need a strong deterrent to enforce sanctions. If our President-Elect has done anything right, he has sent a clear (and apparently calculated) message that China’s sensitivities will not prevent him from acting decisively to protect U.S. interests. After all, it’s not as if our sensitivities have had much visible effect on China’s behavior.

This wasn’t the only energy sanction Treasury imposed last Friday:

OFAC designated the Korea Oil Exploration Corporation for operating in the energy industry in the North Korean economy.  The Korea Oil Exploration Corporation is a state-controlled enterprise of the North Korea Ministry of Oil.  The Korea Oil Exploration Corporation has reportedly worked to establish contracts with Iranian oil entities, in part to supply crude oil to two refineries in North Korea. [U.S. Treasury Dep’t Press Release]

Among others, that’s probably bad news for James Passin, a hedge fund manager who gambled his shareholders’ money on a refinery and oil exploration in North Korea. U.N. sanctions ban exports of aviation and rocket fuel to North Korea, but not crude. Until recently, China continued to export petroleum products to North Korea. (For the record, I oppose banning exports of gasoline, diesel, and heating oil to North Korea, for humanitarian reasons.)

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The Obama administration’s designation of the North Korean companies consolidates a U.S. shift to a harder line on sanctions enforcement, reflecting a bipartisan consensus for tougher action in Congress. It’s also satisfying to me personally, because the administration has adopted the strategy I advocated here in October.  Note that the language in the Treasury Department’s press release (“revenue [that] may benefit the Government of North Korea or the Workers’ Part of Korea”) does not match the language of UNSCR 2321 (“entities that are associated with the DPRK’s nuclear or ballistic missile programmes or other activities prohibited by [applicable U.N.] resolutions”), because the administration relied on the domestic legal authority of Executive Order 13722 instead:

Sec. 2. (a) All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of the following persons are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in: any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:

   (i) to operate in any industry in the North Korean economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to be subject to this subsection, such as transportation, mining, energy, or financial services;

   (ii) to have sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea or any person acting for or on behalf of the Government of North Korea or the Workers’ Party of Korea, metal, graphite, coal, or software, where any revenue or goods received may benefit the Government of North Korea or the Workers’ Party of Korea, including North Korea’s nuclear or ballistic missile programs;  [EO 13722]

Those provisions, in turn, implement sections 104(a)(8) and 104(b)(1) of the North Korea Sanctions and Policy Enhancement Act. They may have also reflected Treasury’s interpretation of the coal export ban as passed in March, in UNSCR 2270. U.N. resolutions don’t enforce themselves. They require U.N. member states to implement their sanctions through legislation. Member states that want U.N. sanctions to work benefit from a U.N. imprimatur to globalize sanctions enforcement. Each level of authority needs and complements the other.

Tactically, it was wise of the administration to wait for the (undoubtedly difficult) negotiations with China to conclude before it acted. The clear message it sent at the conclusion of that negotiation is that, for the time it has left, it will hold China to its word. Let’s hope the next administration is equally serious.

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Why Seoul’s blacklisting of Air Koryo & Dandong Hongxiang matters

South Korea is the first of the Free Three (the U.S., South Korea, and Japan) to announce independent multilateral sanctions on North Korea following the approval of UNSCR 2321. Some of the measures, such as the blacklisting of Choe Ryong-hae and Hwang Pyong-so, will probably mean almost nothing until some future left-wing president tries to give one of them a ticker-tape parade along the Chongro.

An extension of South Korea’s ban on ships that have entered North Korean ports within the last 180 days will do more, by forcing shipping companies to choose between the modest trade with North Korea and the much more significant trade with Japan and South Korea. With North Korea’s own ships already under rising pressure even pre-2321, and now facing a loss of access to insurance, North Korea may soon find itself increasingly isolated from its export markets.

South Korea’s blacklisting of Air Koryo, while not directly significant by itself (Air Koryo doesn’t fly to South Korea) may foreshadow a corresponding action by the U.S. Treasury Department, which would freeze North Korea’s national airline out of the dollar system and seriously crimp its operations. (Update: That turns out to have been a pretty good guess. OFAC just released a new round of designations that includes North Korean banks, slave labor merchants, the Korea National Insurance Corporation, and Air Koryo. I’ll have more to say after work.) It could also clear the way for South Korean diplomats to lobby middle powers like Malaysia, Thailand, Kuwait, and Singapore to deny Air Koryo landing rights. That would be a severe blow to Pyongyang. South Korea’s diplomatic campaign against North Korea’s foreign clients has been highly effective this year.

The most important and courageous move, however, was this one:

In particular, Dandong Hongxiang Industrial Development and four of its executives were included on the list, marking the first time that a Chinese firm is facing South Korea’s unilateral sanctions.

The company is under investigation on suspicions that it exported aluminum oxide — a nuclear bomb ingredient — to the North at least twice in recent years. In September, the U.S. blacklisted it along with its owner and other company officials.

With the latest action by Seoul, a total of 79 individuals and 69 entities will be subject to sanctions in connection with the North’s nuclear programs. The government announced a blacklist in March as a follow-up move to the UNSC’s Resolution 2270 adopted in the wake of the North’s fourth nuclear test in January.

Any financial transactions with them will be prohibited, while their assets in South Korea will be frozen. The blacklisted people will also be banned from entering the country, which is seen as a symbolic action given that there are no exchanges between the two Koreas. [Yonhap]

This could be the first sign that the three allies, acting outside the U.N. and beyond the reach of a Chinese or Russian veto, are forming a coalition to combine their economic power behind secondary sanctions against Pyongyang. If Japan joins in this, it will mean that the Chinese trading companies that prop up His Corpulency’s misrule will now face not only the freezing of their dollar assets, but the loss of their trade relationships with the two most important non-Chinese markets in northeast Asia. If those Chinese trading companies think they can mitigate the risk of secondary sanctions by insulating themselves from the dollar, Seoul has just added an additional layer of risk for those that continue to trade with Pyongyang. If the Free Three have coordinated their sanctions well, Tokyo will soon add its heft to that risk. Trading companies’ shareholders, officers, and bankers may find that risk increasingly unacceptable.

Beijing knows that while Dandong Hongxiang is itself a dead letter, this sort of Progressive Diplomacy represents a dangerous precedent for its interests. I expect it to react furiously. Even a year ago, I could not have imagined Park Geun-hye antagonizing South Korea’s greatest trading partner this way. Today, with all the noise about impeachment and the North Korean crisis, the Chinese reaction could be crowded out of the headlines. But with Park having conceded that she cannot hold onto power for long, she has nothing to lose.

Not only does Park have no reason not to burn bridges, she may have her own reasons to punish China. If she’s at least as paranoid as I am, she may suspect China, or its North Korean dependent, of directly or indirectly supporting the media frenzy that led to her downfall. It seems plausible in the age of Wikileaks that foreign governments give clandestine support to media hostile to leaders who oppose their interests. She may even suspect them of having planted the tablet that first broke the scandal. Personally, I see no direct evidence of it, nor do I think it’s more than 20 percent likely, but I’ve yet to see anyone explain (or even inquire into) the remarkable coincidence by which a discarded device just falls into the lap of a hostile press and topples a head of state. It seems easier to pull off than, say, throwing Wisconsin to Trump.

Either way, Park Geun-hye isn’t going quietly, and she’s gambling that the actions she takes on her way out the door will have the support of a future President Trump. No matter how much the Hankyoreh rages, that will make those actions even harder for her successor to undo than for her to do. What we may be seeing here is the first brick in a multinational sanctions coalition in which the members concentrate their collective power against Pyongyang’s enablers. For now, the Free Three are the core of that coalition, but with skillful diplomacy and time, that coalition may soon include other middle powers, other issuers of convertible currencies, and key members of an increasingly fractious European Union.

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Clinton’s North Korea epiphany: We have always been at (cold) war with China

So desperate are we to avoid a Cold War (or worse) in the Pacific that throughout the Obama years, we’ve pretended that China hasn’t been waging one unilaterally the whole time. Meanwhile, China has seized the South China Sea, bullied our allies with spurious territorial claims, whipped up anti-American rhetoric to persecute human rights activists, and effectively quit enforcing sanctions against North Korea despite signing on for a nominally tough new resolution in March.

Evidence, you ask? Start with this new Australian report showing that China isn’t enforcing the U.N.’s new cargo inspection requirements at all. China still hasn’t stopped buying minerals like gold and titanium, which is isn’t supposed to buy in any quantity. Coal and iron imports, which are supposed to be limited to “livelihood” purposes, fell sharply in the first quarter of this year, only to rise again in the second. Chinese online vendors have even been selling North Korean coal. China continues to sell kerosene (read: jet fuel) in violation of a U.N. ban. Sanctioned North Korean ships have been seen leaving port. One, the Victory 2, has made regular calls in Chinese ports. Others have been seen hovering just off the Chinese coast. A China-based company, Blue Ship Management, continues to operate two sanctioned North Korean ships. More than 800 agents of North Korea’s Reconnaissance General Bureau, which was designated in UNSCR 2270, continue to operate on Chinese soil, mostly hunting for defectors and policing overseas workers. Et cetera, et cetera, et cetera, and so forth.

These are the wages of our weakness toward North Korea and China. The new realization that North Korea could be just two years away from having a second-strike capability to hit our West Coast with nuclear weapons has raised the danger of nuclear war to their highest level since 1962, as I predicted it would a year ago. Unfortunately, the President has been poorly served by his National Security Staff and State Department, which have counseled him to hold back on holding China accountable for enabling the steady rise of this threat. China’s friends in Washington, and others who should know better but don’t, are fond of saying there’s nothing we can do about this. But we know what scares and moves China — secondary sanctions. Congress gave the President the authority (and a mandate) to impose them because China’s violations of sanctions against North Korea are nothing new. They have been so longstanding and so flagrant as to eliminate any other possibility but a deliberate, willful policy.

Even before the last nuclear test, there was a growing sense that President Obama had failed to hold North Korea’s Chinese enablers to account for those violations, despite having so recently signed a new legal mandate to do so. Even before that test, President Obama had said he would seek to toughen sanctions in response to North Korean missile test, and revealed his irritation with China after its rude treatment of him, and after getting an earful of its unreasonable objections to THAAD:

“China continues to object to the THAAD deployment in the Republic of Korea, one of our treaty allies. And what I’ve said to President Xi directly is that we cannot have a situation where we’re unable to defend either ourselves or our treaty allies against increasingly provocative behavior and escalating capabilities by the North Koreans,” Obama said at a news conference in Laos after the East Asia Summit.

“And I indicated to him that if the THAAD bothered him, particularly since it has no purpose other than defensive and does not change the strategic balance between the United States and China, that they need to work with us more effectively to change Pyongyang’s behavior,” he said, according to a White House transcript. [Yonhap]

And even before that test, the Chairman of the Foreign Relations Committee had called on the President to enforce the North Korea sanctions law he has signed just seven months ago, including by imposing secondary sanctions on Chinese entities. Similar reactions came from Paul Ryan and Ed Royce, the Chairman of the House Foreign Affairs Committee (HFAC).

China has to understand that we will sanction those banks again, those Chinese banks that are transferring the hard currency…We need to use these powers that now the administration has under the bill that I authored – that’s been signed into law by the President – to tell China, ‘No, there will be secondary sanctions on any economic activity you are engaged in with North Korea.’ Because our goal right now is to shut [North Korea’s] economy down so they cannot continue to expand this nuclear weapons program.” [CNN]

HFAC’s Asia Subcommittee has already scheduled a hearing for Wednesday afternoon. Even before the hearing was announced, I predicted that it would be contentious — this is an election-year embarrassment the administration and Hillary Clinton don’t need. Now, freshly humiliated by North Korea’s latest nuclear test, the administration is suggesting that it’s finally ready to seek new U.N. sanctions, possibly to close existing loopholes (probably the “livelihood” exception to the coal and iron ore import ban) and ban fuel exports to North Korea. The Washington Post reports that the U.S. and South Korea may also push to ban North Korean labor exports, which will hurt North Korea’s ability to launder money by giving it less “legitimate” income for co-mingling and hiding illicit income. More importantly, the administration is saying that it’s finally ready to follow the law and enforce the sanctions that already exist.

“We will be working very closely in the Security Council and beyond to come up with the strongest possible measure against North Korea’s latest actions,” said U.S. envoy Sung Kim on Sunday.

“In addition to action in the Security Council, both the U.S. and Japan, together with the Republic of Korea, will be looking at unilateral measures, as well as bilateral measures, as well as possible trilateral cooperation,” he said, referring to South Korea by its official name. [Reuters]

So much for the idea that this time is different — that China had finally lost patience with North Korea. In an epiphany that I thought would never come to Washington, Hillary Clinton (of all people) has articulated why — China has been using North Korea as a “useful card” to divide U.S. forces in Asia and the Pacific (left unsaid: while China seizes the South China Sea and surrounds Taiwan).

“Up until relatively recently, I think (China was) under the impression that they could control their neighbor and they didn’t want to crack down because they saw it as a useful card to play,” Clinton said.

“If (North Korean leader Kim Jong-un) gets a little crazy, maybe the South Koreans will move toward (China) a little bit; he gets a little crazier, maybe they can make some deals with the Japanese about things they want. It was a strategic calculation,” she said. [Yonhap]

Separately, Clinton called the North Korean nuclear and missile programs “a direct threat to the United States” that we “cannot and will never accept,” which is welcome news at a time when some people are seriously suggesting that we can and must.

Clinton, a former secretary of state, also said that she supports President Barack Obama’s calls for strengthening the existing sanctions and impose additional measures.

“At the same time, we must strengthen defense cooperation with our allies in the region; South Korea and Japan are critical to our missile defense system, which will protect us against a North Korean missile,” she said.

“China plays a critical role, too, and must meaningfully increase pressure on North Korea — and we must make sure they do,” she said.  [Yonhap]

Clinton is right, of course, as is her rival in this election.

“North Korea’s fifth nuclear test, the fourth since Hillary Clinton became Secretary of State, is yet one more example of Hillary Clinton’s catastrophic failures as secretary of state,” Trump communications aide Jason Miller said in a statement.

“Clinton promised to work to end North Korea’s nuclear program as secretary of state, yet the program has only grown in strength and sophistication,” he said. [Yonhap]

Park Geun-hye has called on China to enforce sanctions as it had agreed, a brave thing considering that China has increasingly tried to bully South Korea with its considerable economic leverage. No doubt, Park knows what’s at stake. There is already speculation about a sixth nuclear test. If the U.S. and South Korea uncover and freeze the money that keeps Kim Jong-un in power, victory and reunification could be within sight. A slow defeat of extortion and enslavement is in sight, too. If these are our choices, better a banking crisis in China than a war in Korea.

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China’s next maritime conflict could be with North Korea

This week, the eyes of the world are on arbitrators’ rejection of China’s made-up claims to the South China Sea. Further north, however, Pyongyang’s lease of fishing rights to Beijing threatens to instigate violent brawls between North Korean and Chinese fishermen.

Earlier this year, China stopped accepting imports of North Korean seafood. The reasons for this still aren’t clear, but one possibility arises from a report that much of North Korea’s fishing fleet is controlled by the Reconnaissance General Bureau, which is designated under U.N. Security Council Resolution 2270. That designation requires China to prohibit all transactions with any person or entity “owned or controlled” by the RGB. (China continues to allow RGB agents to operate on its territory, catching defectors and keeping overseas workers in line, so its enforcement of this provision isn’t wholly rigorous.)

For a while, this meant that North Koreans found previously scarce seafood dumped in the markets at a steep discount. Later, however, Pyongyang began keeping its smaller fishing boats in port. This was a jarring change from the recent stories of North Korean “ghost ships” washing up on the Japanese coast with dead bodies aboard.

As with so much of what goes on in North Korea, we can only speculate about why this happened. It’s possible that the fishermen had attempted to defect, but because there were no women or children among the dead, it seems more likely that the regime had set unreasonable quotas for the fishermen, who then sailed beyond the range of their fuel supply (historically limited as an anti-defection precaution) in a vain attempt to meet those quotas.

Radio Free Asia reported that the subsequent decision to keep the boats in port was another precaution against defections. Maybe, but maybe Pyongyang simply saw no reason to send the boats out if it couldn’t earn hard currency by doing so. Feeding hungry North Koreans is an insufficient motive, apparently.

Clearly, the last few years have been desperately difficult ones for North Korean fishermen. In their latest turn of misfortune, their government leased the rights to fish off North Korea’s coasts to Chinese fishermen. The big winners appear to be the Chinese. The larger ships of Pyongyang’s state-controlled fleet still operate, while small North Korean fishing boats have lost the most.

On the heels of a new bilateral fishing rights deal, state-run companies in the North are bringing in scores of cutting-edge fishing vessels from China, undermining the livelihoods of ordinary fisherman in the North.

“A fleet of new fishing vessels have emerged in the East Sea waters off of Sinpo, South Hamgyong Province,” a source from the province told Daily NK on July 6. These Chinese ships, outfitted with small refrigerating facilities, state-of-the-art fish-finding equipment, and high-performance GPS and radar systems, are under three-year contracts, which stipulate the entirely of any catch be handed directly over to China in exchange for cash– save the costs of the ship lease.

Such an agreement seemingly bears out claims by South Korea’s National Intelligence Service via a parliamentary committee on June 30 that North Korea sold its fishing rights to China this year to the tune of 30 million USD. [Daily NK]

See also The Joongang Ilbo. In other words, Pyongyang found another way to get Beijing’s money, and Beijing found another way to get Pyongyang’s fish, that Beijing thinks it can defend from U.N. scrutiny. But this has put North Korea’s fishermen in desperate straits. Most of their catch as been sold to China, denying them their livelihoods, yet they’re still expected to meet their steep “loyalty” payment quotas to the state.

The pact has spurred frenetic fishing expeditions by North Korean state companies to amass the highest possible amount of funds. China, on the other hand, “is simply sitting back and collecting on this deal,” the source said.

Therefore, the livelihoods of people living in adjacent fishing villages are on the line, which is of “entirely no concern to the [North Korean] leadership,” the source asserted, adding that while many see the season’s squid catch as their “year’s harvest,” but with their backs against the wall to pay loyalty funds, “state companies couldn’t care less about their troubles.”

These hulking vessels are north of 100 tons, highly mobile, and their operators unsatisfied to confine their expeditions to the deep sea, instead pillaging the shallow, coastal waters as well. Bottom trawling, an environmentally destructive fishing method that drags vast nets across the seabed, is also common.

The fishermen may not dare to challenge the North Korean security forces, but they’re ready to brawl with the Chinese fishermen.

Coupled with the fact that China supplies them with diesel and other fishing instruments, these smaller boats “don’t stand a chance,” the source noted, and “with little in the way of recourse, many [fisherman] are staging armed dissent.”

“Denouncing the vessels as ‘pirate ships,’ people hurl stones at them as soon as they spot them. The anger is so intense, in fact, that many of the [North Korean] fishermen stand guard at the ports armed with clubs to prevent them from docking,” he concluded.

In 2014, Pyongyang also leased China the rights to fish in its waters (including waters that both North and South Korea claimed). That same year, however, the North Korean coast guard seized a Chinese fishing boat, roughed up the members of its crew, and confined it on starvation rations until the captain signed a confession. With North Korea, the fact that you have a deal never quite guarantees peace.

Illegal Chinese fishing has also caused clashes with South Korea, some of them fatal. This has recently become a major diplomatic issue between the two countries.

But aren’t the North Koreans too docile and submissive to engage in violent protests against invited guests of the regime? Not really. North Koreans argue with their own country’s police over economic issues (as opposed to explicitly political ones) more than we tend to assume. Brian Myers has described the North Korean tendency toward childlike, spontaneous rage and offers evidence that the state encourages it (within limits, obviously). In this case, the anger of the fishermen derives from a combination of material desperation and xenophobia — both sentiments we can reasonably believe to be stronger in North Korea than in South Korea.

There are several ways this could end badly for Pyongyang — with violent clashes between North Korean and Chinese fishermen, with violent clashes between North Korean fishermen and North Korean police, or in the long term, by giving China a basis to make expansionist claims to a right to fish in Korean waters.

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The evidence of China’s compliance with North Korea sanctions is still mixed.

This week, there has been much talk and excitement about a new study, by the new blog Beyond Parallel, analyzing satellite imagery of six select sites along the Chinese-North Korean border, and finding evidence of a recent decline in bilateral trade. From this, the study concludes that China may be (as Josh Rogin paraphrases it for The Washington Post) “Beijing has been quietly punishing Kim by cutting off the flow of funds to his regime.” Here are the study’s two main findings:

First, the satellite images indicate a substantive reduction of economic activity on the Sino-North Korean border measured by the fewer trucks, trains, and boats in the February 2016 image compared to a similar timeframe in 2015. [….] In the aftermath of North Korea’s January 2016 nuclear test, this observed downturn in activity was comprehensive across customs areas, railway, and road traffic.

Second, the images also suggest that independent Chinese actions were taken to reduce trade in this region after the nuclear test and prior to China’s signing on to UN Security Council Resolution 2270. These findings run contrary to some estimates that Sino-North Korean trade (particularly Chinese exports) increased in the first quarter of 2016, and might confirm large anomalies in trade data as reported by China’s customs statistics, KOTRA (Korea Trade-Investment Promotion Agency), and other organizations.

The study is interesting and data-driven, and every North Korea-watcher should celebrate the launch of any new information source that promises this kind and quality of analysis. What’s more, by analyzing the volume of traffic at multiple sites over several months, the study is less vulnerable to the regime’s manipulations than the satellite theater that is almost the only good reason to read 38north (the contributions of J.R. Mailey and Andrea Berger being two other notable exceptions).

It’s especially tempting to feel triumphal about Victor Cha’s conclusions that China has taken “unilateral measures to drastically curtail trade interaction along their border,” and that China is “squeezing [North Korea] more than we were led to expect.” Still, the evidence and my objectivity restrain me to say, “Not so fast.”

First, there is also substantial evidence that China is still violating key provisions of the sanctions to prop North Korea up. North Korea’s most important export by reported volume is coal, followed by other minerals, and as NK News’s invaluable Leo Byrne has noted, the trade in sanctioned minerals continues. To some extent, North Korea has shifted its coal exports to other avenues, including Alibaba.com. At the land border, trucks loaded with titanium are still crossing into China. Worse, North Korean ships that have been specifically designated by the U.N. are still operating, and in some cases, are coming very close to Chinese ports they aren’t even supposed to approach. Then, their transponders go dark. This suggests that those ships are either landing in Chinese ports or off-loading their cargo onto smaller vessels without landing. Both alternatives violate UNSCR 2270.

Second, the kinds of commerce that benefit the regime most (as opposed to market trade that benefits the North Korean people) aren’t easy to measure with satellites. North Korea’s other lucrative exports include gold, weapons and weapons and technology, and labor. Its most essential imports include bulk cash, wire transfers, gold (again), and luxury goods that come in on Air Koryo. It probably also earns significant revenue through tourism. These are not things that can be measured by counting railcars.

Third, the study focuses on overland trade but tells us little about maritime trade. If the authors of the study want to improve the utility of this project — and I emphasize that it’s potentially a very valuable one — it should also examine maritime traffic to and from the key North Korean ports of Nampo and Sinuiju. Maritime trade is more likely to be under the control of, and to the immediate benefit of, the regime. It should specifically look for trade in bulk cargo like coal, imports and exports of fuel, and the movement of designated ships (it’s possible to match IMO numbers from transponders with satellite images).

Fourth, there may be other explanations for Beyond Parallel’s observations. I’ve long felt that Korea-watchers were far too trusting of officially reported statistics on China’s trade with North Korea, and the case of China’s fuel exports to North Korea illustrates just how easily China can manipulate those statistics. But to the extent we believe those stats, they do show a significant decline in North Korea’s exports over the last six months. The problem with attributing this to sanctions is that this decline extends a trend that we began to observe earlier, particularly in the mining industry. In fact, at Benjamin Katzleff Silberstein has pointed out on several occasions, this decline in trade volume has a closer correlation to the decline China’s economy than it has to sanctions. An interesting question is whether China’s own internal market controls, including its restrictions to prevent capital flight, may be playing a role, but that question is beyond the depth of my knowledge of economics (anyone? Bueller?).

Other potential causes of a decline in bilateral trade include regime-driven trade and travel restrictions leading up to the party congress in May, and problems with North Korea’s infrastructure, such as the partial collapse and subsequent repair of the Sino-Korean Friendship Bridge last October. (The effects of this may or may not have ended before Beyond Parallel’s study began.) That would also help explain why the study found that trade began to decline before U.N. sanctions were increased in March.

Finally, we should not hope for China to enforce sanctions in unilateral ways that depart from the strict letter of the U.N. Security Council resolutions, whether by under-enforcing or over-enforcing sanctions. The main reason sanctions haven’t worked thus far has been — and continues to be — China’s under-enforcement of sanctions. That is why Congress decided that secondary sanctions were necessary to force China to comply, by dividing the interests of China’s fundamentally hostile government from those of its more pliable banks and industries, which need access to American markets. But what we don’t always realize is that sanctions over-enforcement is an equal danger. This veers off onto a long tangent, so I’ll save it for tomorrow’s post.

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Daily NK: China not taking North Korean coal shipments

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.

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HSBC freezes “at least” $87M in assets of North Korea-linked Chinese tycoon

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]
The story included no suggestion that the action was related to Pa’s links to North Korea. Oh, and you all remember who’s in charge of compliance at HSBC, right? Good for HSBC.

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N. Korea sanctions are failing because of China. That’s why we need secondary sanctions.

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.

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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.

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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).

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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.

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Remember when the South Koreans recovered UAVs that had overflown the Blue House and Baekryeong Island? This seems rather damning.

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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.

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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.

Screen Shot 2016-03-08 at 10.16.00 PMMirae 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.

The upshot:

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.

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WaPo editorial: “China’s switch” on N. Korea sanctions “had a lot to do with” H.R. 757.

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.

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China’s largest bank freezes North Korean accounts

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.

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[ICBC Branch in Dandong]

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.

Update: 

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.

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