Archive for Sanctions

Must read: Iranian bank handled arms transactions for Tehran, Pyongyang through Seoul branch

Investigative journalist Claudia Rosett, who covered the Tienanmen Massacre and exposed the U.N. Oil-for-Food scandal, has written an extensive report about the operations of Iran’s Bank Mellat in Seoul during the administrations of Roh Moo-Hyun and Lee Myung-Bak:

In a cable dated March 20, State asked its embassy in Seoul to tell the South Korean government that “Bank Mellat has facilitated the movement of millions of dollars for Iran’s nuclear program since at least 2003.”

Four days later, State followed up with a cable asking its embassy to “Inform Seoul that the U.S. views Bank Mellat’s Seoul branch as a key node for facilitation of proliferation-related activities.” That same cable included a list of U.S. allegations regarding specific transactions of Bank Mellat in Seoul. For example, State alleged that in 2007 Bank Mellat in Seoul had served as an intermediary for a Hong Kong company that was “almost certainly a front company for Tanchon Bank (North Korea’s primary weapons trade bank)” and that Bank Mellat in Seoul had played a role in financial transactions related to Iran’s ballistic missile program, purchase of a surface-to-air missile system, and illicit nuclear procurement networks in China.

Tanchon is a front for KOMID, the Korea Mining Development Trading Corporation, a notorious proliferator for North Korea. Treasury designated  KOMID under Executive Order 13,382 in 2005, and the U.N. designated it in 2009. Treasury designated Tanchon Bank under the same Executive Order in 2009.

E.O. 13,382 is an authority that allows the blocking of the dollar-denominated assets of entities involved in the proliferation of weapons of mass destruction.

South Korean officials thanked the U.S. for this demarche, and reaffirmed their commitment to investigating Bank Mellat’s branch in Seoul.

A few months later, in June, 2008, U.S. authorities, in turn, thanked Seoul, and urged them, consistent with U.N. sanctions on Iran, to “establish reporting and/or licensing requirements for all transactions executed by Bank Mellat Seoul.” The U.S. also suggested that South Korea, “once its investigation is complete, explore options for closing Bank Mellat Seoul.”

So while 28,500 Americans were in South Korea, defending it from North Korea’s growing WMD threat, South Korea let an Iranian bank front for a North Korean proliferator … admittedly one that Treasury itself has not yet designated.

Still, you’d think that Seoul would be especially sensitive to violations of U.N. Security Council Resolutions 1695 and 1718, which prohibited North Korea’s missile programs, and sales or purchases of major weapons systems. Those resolutions were largely U.S. initiatives to protect South Korea’s security, meaning that South Korea ate our sugar from one end and shat it right out the other. I’ll just let that be your kachi kapshida image for that day. (Update: No, I won’t. Not this day. See the next post.)

Two more years went by, during which the U.S. continued to prod South Korea to take action. In June, 2010 the U.N. Security Council passed its fourth sanctions resolution on Iran. This resolution included, in an annex, the statement that “Over the last seven years, Bank Mellat has facilitated hundreds of millions of dollars in transactions for Iranian nuclear, missile and defense entities.”

… and by this time, the U.N. Security Council had also passed UNSCR 1874, further tightening the restrictions on North Korea’s arms trade.

Even then, it took three more months, and a visit from the State Department’s then-serving special advisor for nonproliferation and arms control, Robert Einhorn, before South Korea in Sept. 2010 worked around to blacklisting Bank Mellat’s branch in Seoul. [Claudia Rosett, Forbes]

Although Rosett makes a strong case that South Korean regulators turned a blind eye to Treasury’s pleas for years, Treasury itself was slow to act against Bank Mellat. Bank Mellat is not listed as a Primary Money Laundering Concern by Treasury, and Treasury did not designate Bank Mellat under Executive Order 13,382 until 2011. To an extent, I can understand the South Koreans’ slow reaction: why should they take action against Bank Mellat when not even Treasury itself had done so? You would think that South Korea’s own security interest in the success of the global nonproliferation system would answer that question, but that sort of logic does not match the prevailing point of view in South Korea then or now.

In any event, the chronology you see illustrated here is a combination of financial diplomacy and enforcement that this administration would take against a target in which it shows genuine interest. That’s exactly what you won’t see with respect to North Korea.

Breaking news! FINCEN rehashes same old North Korea advisory.

To hear Yonhap tell it, the Treasury Department’s Financial Crimes Enforcement Network just stuffed Kim Jong Un into a size XXXXL iron maiden, financially speaking:

The United States has issued another advisory on financial transactions with North Korea, designating the communist country as a jurisdiction with high money laundering and terrorist financing risks, a U.S. report said Wednesday.

The guidance to U.S. financial institutions, issued Monday by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), is based on the international money laundering watchdog Financial Action Task Force’s updated list of countries with anti-money laundering and counter-terrorist financing deficiencies, according to the Radio Free Asia (RFA) report. [Yonhap]

The truth is much less dramatic. In reality, FINCEN didn’t “designate” North Korea as anything. It’s just echoing the latest iteration of the same call for “countermeasures” against North Korean money laundering that the Financial Action Task Force (FATF) has been issuing since 2011. If you actually read FINCEN’s advisory, there’s a section called “Summary of Changes to this List,” which shows that the advisory language applicable to North Korea didn’t change at all.

Jurisdictions in this section (Iran and DPRK) are subject to the FATF’s call on its members and other countries to apply countermeasures to protect the international financial system from AML/CFT risks. U.S. financial institutions should continue to consult existing FinCEN and U.S. Department of the Treasury (Treasury) guidance on engaging in financial transactions with Iran and DPRK. Previous FinCEN advisories and guidance on Iran and DPRK remain in effect. [….]

Existing U.S. sanctions – in particular, those under the North Korea Sanctions Regulations and Executive Orders 13570 and 13551 – create a legal framework that limits U.S. financial institutions’ direct exposure to the types of North Korean financial or commercial transactions contributing to DPRK’s proliferation activities that are the focus of UNSCRs 2087 and 2094, as well as UNSCR 1718. [FINCEN]

Warnings like these may well dissuade the more reputation-conscious banks from handling transactions with North Korea or encourage them to report the suspicious ones, but this advisory doesn’t block anything, and strictly speaking, isn’t even a sanction. It’s the banking equivalent of, “Hey, kid, be careful, broken glass.”

In fairness, I vaguely recall that I made the same mistake myself several years ago, when I knew much less about this subject. There isn’t really much of a story here at all.

For those interested in what our North Korea sanctions actually do — and don’t do — the only primer I’m aware of is the one I wrote for the Fletcher Security Review.

Russia’s nuclear cooperation with N. Korea violates at least three UNSC resolutions

My final excerpt from the draft U.N. Panel of Experts report is a lengthy graf (below the fold) describing long-standing and continuing Russian assistance to, and cooperation with, some of the same scientists involved in North Korea’s nuclear weapons program.

It’s hard for me to understand how this is not a violation of the UNSC sanctions. Despite the fact that key scientists in designated North Korean agencies (for example, its General Bureau of Atomic Energy) were invited to do research in Russia, Russia argues that technically, it didn’t invite any designated individuals, that its own facility’s purposes are peaceful, and that North Korea “should not be excluded from fundamental science activities.”

The POE responds that “all … nuclear programmes” means what it says. I’ll helpfully insert the relevant provisions, starting with this one from UNSCR 1718 (2006):

6. Decides that the DPRK shall abandon all nuclear weapons and existing nuclear programmes in a complete, verifiable and irreversible manner, shall act strictly in accordance with the obligations applicable to parties under the Treaty on the Non-Proliferation of Nuclear Weapons and the terms and conditions of its International Atomic Energy Agency (IAEA) Safeguards Agreement (IAEA INFCIRC/403) and shall provide the IAEA transparency measures extending beyond these requirements, including such access to individuals, documentation, equipments and facilities as may be required and deemed necessary by the IAEA;

And there is this, from UNSCR 1874 (2009):

“8.   Decides that the DPRK shall abandon all nuclear weapons and existing nuclear programmes in a complete, verifiable and irreversible manner and immediately cease all related activities, shall act strictly in accordance with the obligations applicable to parties under the NPT and the terms and conditions of the IAEA Safeguards Agreement (IAEA INFCIRC/403) and shall provide the IAEA transparency measures extending beyond these requirements, including such access to individuals, documentation, equipment and facilities as may be required and deemed necessary by the IAEA;

And this, from UNSCR 2094 (2013):

“5.   Condemns all the DPRK’s ongoing nuclear activities, including its uranium enrichment, notes that all such activities are in violation of resolutions 1718 (2006), 1874 (2009) and 2087 (2013), reaffirms its decision that the DPRK shall abandon all nuclear weapons and existing nuclear programmes, in a complete, verifiable and irreversible manner and immediately cease all related activities and shall act strictly in accordance with the obligations applicable to parties under the NPT and the terms and conditions of the IAEA Safeguards Agreement (IAEA INFCIRC/403);

Under Section 104(a) of the NKSEA, the Russian institute concerned would be subject to mandatory asset blocking, and possibly to criminal prosecution leading to the forfeiture of its U.S.-based assets. Unless, of course, the institute was unwise enough to have kept its funds in Euros or (may God help them) Rubles. In which case, the question would shift to which bank the Institute uses.

The POE stops short of concluding that Russia is in violation, but says it will continue to investigate. The POE is also investigating that recent report that Russia invited North Korean representatives to attend a weapons trade fair. All in all, it’s a promising candidacy for the Axis of Evil. Excerpts follow.

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Why legal investments in North Korea are a money laundering risk

You’ve often seen me write about the importance of “financial transparency” in transactions with North Korea. For a decade, economic engagement has mostly been done by one of two models: (1) controlled interactions with members of the elite, the actual effects of which are negligible at best; and (2) barbed-wire capitalism, where a few North Korean officials relay orders from foreign managers to hand-picked workers, and where the regime seals the whole enterprise off to prevent it from influencing the local community.

The former are, for the most part, of little financial significance. The latter may represent a significant source of income for illegitimate uses, and may also help the regime hide its flows of dirty money.

It wasn’t supposed to be this way by now. The idea behind economic engagement was to gradually draw North Korea into compliance with the rules that the civilized world lives by. Yet ten years later, the South Korean Unification Ministry can’t tell us how much (if anything) Kaesong’s workers receive after the regime takes its cut from their wages, and the Undersecretary of the Treasury recently expressed his concern about just how North Korea is spending that money.

The U.N. Panel of Experts now expresses a related worry — that North Korea could be using its ostensibly legal businesses to conceal and launder the proceeds of illicit activity:Screen Shot 2015-03-03 at 7.32.53 AMScreen Shot 2015-03-03 at 7.33.11 AMA few days ago, we saw that North Korean diplomats have been smuggling gold to earn hard currency for Pyongyang. That’s not just of concern because of how North Korea spends the earnings, but also because of concerns about conditions in which the gold is mined. As noted here, however, North Korea continues to run most of this business through the dollar system.

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Hence, the renewal of FATF’s warning about “countermeasures.”

Recently, a scholar friend emailed me that his opponent in a debate had criticized the effrontery of blocking North Korean assets that are the co-mingled proceeds of legal and illicit activity. In fact, that is standard law enforcement practice, because co-mingling is the essence of how criminal organizations conceal the illicit origin of their earnings.

Defendants often commingle SUA proceeds with legitimate funds. The government need not prove that all proceeds in a transaction were unlawfully derived, but must be able to trace some of the proceeds to a SUA. Criminally derived proceeds deposited with legal funds are considered to be withdrawn last unless the account/business is deemed to be permeated with fraud. This implies that the business operations are so intertwined with fraud that to segregate the legitimate operation and profits is impossible. Special agents should work closely with the attorney for the government when investigations involve commingled funds to ensure the elements of the crime are met. [IRS]

That’s why Congress, and many third-country parliaments, have long given their law enforcement agencies the authority to seize co-mingled funds.

The Treasury Department could do a great deal to regulate transactions with North Korea — and perhaps, put more food into empty bellies and drive the development of a true market economy — simply by requiring OFAC to license them. As a condition of each license, the Treasury Department could ask the applicant for assurances that the ultimate end-use of the funds would be for items that would benefit the people: food, clothing, medicine, consumer goods, materials for civilian construction projects, or electronic items like desktop computers that help to open up information flows.

To make this requirement truly effective, the EU Central Bank could impose similar requirements for Euro-clearing transactions. If Canada, Britain, Australia, and Switzerland joined, they would collectively cover just about all of the world’s convertible currencies, leaving only trades in Chinese Yuan unregulated. Of the latter, the Treasury Department could still target the most egregious with secondary sanctions.

In his paper about labor conditions in Kaesong, Marcus Noland called for investors in North Korea to adhere to a single set of minimal standards, akin to the Sullivan Principles. What I’m calling for here is a financial analogue to the Sullivan Principles — a requirement that investors ensure that their money will be used to better the lives of the North Korean people, rather than being wasted on weapons and luxury goods.

The real flaw in the engagement argument today, ten years after it began, is that it can’t show any significant, enduring, positive impact on North Korea, its treatment of its people, or its relations with the wider world.

It’s unfortunate that so many advocates of engagement are too focused on making nice with their minders to insist that the regime make any of the changes they once promised. Two good places to begin would be transparency in their labor and financial arrangements. If they did, they might strengthen their argument by showing that they’ve made legitimate, positive change in how North Korea does business.

North Korea evades U.N. sanctions with shell games, spell games, and whack-a-mole

On any given day, the U.S. Treasury Department’s Office of Foreign Assets Control may publish several pages of new designations for the list of Specially Designated Nationals. Inevitably, most of the designations will be designations of aliases. That’s because one of the oldest sanctions-evasion tricks is renaming an entity, so that when banks type its name into their software, they don’t get a hit that might warn them to decline the transaction, block the account, or file a Suspicious Activity Report.

In the case of North Korea, there’s an additional and related problem. North Korea can also play spell games with the English transliteration of Korean names. The U.N. Panel of Experts has specifically raised that issue as a problem that requires closer attention from national governments.

So when Treasury designates a list of North Korean smuggling ships, as it did last July, it’s not enough to publish their names and IMO numbers and call it done.

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Like any sanctions program, the enforcement of sanctions against North Korea requires constant attention and follow-up.

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It’s a long game of what Marcus Noland calls Whack-a-Mole. And judging by the POE’s latest report, we aren’t winning that game.

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This isn’t a grand new revelation. NK News’s Leo Byrne, one of the very best reporters to cover North Korea for any publication, noticed this last October. Four months later, Treasury hasn’t followed up with new alias designations. You can even extend that M.O. back to this 2006 New York Times report, on North Korea’s use of deceptive shipping practices, like re-naming and re-flagging. Whether Treasury’s inaction reflects a lack of political will or a simple lack of resources, I’ll decline to speculate.

A key point the POE makes is that member states are required to seize these vessels as soon as they identify them.

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Instead, several nations are allowing Ocean Maritime Management to continue operating on their soil, or from their ports.

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OMM doesn’t just rename its ships; it also renames itself. Lately, for example, it has gone by the names “Haejin Ship Management Co Ltd.” and “Yongjin Ship Management Co Ltd.” Sometimes, it puts each ship under the ownership of its own shell company. The POE also suspects that OMM is working through Singapore-based entities known as ”Senat Shipping & Trading Private Limited,” “Senat Shipping Limited,” and “Senat Shipping Agency Pte. Ltd.,” particularly for the handling of its financial transactions. The POE put some questions to Senat. Senat hasn’t responded.

OMM’s deceptive practices don’t only appear to be designed to evade sanctions. They also appear to be intended to evade creditors. Switching the ownership of each ship to a single shell company is helpful for that.

As a result, OMM is still in business. And in some cases, its agents are actually North Korean diplomats.

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The POE even made this interesting diagram.

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North Korea isn’t only playing whack-a-mole with shipping. Notorious (and U.N.-designated) proliferator Ryonha Machinery sometimes goes by “Millim Technology Company.” It operates openly in Dandong and Beijing, China under that name. The General Department of Atomic Energy of the DPRK now calls itself the “Ministry of Atomic Energy Industry of DPRK.” The Korean Committee for Space Technology recently renamed itself the “National Aerospace Development Administration,” or NADA (couldn’t you have checked that one with your Cuban friends?). The Second Academy of Natural Sciences has taken to calling itself the “National Defence Science of the Democratic People’s Republic of Korea.”

The moles, in other words, are popping up faster than we can whack them. Thanks to Chinese stalling, the U.N. bureaucracy is too hopelessly slow to keep up, and the member state governments (including ours) that are supposed to be enforcing these sanctions aren’t paying attention.

The report tells us some other interesting things about North Korea’s merchant fleet. As North Korea’s fleet ages out, it is switching to smaller vessels. In a rare bit of good news, its port calls in non-Chinese foreign ports have declined dramatically in recent years, “to just 6 percent of 2008 figures,” according to the POE. Today, nearly all of its direct shipping trade is with China. It would make sense for North Korea to migrate to smaller ships in that case. In the past, for example, in the 2009 ANL Australia incident, North Korea shipped its cargo to Chinese ports in containers, and then played a shell game with port authorities all the way to Dubai, and very nearly to Bandar Abbas.

North Korea is also relying more on reflagging — the use of so-called “flags of convenience,” to dodge inspections.

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The obvious answer is for governments to call on these states to stop reflagging North Korean ships, unless they physically cross-check their IMOs. If these states continue reflagging vessels that are subject to immediate seizure, vessels flying these flags should be targeted for inspection by the United States and other countries. This is a national security issue. God only knows what the North Koreans might want to slip into this country in a shipping container. For more on that option, see Section 205 of the NKSEA.

One potential exploit in North Korea’s shipping system is insurance. North Korea has found it difficult enough to insure its vessels that it self-insures.

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We saw, in the case of the Mu Du Bong, that North Korean self-insurance isn’t particularly useful. One solution to that problem is for ports to refuse to accept KSPIA as a valid insurer. When port directors and customs inspectors see that a vessel is insured by KSPIA, that should also be a signal for them to check the vessel’s IMO number, or any links to Ocean Maritime Management or its aliases. If they can, they should be seizing any of its vessels on the spot.

Finally, North Korean ships are switching off their transponders.

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Screen Shot 2015-02-27 at 6.56.41 PMThat’s often the first sign of a vessel that’s engaged in smuggling or piracy. Those vessels should be followed to port, boarded, and inspected.

The POE also seems close to calling for the designation of Air Koryo, although I’d personally counsel against that, absent some established link between them and North Korea’s post-UNSCR 1874 smuggling:

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I’ll close with this graphic of POE’s various methods of deception.

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Clearly, many member states aren’t taking the enforcement of these sanctions seriously. What’s most obviously lacking is any coordination of enforcement among governments. If only there were some inter-governmental organization whose mission were to control proliferation through international air and maritime cargo. Even better, if only that organization were unencumbered by a requirement for unanimous consent, or the threat of a veto from Russia or China. Oh, wait. There is exactly such an organization. So what’s stopping us?

Yes, North Korea is still using the dollar system to launder its money.

The Financial Action Task Force has re-issued its call for “countermeasures” against the risks of money laundering and terrorist financing emanating from North Korea. The FATF’s call is not significantly different from advisories the FATF has issued since 2011, but it is significant in one way.

More sensible Korea-watchers are accustomed to the pavlovian response of the South Korean press, and of certain American academics, whenever North Korea hints at being willing to talk. We saw this again after Kim Jong Un’s New Year speech, which was (as is traditional) so selectively overanalyzed that Kim Jong Un’s intent could not be identified from dental records. We saw it when the editors of The New York Times seized on a risible North Korean offer and called on President Obama to “test North Korea’s intentions” — it would be equally enlightening to test Dennis Rodman’s urine — as if the last 20 years have tested nothing. By my count, North Korea has conducted three underground tests of its intentions. But I digress.

We saw the same Pavlovian response in some reporters after North Korea agreed to hold talks with the FATF, and after its Central Bank issued a statement committing “to implementing the action plan of ‘international standard’ for anti-money laundering and combating the financing of terrorism.” (As if.) Yonhap even took it seriously when Pyongyang announced that it had established its own anti-money laundering body. And here’s how the FATF dispensed with that:

Since October 2014, the DPRK sent a letter to the FATF indicating its commitment to implementing the action plan developed with the FATF.

However, the FATF remains concerned by the DPRK’s failure to address the significant deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threat this poses to the integrity of the international financial system. The FATF urges the DPRK to immediately and meaningfully address its AML/CFT deficiencies.

The FATF reaffirms its 25 February 2011 call on its members, and urges all jurisdictions, to advise their financial institutions to give special attention to business relationships and transactions with the DPRK, including DPRK companies and financial institutions. In addition to enhanced scrutiny, the FATF further calls on its members, and urges all jurisdictions, to apply effective counter-measures to protect their financial sectors from ML/FT risks emanating from the DPRK. Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices, and take into account ML/FT risks when considering requests by DPRK financial institutions to open branches and subsidiaries in their jurisdiction. [FATF]

The force may have a strong influence on the weak-minded, but Pyongyang’s mind tricks haven’t influenced the FATF’s bankers. Maybe all those years of foreclosing on tearful widows and orphans have built an immunity that can, in a different context, serve mankind’s greater good. It never ceases to fascinate me how much better bankers are at diplomacy than diplomats are. A certain discipline may come with the expectation that the words in contracts are meaningful and enforceable as written. The FATF expects more than words from North Korea, and the latest draft U.N. Panel of Experts report goes far to explain why.

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That is, North Korea habitually uses deceptive financial practices similar to those used by criminal organizations. Moving money this way has a higher risk premium, higher cost, slower speed, and less flexibility. North Korea wouldn’t use these cryptic, bronze-age methods unless it was hiding something. Similarly, if Pyongyang’s finances are legit, why is it using Reconnaissance General Bureau agents as bulk cash smugglers?

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The U.N. report also tells us that North Korea continues to use the dollar system for those deceptive practices.

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That isn’t the only report this week that King Dollar rules in Pyongyang, partially as a consequence of Pyongyang’s catastrophically self-destructive currency “reform.” An interesting report in The Daily NK tells us that North Korea’s Ministry of Railways expects payment for shipping from both its state-controlled “foreign-currency earning enterprises” and “individual vendors” in U.S. dollars. This Yonhap report quotes an anonymous source, who says that “Pyongyang has become a de-facto dollar-using economy,” although the Yuan is more popular near the Chinese border.

And here’s an example of how this works in practice:

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The FATF’s warnings, of course, are merely persuasive authority; they don’t have the force of law. They are persuasive to responsible governments and banks, but North Korea finds its enablers among the world’s less responsible actors. That will not change until the U.S. Treasury Department and other regulators credibly threaten those actors with secondary sanctions. You can almost hear the Panel of Experts calling on the Treasury Department to do exactly that here, with respect to North Korean weapons smuggler/shipper Ocean Maritime Management, and others:

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And what has President Obama done about any of this lately? On January 2, 2015, he signed Executive Order 13687, the actual legal effect of which was to block the assets of ten low-level arms dealers. If there is a single theme that emerges from the latest POE report, however, it is Pyongyang’s speed and deftness at whack-a-mole. I can just about guarantee you that those low-level arms dealers have been replaced by ten other low-level arms dealers. Whatever the effect of EO 13687’s original designations, they were minimal and brief.

There are several conclusions this evidence points to. First, Pyongyang is worried about sanctions. Second, its growing dependency on King Dollar gives it good reason to be. Third, it continues to use the dollar system to engage in money laundering and to violate U.N. Security Council sanctions. Fourth, the Obama Administration has yet to show that it is serious about protecting the U.S. financial system from North Korea’s money laundering, or about making U.N. sanctions work. It tells you everything you need to know that even the U.N. is (in its own subtle way) pleading for the President to enforce the law.

North Korea’s arms trade flourishes as U.S. diplomacy falters

The latest U.N. Panel of Experts report is a bleak one for the U.N., and for an Obama Administration that seems content to outsource its policy to it. North Korea shows no sign of complying with the resolutions, and every sign of pursuing its WMD programs at full speed. Yongbyon was active for a while last year, and as recently as last September, there were signs of new excavation at North Korea’s nuclear test site at Punggye-ri. North Korea has improved its Seohae missile test site, tested a KN-08 engine, and fired off large numbers of rockets and missiles from its east coast.

By design, the U.N. can’t enforce its own resolutions, and governments’ enforcement of the U.N. sanctions is flagging. This chart from the latest U.N. Panel of Experts report should tell you most of what you need to know:

Screen Shot 2015-03-02 at 8.23.14 AMIn other words, most member states are less likely to have reported back to the U.N. on their enforcement of North Korea sanctions than they were to have reported on their enforcement of other U.N. sanctions. We’ll turn to why later in this post, but a number of anecdotes reported by the POE should give you a good idea:

– Iran (of course) has been shipping North Korean weapons to Yemen (most likely to Houthi militias). That would be consistent with Iran’s long-standing practice of buying North Korean weapons for Hamas and Hezbollah.

– Ethiopia, a long-standing arms client of North Korea, is suspected of violating the arms embargo to buy ammunition from the Korea Mineral Trading General Corporation, or KOMID, which has been designated by Treasury for its proliferation-related activities.

– Next door, Ethiopia’s arch-enemy, Eritrea is suspected of “arms-related cooperation” with Green Pine Associated Corporation, another North Korean proliferator.

I’ve previously accused Uganda of violating the arms embargo by hiring North Koreans to train its police, and apparently, the POE agrees:

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– North Korean-made 107- and 122-millimeter rockets have been found in the possession of rebels in the eastern D.R. Congo. The POE is still investigating, but Uganda and Rwanda are both known to have armed rebel groups there.

– The POE also updates us on the abortive sale by corrupt Mongolian military officers of MiG-21s to North Korea. The story has a happy ending: the sale was blocked, and the North Koreans never got their money back.

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The POE also reports that an unknown European state provided information leading to the discovery of “an air shipment” of “spare parts for Yugo class submarines that were procured in the United States market, for a military-related company based in South-East Asia.” Really? There are people in the United States who deal in that sort of gear? So where are the indictments? Maybe they’re filed in the same receptacle as Dennis Rodman’s civil penalty.

While we’re on the subject of luxury goods, the U.S. is in good company in its lackluster enforcement:

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There are certainly plenty of knowing suppliers, although the only guilty party these particular facts implicate is the one that the luxury goods almost necessarily traversed to get to North Korea.

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So while one part of the U.N. goes begging for aid for malnourished North Korean kids, another part of the U.N. can only point out that Kim Jong Un is spending freely on limousines, ski equipment, and yachts:

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Not even rule-bound Britain would (or could) make Princess Yachts answer the POE’s questions about selling yachts to North Korea. That’s typical: of 262 requests the POE sent out last year, asking for information, it only received 116 responses.

Numerous states also hosted offices of U.N.- and U.S.- sanctioned Ocean Maritime Management “including Brazil (São Paulo, Brasilia), China (Dalian, Hong Kong, Shenzhen), Egypt (Port Said), Greece (Athens), Japan, Malaysia (Kuala Lumpur), Peru (Lima), the Russian Federation (Vladivostok), Singapore and Thailand (Bangkok).” But more on shipping in a future post.

Then, there is the example of Cuba. It violated the North Korea sanctions flagrantly, yet neither the U.N. nor the Treasury Department sanctioned a single Cuban person or entity for it. You may agree with the U.S. policy shift toward Cuba, and you may not, but the U.S. was able to improve its relationship with Burma and still sanction Burmese generals for their arms deals with North Korea.

~   ~   ~

The picture this paints is of a sanctions regime that few governments — including ours — believe they have to take seriously. It isn’t the job of the POE, after all, to enforce the law. That’s something member states have to do through their national laws.

The Ugandas, Ethiopias, and Chinas of the world have their own reasons for violating sanctions. They aren’t going to be persuaded to change their behavior the easy way. We can raise the cost of their non-compliance, but that would require political will. States that receive U.S. aid may find themselves denied aid one day under Section 203 of the NKSEA, and the bureaucrats responsible for arms deals with North Korea could have their assets blocked. In the case of China, forcing change will require a combination of credible threats and face-saving diplomacy.

Other governments are probably more passive and persuadable, but they might reasonably ask why they should be the only ones enforcing the resolutions. They aren’t necessarily looking to the U.S. for leadership, but because of America’s economic power, U.S. leadership would certainly sway many of them toward a global consensus of serious enforcement of North Korea sanctions. If forced to choose whether to have an economic relationship with the United States or an economic relationship with North Korea, the choice would be an easy one for most banks and governments. Right now, that’s not a choice anyone has to make. But if the U.S. doesn’t lead, who will? And if it doesn’t, who will follow?

Most people remember that the Treasury Department sanctioned Banco Delta Asia. Few people remember that top Treasury Department officials did much more than sanction one bank in 2005 — they launched a campaign of financial diplomacy to persuade bankers and finance ministers from Moscow to Ulaanbaatar to Hanoi to distance themselves from North Korea. It was multilateral diplomacy at its best, and it worked, until the State Department swallowed Kim Jong Il’s bait and undid all of it. What’s needed today is neither war nor appeasement, but some good diplomacy. Of course, all good diplomacy requires leverage, in the form of veiled consequences.

So, what “appropriate measures” *did* the feds take against Dennis Rodman for violating N. Korea sanctions?

The newest U.N. Panel of Experts report* on North Korea sanctions enforcement contains this buried treasure:

Screen Shot 2015-02-27 at 7.21.09 AM

The first question this raises is what those appropriate measures were. The use of passive voice conceals whether the feds took any measures at all.

The second question is why there should be a “lack of information” from Rodman, when the Commerce and Treasury Departments have subpoena powers and an obligation to cooperate with U.N. authorities enforcing North Korea sanctions. The law applies to superpowers and celebrities, too.

There is video evidence of Rodman personally giving Kim Jong Un banned luxury gifts in violation of Commerce Department regulations and Executive Order 13551. I previously explained here why that’s a felony, and there’s no question that at least some of the goods presented are listed on Supplement 1 and were luxury goods.

Don’t get me wrong here. There are bigger fish in this sea than Dennis Rodman. I don’t believe this is the sort of thing that justifies prison time, but it does compel making an example of Rodman and his assortment of camp followers and opportunistic sociopaths, even if only through a modest civil penalty and a (publicly posted) cautionary letter. Ignorance (or willful ignorance) of the law may mitigate punishment, but it’s not a defense.

Having said that, this sort of thing does matter. Cutting off Kim Jong Un’s luxury goods is ultimately about North Korea’s chronic food crisis and the completely needless suffering of its people. The purpose of the ban is to force him to prioritize feeding the 80% of North Koreans who are barely getting through the lean season each year. Conduct like Rodman’s sends a message that the world doesn’t care about their suffering, and that it’s willing to give Kim Jong Un access to the fruits of the world’s fleshpots anyway.

Overall, the POE report paints a picture of a sanctions framework that is being ignored by most U.N. member states. There’s a display of concern when North Korea does something hideous that actually makes headlines, and then everyone goes right back to ignoring them. How are North Korea’s arms clients in Uganda, Tanzania, and Ethiopia supposed to react if the U.S. doesn’t appear to be serious about enforcing them, either?

~   ~   ~

* This is from a draft leaked to me; the final still isn’t published.

Kim Jong Un seeks friends and funds abroad as he isolates his people.

In the three years that he has been in power, His Porcine Majesty has found plenty of time for Dennis Rodman, but none for meetings with foreign leaders. Suddenly, in the last two months, he has flirted with (1) a summit with South Korean leader Park Geun-Hye, (2) inviting Japanese Prime Minister Shinzo Abe to Pyongyang, (3) and a visit to Vladimir Putin in Moscow in May. His central bank even “committed itself to implementing the action plan of ‘international standard’ for anti-money laundering and combating the financing of terrorism.” (I’m sure Pyongyang will find some way to reconcile this with its arms sales to Hezbollah and Hamas.)

If you believe that talks with North Korea are immediately capable of solving anything, or that they are an end in themselves, you may be pleased that Kim Jong Un has developed this urgent interest in diplomacy. What accounts for this belated quinceañera, assuming that any of these meetings comes to pass? Only Kim Jong Un knows, but I doubt it has anything to do with a yearning for more intelligent companionship. There’s almost certainly a financial motive, if not more than one.

One motive may be a growing threat of sanctions. Kim’s charm offensive began just after December 19th, when FBI and President Obama announced that North Korea had hacked Sony Pictures and threatened audiences for “The Interview.” Almost immediately, Congress called for stronger sanctions, and centrist figures in the foreign policy establishment, including Richard Haass and Winston Lord, began calling for regime change. President Obama himself suggested that the collapse of North Korea’s system was inevitable, although he didn’t declare an intent to catalyze that result.

On January 2nd, President Obama signed Executive Order 13687, authorizing sanctions against all entities and officials of North Korea’s government and ruling party, and (more importantly) authorizing secondary sanctions against the Chinese, and other entities that provide Pyongyang its regime-sustaining hard currency. The order was potentially sweeping and devastating, but in its actual impact, it reached only three entities that were already sanctioned, and ten mid- to low-level arms dealers. But the President also said that this was only a first step, which left Pyongyang scurrying to secure its financial lifelines.

Pyongyang’s charm offensives always seem to come just as the political will waxes to enforce sanctions against it. The charm offensives play on the individual interest of each interlocutor — Park Geun Hye’s domestic unpopularity, Shinzo Abe’s desire to bring abductees home, Putin’s search for ways to f**k with Obama — to disrupt any coordination among them. It works because we’re dumb enough to let it. And once sanctions enforcement wanes, so will Kim Jong Un’s interest in diplomacy.

One thing is clear enough: a credible threat of sanctions certainly hasn’t done any harm to prospects for diplomacy with North Korea. I could also say, with equal conviction, that they haven’t harmed John Hinckley’s odds of marrying Jodie Foster.

~   ~   ~

Another possible explanation is a series of reports suggesting that North Korea’s trade relations with China are declining. For one thing, fewer North Koreans are traveling there:

Overall figures for North Korean residents entering China annually totaled between 100,000-120,000 until 2010 before jumping to 150,000 in 2011. A steady period of continual increase in visitors followed until 2013, when the number of North Koreans traveling to China reached an all-time high of 200,000, roughly half of whom noted their reason for making the trip as “looking for work.” Aside from finding employment, 34,000 went to conduct business or attend a conference, and 1,500 went purely to travel. This represents a 60% and 50% respective reduction when compared to last year’s figures. Visits to friends and relatives dropped to 1,100–one-third of those making the trip for the same reason in 2013.

Male visitors [150,000] composed five times total amount of females [30,000] visiting China from North Korea. Most North Koreans [77,000] traveled by boat for the trip. [Daily NK]

North Korean agents who do travel to China are also having more difficulty doing business there. There’s no evidence this has anything to do with sanctions. It appears to be because of a combination of a sagging Chinese economy and the lingering effects of the Jang Song-Thaek purge. After that purge, I posted here that the regime had called home large numbers of its China-based money men, presumably men who were loyal to Jang or thought to be, and that the money men had stayed away in droves. Subsequently, I posted about another reported defection of a senior financier in Russia. That trend continues:

A source in a northeastern Chinese city, who spoke on condition of anonymity because of the sensitivity of the issue, said only about 30 percent of the North Korean businessmen have returned to China after being summoned.The summonses are also believed to be part of efforts by North Korea to redistribute the “rights of doing businesses with China,” a key source of earning hard currency, to its ruling elite, the source said.”The replacement of businessmen loyal to Jang Song-thaek has been gradually carried out and a lot of North Korean businessmen were summoned until late last year,” the source said. “Of those being summoned, only about 30 percent returned to China.”There are no official data on how many North Korean businessmen are working in the Chinese border cities.A second source in another Chinese border city with North Korea said that about 170 North Korean businessmen in the city were replaced over the past year.With Chinese investor confidence eroding over the North’s unpredictable behavior, the new North Korean businessmen come under further pressure in building business connections with their Chinese counterparts, the second source said. [Yonhap, via the Korea Herald]

Not only is the sagging Chinese economy hurting Bureau 39, but according to the report, “Chinese investor confidence” is also “eroding.” One reason may be the arbitrary behavior of North Korean officials, including their inclination toward unilateral price increases and demands for bribes and prostitutes. I can’t speak to the latter concern, but the former concern can’t have improved since Kim Jong Un had Jang shot for “selling off precious resources of the country at cheap prices.” This is consistent with evidence of a sudden onset of distress in North Korea’s mining industry, although I can’t say whether poor investor relations are a cause of the problems or a consequence of them.

The report cites Korea Trade and Investment Promotion Agency (KOTRA) figures, according to which, “North Korea’s annual trade with China fell 2.4 percent from a year ago in 2014,” from $6.54 to $6.39 billion, “marking the first decline since 2009.” These figures are sourced to Chinese government statistics, which is one reason to distrust them. For example, we read a lot of reporting last year that China had cut off North Korea’s crude oil supply, only to find that China had merely reclassified its trade as aid, or supplied Pyongyang with refined petroleum products (such as jet fuel) instead.

The report also claims that “North Korea’s exports of coal to China slipped 17.6 percent from a year ago to $1.13 billion, marking the first drop in 8 years.” I see more extrinsic evidence that that report is accurate.

And there are other signs of trouble: it would be a snub for Kim Jong Un to visit Russia before he visits China, and it was a snub for the leaders of China and South Korea to meet before the leaders of China and North Korea met. China didn’t send a representative to Kim Jong Il’s latest birthday party, either. This doesn’t yet mean that China has broken with North Korea. It certainly doesn’t mean that China wants to destabilize North Korea. It bears watching, however.

~   ~   ~

In other ways, Pyongyang is intensifying its isolationism. The ones that have attracted the most media attention are its bans on foreigners entering North Korea for a marathon and its creepy Arirang Festival. (By contrast, it recently granted permission for this “peace” march by a group of left-wing activists, led by Christine Ahn and Gloria Steinem). The dubious pretext for Pyongyang’s isolationism is that it is a precautionary quarantine against Ebola. This has inconvenienced two groups of useful idiots — the North Korea tour companies and the slummers who use them. I don’t see the down side to that. In the long run, it will mean fewer hostages for Pyongyang, and less hard currency for its bank accounts.

Why would Pyongyang shut down this lucrative, low-risk traffic in people with more money than sense or soul? No one knows but Pyongyang. Maybe it really is terrified of Ebola, yet confident that Gloria Steinem isn’t a carrier. Then again, maybe it’s terrified of a contagion of another kind.

For years, the pro-“engagement” argument for tourism in North Korea has been that there is something transformational, even dangerously subversive, about it that minders, deceptions, and other controls can’t contain. (Somehow, I doubt that Koryo Tours and Young Pioneers make the same argument to their contacts in Pyongyang.) I’ve usually been dismissive of this argument, although I’d be genuinely interested in hearing any evidence that Pyongyang thinks it has anything to fear from this kind of tourism. Even if that argument had any merit, Pyongyang knows how to deal with foreign subversive influences. Maybe it just did.

~   ~   ~
Kim Jong Un has been isolating low-caste North Koreans since the very beginning of his reign. His regime continues to do that by terrorizing traders, cracking down on cell phones, and blocking the flight of desperate people:

“A family of four from North Hamkyung Province attempted to escape with the help from a border guard and a smuggler near the end of last month; however, someone tipped off the proper officials, resulting in their arrest,” a source in Yangkang Province reported to Daily NK on February 4th. “To expedite the family’s escape, the smuggler got a number of soldiers, all of whom he deemed trustworthy, involved. But too many caught wind of the family’s plot to defect, which led to the family’s eventual capture.”

The family’s eldest son purportedly fled while being held in custody, leaving behind the parents and their younger son to endure relentless interrogation at a SSD-run detention center, where they are “as good as dead,” according to the source, because not only were they themselves planning to defect, but now their son presumably succeeded in doing so despite being held in custody. [Daily NK]

Human Rights Watch has documented the border crackdown in a new report, which you can read here.

“North Korean authorities are using brutal punishments to shut the door on people fleeing the country, and cracking down on those who share information with the outside world,” said Phil Robertson, deputy Asia Director. “Kim Jong-Un is trying to silence news of his systemic and pervasive rights crimes by going after the messengers, such as people with connections in South Korea or those who can help North Koreans flee there.”

The North Korean leadership has made clear the country must redouble its efforts to remain shut to the outside world.

“We must set up two or three layers of mosquito nets to prevent the poison of capitalism from being persistently spread by our enemies across the border into our territory,” said Kim Jong-Un, North Korea’s supreme leader, during a speech at the 8th Conference of Ideological Workers of the Korean Worker’s Party on February 25, 2014. “We also have to be active to block the imperialists’ plots for ideological and cultural invasion.” The “mosquito net” system Kim referred to was developed in the North to attract the inflow of foreign investment while blocking the infiltrations of foreign ideas, news, and culture. [….]

According to the escapees, the North Korean government has also been actively tracking down unauthorized phone calls from cell-phones operating on Chinese service provider networks being used by people in the North Korean border areas to call to China or South Korea. “The phones have no signal in the cities anymore and I have heard they even have mobile technology to find the exact location of the caller even after you hang up,” said Kim. “I used to call from my living room, but later I had to go high up in the mountains in the middle of the night and I was scared to talk for more than a minute or two.” Park said she used to get calls from North Korea at all times of the day and talk for long periods, but now the number of calls she receives has shrunk by approximately 60 percent since 2012.

“North Korea feels threatened by news and images of the outside world seeping into the country and now is trying to reassert its control by going after people bringing in the information,” said Robertson. “Talking on an overseas phone call, or watching a foreign television show should not be considered crimes, but the government is tightening control through repression and fear.”

More here and here. One backlash of this increased border control is a rise in cross-border violence, and more tension with China. North Korea’s border guards had come to rely on the bribes and extortion they taxed from this localized, illicit cross-border trade. With the loss of that income, the underpaid guards have turned to violent crime, and like all criminals, they go where the money is. China has since raised militias to patrol the border regions, and North Korea has purged an official of the Supreme Guard Command as punishment for the violence. There were also purges at the local level.

There is a very important point here, one that makes Kim Jong Un’s diplomatic outreach completely consistent with his isolationism: it costs money to pay border guards, buy cell phone trackers, and isolate the people you consider “wavering” or “hostile.” North Korea earns that money by extracting aid from foreign sources, and through its officially sanctioned trade relationships. Here is another way that sanctioning the regime can actually open North Korea to outside trade and influence.

~   ~   ~
These reports paint a picture of a regime that is struggling to maintain its financial links to the outside world, while severing the economic, social, and cultural links between its people and the outside world. If a less isolated, less hungry, less brutal, and less provocative North Korea is in our interests, then our obvious policy response is to undermine both aspects of that policy — to facilitate illicit cross-border flows of information, people, money, and goods, while cutting Pyongyang’s hard currency flows.

The first part of this strategy is the more difficult one. Some of it can be done through broadcasting, some requires creative technological thinking, and some will require clandestine operations.

The second part is about sanctions enforcement, which requires financial intelligence, legal tools, effective diplomacy, and political will.

The reports of defections by North Korean financiers suggest a potential windfall of financial intelligence. Each of these men, and each of their laptops, represents a potential Rosetta Stone. I certainly hope some of them have found safety in the care of U.S. and South Korean intelligence agents. I’ll also express my hope that The Guardian and Al-Jazeera will refrain from getting them — and their entire families — killed, by printing their names.

The Obama Administration will also have to find the political will to dissuade South Korea and Japan from subsidizing Pyongyang and loosening their own sanctions. It will have to find the political will to threaten secondary sanctions against the Chinese and Russian interests that prop Pyongyang up. Lacking this, the administration’s policy will continue to fail. My guesses are (respectively) that it won’t, it won’t, and so it will. North Korea’s hostage-taking, threats, and inducements will recoup more modest financial benefits for the regime. That’s about all Pyongyang needs to undermine the effect of U.N. sanctions, and to sustain its provocative and repressive ways.

More food for hungry North Koreans is not “bad news” for sanctions proponents.

I don’t always agree with Scott Snyder’s views, but I’ve always enjoyed reading his work. In almost every case, I’ve found it to be well-researched and objective. In a blog post for the Council on Foreign Relations, Snyder cautiously concludes that North’s cereal production is “stable and improving” — from 5.93 million tons last year to 5.94 million tons this year, a more generous characterization than the U.N. Food and Agricultural Organization report he cites, which calls North Korea’s food production “stagnant.” My own characterization would be “suspiciously constant.”

The UN FAO estimates that this year’s deficit will be 407,000 tons. That’s still low by historical North Korean standards, but hardly a sign that happy days are here again. The FAO also tells us that the impoverished government of North Korea only intends to import 300,000 tons, leaving an “uncovered deficit” of 107,000 tons. Here is Mercy Corps’s cue to tell us all how desperately North Korea needs food aid.

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[Above: An actual sanctions target, riding aboard another sanctions target.]

At least the World Food Program shouldn’t have to worry about any lack of transport to do monitoring and assessment visits. Maybe His Porcine Majesty can even give Christine Ahn a ride in it, the next time she’s in Pyongyang to complain about how U.S. sanctions are starving North Korean babies.

~   ~   ~

Snyder is honest enough to admit some weaknesses in his conclusion. For one, the UN FAO estimate he cites relies on Pyongyang’s own food production statistics, because this year (glasnost alert!), Pyongyang wouldn’t let the FAO do an on-the-ground food security assessment. But that’s no cause for alarm; after all, North Korea wouldn’t try to falsify information about its food supply or manipulate aid agencies, would it?

Snyder also admits that North Korea’s winter crops are falling well short of forecasts, a point that caused aid groups to warn of another food crisis recently:

“We’re concerned about seed scarcity and the low level rain and snowfall,” John Aylieff, deputy Asia director at the U.N.’s World Food Program, said from Pyongyang. “All of these things are raising concerns about the winter harvest this year.”

Winter crops — including wheat and barley — should be growing now, but after an exceptionally dry year in 2014, rainfall around the country has been markedly lower than usual so far this year, particularly in the “cereal bowl” provinces of Pyongan in the west and Hwanghae in the south.

Although the winter harvest makes up only 5 percent of North Korea’s domestic food supply, it is a critical time because the crops see the country through the lean season known locally as the barley hump — the period between May and August before rice and corn crops are harvested.

“If there is a big gap, this could prolong the lean season and it could prove a ‘flash point’ for malnutrition,” Aylieff said.  [WaPo, Anna Fifield]

Take this with a grain of salt, too. I’ve often suspected that some aid groups exaggerate conditions in North Korea, whether to influence policy debates here or to rake in more donations. You can’t even blame them for it. If they don’t know where the trends are heading, they almost have to raise the alarm prematurely to be able to respond to a catastrophe in time.

Snyder also cites Andrei Lankov’s recent writings, which, as I’ve argued here and here, don’t look very well sourced to me, and haven’t held up well against better-sourced evidence. As a friend said about Andrei today, he’s always interesting, and often brilliant, even when he’s wrong. It still looks like wishful thinking to me — evidence that’s mostly apocryphal, ephemeral, or parochial, or a misattribution of market trends unrelated to regime policies.

We’ll know better by November. Meanwhile, obsessing over North Korean agricultural policies is like watching the paint dry on the side of a burning house. Hardly anyone still argues that Pyongyang is interested in broad, serious, structural reforms to its agricultural, economic, or political systems. No one believes they’ll cede their nuclear weapons. I doubt that anyone really knows what the true food situation is, including in Pyongyang. How could it be otherwise in a country where those who do not hoard, starve?

This bring us to another problem. Even if North Korea is growing more food, that doesn’t mean the people are eating more of it. It’s no good to produce more food if regime officials simply seize what they consider to be “surplus” crops for export. And as Snyder concedes, “growing income inequality in North Korea has resulted in continuing malnutrition among some sectors of the population, especially in rural areas.”

Two other interesting points in Snyder’s post reinforce this suspicion: first, North Korea has cut way back on its commercial food imports since the famine years. Second, it raised them again to adjust for a decline in external food aid. In other words, Pyongyang seems to be using commercial imports to calibrate the domestic food supply to a level that, according to the best evidence we have, is a pretty marginal one for 84% of North Koreans. That’s why I call the North’s food supply statistics “suspiciously constant.” We’ll pick that point up again in a moment.

~   ~   ~

My main issue with Snyder’s post, however, is his conclusion:

North Korea’s apparent economic progress is bad news for those who expect increased sanctions to be decisive in driving North Korea to make a strategic choice to give up its nuclear weapons. So far, the effects of increased sanctions have been far from generating sufficient economic pressure to induce North Korea to make such a choice. Under current circumstances, there is nothing to stop North Korea from having its cake and its yellowcake, too.

Well, where does one begin with that? First, here again is the urban legend that our sanctions against North Korea have been strong, and thus properly tested as a tool of policy. For those who haven’t yet read it, I’ve refuted that argument here. It’s certainly true that sanctions have been enforced poorly by just about everyone — from the Chinese, to the South Koreans, to the Obama Administration, and most recently, the Russians. Private jets don’t import themselves, after all.

My real problem with Snyder’s argument, however, is its implication that sanctions would target North Korea’s food supply. I don’t know a single sanctions proponent who wants to target North Korea’s food supply or starve innocent people. Let’s have a look at the care H.R. 757, the North Korea Sanctions Enforcement Act, takes to avoid that, starting with Section 207(a)(2), which provides exemptions for imports of food and medicine:

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There’s also a catch-all waiver provision at Section 207(b)(3) in the event a particular sanction has unintended humanitarian consequences:

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We even wrote a provision at Section 207(d) that would allow the Treasury Department to license a responsible foreign bank to handle transactions to bring food and other humanitarian supplies into North Korea:

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Of course, some banks could adopt excessively cautious interpretations of the law. The answer to that problem is for the Treasury Department to publish guidance and general licenses to give the banks peace of mind that transactions in food and aid don’t violate the law — promptly. As in, Treasury should start drafting that guidance now.

I’ll take this a step further: those of us who advocate for Kim Jong Un’s Götterdämmerung, and for policies that are just as content to catalyze that outcome as to extract change diplomatically, want the North Korean people to have more food, not less. Not only would that be far better for the North Korean people, it might hasten the regime’s overthrow. I’ve long argued that the regime uses hunger as a tool of control: it seeks to keep its people too weak and too exhausted to think of anything but survival. Historically, starving people do not overthrow their oppressors. People who overthrow their oppressors have enough to survive, and to seethe against the ruling class. It is the envy of oligarchs, not famine, that causes revolutions. An ample food supply would not preempt North Korea’s class war, but it would do much to free those on the lower regions of the songbun ladder to contemplate the differences between existence and life.

In short, there would be no “bad news” for any sanctions proponent in a rise in North Korea’s food supply. Pending sanctions legislation takes extreme pain to avoid reducing it. It is wrong to suggest that so many proponents of targeted sanctions legislation — chief among them, longstanding human rights advocates — are so callous about human life and suffering as to intentionally attack the food supply of Kim Jong Un’s victims. It’s an offense that could easily have been avoided by taking the time to read and understand the sanctions before implying as much.

Introducing H.R. 757: The North Korea Sanctions Enforcement Act of 2015

Ed Royce and Elliot Engel, the Chairman and Ranking Member of the House Foreign Affairs Committee, have introduced the new, improved, post-Sony version of H.R. 1771.

Why I’m concerned about the overuse of financial sanctions

As much as I’ve advocated the use of financial sanctions as a potentially effective tool against North Korea, and as much as financial sanctions against Russia appear to have played a significant role in crashing the ruble, it worries me that if we use this tool too much against the wrong targets, we risk blunting the power of our financial weapon.

I think North Korea is a good target for financial sanctions because it is (a) dependent on the financial system, (b) misusing the system in ways that raise traditional law enforcement and money laundering risks, (c) not an important trading partner to anyone, and (d) subject to theoretically strict financial safeguards under U.N. Security Council resolutions.

That is to say, this weapon is for the worst of the worst–rogue states with weak links to the financial system, where there is (or could be) broad international agreement that financial sanctions are an appropriate countermeasure. (In the case of Russia and the Ukraine, better training and weapons for the Ukrainians might have been a better response. Russia’s history of losing wars to smaller neighbors is older than the Winter War against Finland and more recent than Afghanistan).

In this post, Walter Russell Mead worries that financial sanctions might have been the wrong tool against Russia, and that it might cause more states to agree that they need an alternative reserve currency. It’s a concern I share. In the case of Russia, for the first time ever, we’ve blocked out a large, interconnected economy without basing that action on concerns about money laundering, terrorist financing, or proliferation.

Three Cheers for Obama’s Sony attribution, a golf clap for his “proportional” response.

In The Washington Post, Ellen Nakashima describes how Sony’s decision to cancel the premiere of The Interview catalyzed the Obama Administration’s decision to blame North Korea publicly:

The next day, alarmed by the surrender, President Barack Obama convened his top officials in the White House Situation Room and, based on their unanimous recommendation, decided to take an action the United States had never dared before in response to a cyberattack by another nation: name the government responsible and punish it. [….]

The blocking of Sony’s freedom of expression, on top of a highly damaging hack, is what ultimately compelled officials to act, in the name of deterrence.

“The argument I made was the whole world is watching how we as a nation respond,” said Adm. Michael Rogers, the director of the National Security Agency, who, other officials said, was at the previously undisclosed meeting.

“And if we don’t acknowledge this, if we don’t name names here, it will only — I’m concerned — encourage others to decide: ‘Well, this must not be a red line for the United States. This must be something they’re comfortable [with] and willing to accept,’ ” Rogers said at an international cybersecurity conference at Fordham University last week.

There “was a significant debate within the administration about whether or not to take that step” of naming North Korea, a senior administration official said. “Attribution is hard, and there are all sorts of reasons we don’t normally want to do that,” including setting a precedent that would increase pressure to name other countries in future incidents and antagonizing the offending governments.

But the attack on Sony’s right to screen a movie struck a nerve. The entertainment company may not be “critical” to national security, but free speech is “a core value,” said the official, who spoke on the condition of anonymity to describe internal discussions. “Yes, it was a Seth Rogen comedy, but next time it might not be,” he said. What he described as the hack’s “destructive” nature combined with the element of coercion against Sony “crossed the threshold,” he said. “It took us into a new realm.”

The attack was a violation of U.S. sovereignty “coupled with an attempt to interfere with freedom of expression,” said Christopher Painter, State Department coordinator for cyber issues. “You had, in many ways, the perfect storm of all these things coming together that were really important.” [WaPo, Ellen Nakashima]

I applaud this unreservedly. It was the right decision for the right reasons.

~   ~   ~

The administration has stumbled twice since then, however. For several weeks, the administration failed to challenge inside-job theories from some IT security experts. Some of them challenged the sufficiency of the publicly available evidence, which is fair enough. But to argue that North Korea didn’t do it is much more problematic. Some of the inside-jobbers lost sight of the possibility that they were arguing based on incomplete information. Others may have been motivated by grudges against the administration over the Snowden revelations, or other biases. Yet others, including inmates of the Alex Jones, Christine Ahn, and Ron Paul asylums, shared the sort of skepticism that’s unique to the world’s most gullible people.

The administration continued to lose this argument for several weeks before FBI Director James Comey publicly reaffirmed that he was certain that the North Koreans did it. Comey’s call to declassify more of the evidence is now being answered by the National Security Agency:

Spurred by growing concern about North Korea’s maturing capabilities, the American spy agency drilled into the Chinese networks that connect North Korea to the outside world, picked through connections in Malaysia favored by North Korean hackers and penetrated directly into the North with the help of South Korea and other American allies, according to former United States and foreign officials, computer experts later briefed on the operations and a newly disclosed N.S.A. document.

A classified security agency program expanded into an ambitious effort, officials said, to place malware that could track the internal workings of many of the computers and networks used by the North’s hackers, a force that South Korea’s military recently said numbers roughly 6,000 people. Most are commanded by the country’s main intelligence service, called the Reconnaissance General Bureau, and Bureau 121, its secretive hacking unit, with a large outpost in China.

The evidence gathered by the “early warning radar” of software painstakingly hidden to monitor North Korea’s activities proved critical in persuading President Obama to accuse the government of Kim Jong-un of ordering the Sony attack, according to the officials and experts, who spoke on the condition of anonymity about the classified N.S.A. operation. [N.Y. Times, David E. Sanger & Martin Fackler]

The CIA’s malware was built on its highly successful Stuxnet worm:

For about a decade, the United States has implanted “beacons,” which can map a computer network, along with surveillance software and occasionally even destructive malware in the computer systems of foreign adversaries. The government spends billions of dollars on the technology, which was crucial to the American and Israeli attacks on Iran’s nuclear program, and documents previously disclosed by Edward J. Snowden, the former security agency contractor, demonstrated how widely they have been deployed against China. [N.Y. Times]

For those incapable of wrapping their heads around the idea of North Korea being technologically sophisticated enough to hack someone, the Times story also provides an extensive history of Unit 121, and an interview with two defectors with insider knowledge of the unit’s operations.

See also CNN and CBS News (quoting Comey, “We could see that the IP addresses that were being used to post and to send the e-mails were coming from IPs that were exclusively used by the North Koreans.”).

Interestingly enough, just a few weeks before the Sony hack, Director of National Intelligence James Clapper had dinner with Kim Yong-Chol, the head of North Korea’s Reconnaissance Bureau (RGB), the man responsible for overseeing North Korea’s hackers, and also for multiple attempts to assassinate human rights activists and North Korean dissidents in exile. The RGB’s assets are blocked, but Gen. Kim’s are not. I can’t help wonder if Gen. Kim smiled at the thought of how Clapper would react to the Sony attacks. Let’s hope that the Obama Administration gives Gen. Kim cause to regret this lapse of malignant egomania.

It amuses me some to wonder whether there was a small bandage on Mr. Clapper’s right palm when the two men shook hands.

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Which brings us to the President’s second stumble: his failure, so far, to respond credibly, to deter others from crossing the red line that North Korea crossed in November, and also to deter others from blunting President Obama’s response by undermining sanctions.

It did not take long for American officials to conclude that the source of the attack was North Korea, officials say. “Figuring out how to respond was a lot harder,” one White House official said. [N.Y. Times]

That’s becoming more painfully obvious by the day. President Obama has said that Executive Order 13,687 and the designations of January 2nd were only a beginning, and let’s hope he’s right about that. Sanctions work better when they hit with a shock than when they’re applied incrementally, and give the target time to adapt. If my guess is right, however, Treasury needs more time to do that, because this administration hasn’t made North Korea a priority in its financial intelligence targeting. But so far, as former CIA Director Michael Hayden said, the administration’s new sanctions have been “symbolic at best,” for reasons I explained here. Worse, our apparent lack of determination is inviting troublemakers to undermine the administration’s negative reinforcement.

Here is Vladimir Putin’s cue to enter stage left.

According to this article, Russia has recently begun to service transactions for the U.S. Treasury-sanctioned Foreign Trade Bank of North Korea in rubles. Treasury sanctioned the FTB in March 2013 for its involvement in servicing WMD-related financial transactions. The article’s author, whose work reads like that of a Putinjugend fangirl, may not have considered the possibility that the Russian businesses involved could still be cut out of the financial system under EO 13,687 or (one day in the not-too-distant future, according to Chairman Royce) the North Korea Sanctions Enforcement Act. However unwittingly, fangirl has done us a great public service by bringing this information to our attention.

In his State of the Union speech, President Obama promised to defend us against cyberattacks. He didn’t mention North Korea by name, but the reference was obvious. Deterrence is a critical part of defense. Imposing new cybersecurity laws and regulations on industry alone will not be a complete answer, and the new requirements will come with massive costs to American industry. Even if the administration has good reasons to delay the main thrust of its response to Kim Jong Un until it finds a critical mass of North Korea’s financial nodes, it still needs to make a bold demonstration that it’s unwilling to tolerate the willful subversion of its policies by Russia and others. If the sanctions of January 2nd are the only price a foreign enemy pays for a devastating and chilling attack on the central principle of our political system, those sanctions will mean less than no deterrent at all.

Wanna read about North Korea sanctions law? You know you do.

In the Fletcher Security Review, I attack the myth that our North Korea sanctions are strong, summarize the authorities, describe what has and hasn’t worked, and explain how to make sanctions work as part of a more coherent and effective North Korea policy.

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Update: See also this Wall Street Journal column, citing yours truly, which I swear I didn’t see coming. If only the author had cited the paper linked above, after I knew the answer to the question posed. But just the same, the article shows a good understanding of the subject matter. It’s gratifying to be read, to be getting through to people, and to be changing the conversation.

NHK Documentary: Money & Power in North Korea

I haven’t watched it all — was busy finishing another project — but it looks to be an interesting examination of the subject that interests me most about North Korea: its money. It talks about the regime’s “gift politics,” luxury goods trade, the “royal court economy,” money laundering, and hunger.

Although the documentary itself is new, some of the info seems a bit dated. There were other things I didn’t know. For example, it claims that in Pyongyang, there’s a massive vault filled with yen, dollars, and euros, in cash. It also claims that North Korea continues to operate out of Macau, selling gold (among other things). It also discusses North Korea’s statue-building business in Africa, and its slave-labor exports.

The documentary also claims that Jang Song-Thaek was purged because of a shortage of funding and because his control of wealth was seen as a threat. That makes sense to me, but I would still treat any “insider” accounts with great suspicion.

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Update: OK, I finished watching it. It’s well worth seeing, although based on other information I’ve seen, I don’t agree that Kim Jong Un’s hard currency streams are dwindling. Just look at this chart.

Actually, sanctions are looking like the best thing that ever happened to engagement

Since December 19th, when the President blamed North Korea for the Sony hacking and cyberterrorism attacks, Congress has been pushing for tougher sanctions against North Korea, and it has looked increasingly like it has been pushing against an open door. And suddenly, a North Korean leader who has never gone abroad or met a foreign leader during his three-year reign (no, Rodman doesn’t count) has taken a sudden — even urgent — interest in personal diplomacy.

On January 1, Kim Jong Un made a highly conditional suggestion that he might be interested in meeting Park Geun-Hye. Park, with record low approval ratings and a desperate need to change the subject, seized on the offer and has pushed Kim to hurry along to Seoul.

The next day, President Obama issued an executive order authorizing sanctions against all entities and officials of North Korea’s government and ruling party, and (more importantly) against the third-country entities that provide Pyongyang its regime-sustaining hard currency. The order was potentially sweeping and devastating. In its actual impact, it reached only three entities that were already sanctioned, and ten mid- to low-level arms dealers. But the President also said that this was only a first step, which left Pyongyang scurrying to secure its financial lifelines.

Suddenly, within a week, press reports said that Shinzo Abe might visit Pyongyang, and that Kim might accept Putin’s invitation to Moscow in May.

Kim even reached out to Washington a little, offering a nuclear test freeze if Washington cancels annual military exercises. This was enough to fool the gullible editors of The New York Times, but not President Obama. Still, it’s more than North Korea has offered Washington for the last year.

Today, North Korea’s Central Bank responded to an obviously planted question from its state news agency by “committ[ing] itself to implementing the action plan of ‘international standard’ for anti-money laundering and combating the financing of terrorism.” (quote from KCNA; Reuters report here.) Kim surely knows that international efforts to enforce financial sanctions against Pyongyang will determine their success.

All of this is great news if you believe that talks are an end in themselves, rather than a means to achieve concrete interests. But it’s also great news if you’re searching for a strategy that raises enough colon-clenching horror in the palaces and ministries of Pyongyang to modify the regime’s behavior.

There’s little question that Kim Jong Un’s sudden interest in diplomacy is fundamentally about frustrating U.S. interests, rather than disarmament or genuine reform. Pyongyang is bracing for financial warfare — trying to break up the formation of an international coalition against its finances, protecting key cash cows like Kaesong, and shoring up its financial lifelines to resist sanctions. But at least for now, despite all of the “expert” opinion that sanctions can do no more, we’ve heard, however indirectly, from the best authorities on that subject — the ones in Pyongyang.

White House considers sanctions, psyops, and cyber responses to N. Korea

Because I’ve begun to develop a certain sense of when interesting events are about to get much more interesting, yesterday morning, I decided to check the web site of KCNA, North Korea’s official “news” service. The site did not load, but it has always been slow to load. Then, news sites began to report that North Korea’s internet access had gone down, and that the White House wasn’t denying that it had a hand in this.

This morning, kcna.kp loaded with its usual masikryeong speed. Let’s all hope that our government has the will and the means to respond more potently than this. Kicking North Korea out of the Internet is like kicking Alabama out of the World Cup, and North Korea without internet is like North Dakota without surfing, Ireland without sunshine, or a Kardashian without a job. Meanwhile, the Japanese mirror site of KCNA kept right on squawking its threats to attack the White House:

Our target is all the citadels of the U.S. imperialists who earned the bitterest grudge of all Koreans. The army and people of the DPRK are fully ready to stand in confrontation with the U.S. in all war spaces including cyber warfare space to blow up those citadels.

Our toughest counteraction will be boldly taken against the White House, the Pentagon and the whole U.S. mainland, the cesspool of terrorism, by far surpassing the “symmetric counteraction” declared by Obama. This is the invariable toughest stand of the army and people of the DPRK.

Fighters for justice including “guardians of peace” who turned out in the sacred drive for cooperation in the fight against the U.S. to defend human justice and conscience and to dismember the U.S. imperialists, the root cause of all sorts of evils and kingpin of injustice, are sharpening bayonets not only in the U.S. mainland but in all other parts of the world. [KCNA.co.jp]

President Bush removed North Korea from the list of state sponsors of terrorism on October 11, 2008. The Obama Administration’s official view is that North Korea is “not known to have sponsored any terrorist acts since the bombing of a Korean Airlines flight in 1987.” Discuss among yourselves.

I can only guess, but if this was an attack, I’d guess that the U.S. government wasn’t behind it, and that independent hackers were. That’s also what I’m hoping, because if this is the worst that the world’s most powerful nation can do to a blighted hell-hole like North Korea, it would be wholly inadequate to deter any other despots who would censor and control our discourse through cyberwarfare and cyberterrorism. A nine-hour DDOS attack wouldn’t do much to deter Kim Jong Un, or contribute to solving the greater problem — the fact that he rules a country to begin with. That level of response, together with the President’s description of North Korea’s attacks as “cybervandalism,” would imply a junior-varsity insouciance about the gravity of this threat:

Sen. John McCain rejected Obama’s characterization of the North Korean hack as “an act of cybervandelism,” instead calling it “a new form of warfare” on CNN’s State of the Union.

“The President does not understand that this is a manifestation of a new form of warfare when you destroy economies, when you are able to impose censorship,” McCain, a Republican from Arizona, said. “It’s more than vandalism. It’s a new form of warfare that we’re involved in and we need to react and we need to react vigorously.” [CNN]

McCain, the incoming Chairman of the Armed Services Committee, promised to call hearings on the issue when the new Congress convenes.

Sen. Lindsey Graham of South Carolina called it “an act of terrorism” and favored reimposing sanctions and adding North Korea to the terrorism list. The United States needs to “make is so hard on the North Koreans that they don’t want to do this in the future,” Graham said. [Joongang Ilbo]

Fortunately, a report from The New York Times claims the White House is considering better alternatives, starting with asking the Pentagon’s Cyber Command for a list of options:

“What we are looking for is a blocking action, something that would cripple their efforts to carry out attacks,” one official said. [….]

For now, the White House appears to have declined to consider what one Defense Department official termed “a demonstration strike” in cyberspace, which could have included targets such as North Korean military facilities, computer network servers and communications networks.

United States officials said that American efforts to block North Korea’s access to the Internet, which is available only to the military and the elite, would necessarily impinge on Chinese sovereignty.  N.Y. Times]

Sort of like China and North Korea just impinged on ours, then.

Tom Kellermann, a former member of the presidential commission on cybersecurity, said one option was what security experts refer to as a “hack back,” in which they use the attackers’ own computer footprints and back doors to deploy an attack that destroys North Korea’s attack infrastructure, or compromises the integrity of the machines that did the hacking. For example, the United States could deploy a malicious payload that encrypts the data on North Korea’s machines, or renders them unable to reboot — clearly “proportional,” in the president’s words, because that was what happened to Sony’s computers.

The White House is also considering financial sanctions, “mirroring those recently placed on Russian oligarchs and officials close to President Vladimir V. Putin,” to “cut off their access to cash … that allows the elite surrounding Kim Jong-un, the North Korean leader, to live lifestyles their starving countrymen can barely imagine.” The Times even invokes the example of Banco Delta Asia, calling it “the one sanction in the past decade that caused the most pain to the North Korean leadership.”

They’re starting to sound like Ed Royce, who is starting to sound like a man ahead of his time.

Finally, they’re considering an offensive of information operations — or if you prefer, psyops, “in which the United States plays on North Korea’s worst fears by using its access to the North Korean domestic computer and radio systems to deploy propaganda inside North Korea’s closed media bubble.”

A combination of those three options could be a serious response, although I’ll reserve judgment until I see the administration actually enforce it.

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Update: Reuters suggest some other alternatives:

U.S. cyber teams could also go after the hackers aligned with Pyongyang and make their lives miserable. It’s an effective tactic. Bullies are notoriously susceptible to bullying.

Since the FBI has declared that the attack came from North Korea, there’s a good chance the bureau’s experts know which computers and even which hackers it came from. Hackers generally have robust online lives. They use social networks, maintain a presence in online forums and chatrooms and transfer money using Bitcoin or other cryptocurrencies. Washington could make their lives uncomfortably complicated.

It could break into the hackers’ email accounts and publish them – just as the hackers did to Sony Pictures executives. It could ban their Internet protocol addresses or infect their computers with destructive viruses and malware that could store every keystroke the hackers type. Every password, email, website visited would be recorded and stored in a U.S. database. It might only sideline the hackers, by making them spend time and energy fixing the problem or even force them to buy entirely new hardware — a hacker’s worst case scenario.

U.S. cyber teams could also pose online as commentators and ruin the hackers’ reputations among any communities they belong to. For example, they could upload faulty software to the black markets as the Guardians of Peace.

In the long run, those tactics might damage the North Korean hackers’ capabilities, but wouldn’t do much to deter North Korea or other copycat cyberterrorists.

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This post was edited after publication.

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Update 2: These hackers claim responsibility for taking down North Korea’s internet. HT: Steve Herman.

What re-listing N. Korea as a state sponsor of terrorism would mean

The New York Times is reporting that President Obama is considering re-listing North Korea as a state sponsor of terrorism:

As the United States moves closer to taking Cuba off the list of state sponsors of terrorism, President Obama said he would “review” whether to return North Korea to the list, part of a broader government response to a damaging cyberattack on Sony’s Hollywood studio.

“We have got very clear criteria as to what it means for a state to sponsor terrorism, and we don’t make those judgments just based on the news of the day,” Mr. Obama told CNN in an interview broadcast Sunday. “We look systematically at what’s been done.” [N.Y. Times]

In fact, the standard isn’t clear, and neither is the Foreign Assistance Act’s definition of terrorism, but it wasn’t until I reviewed a post I wrote several years ago that I realized the full significance of a re-listing. I was reminded that Section 2332d of the Criminal Code prohibits financial transactions by U.S. persons with the governments of states designated as sponsors of terrorism, except in accordance with Treasury Department regulations published at 31 C.F.R. Part 596, which require that those transactions be licensed. Because almost everything in North Korea is controlled by the government, this would effectively force most U.S. corporations and their subsidiaries to divest from North Korea, closing one important loophole in our current sanctions. Compare Part 596 to our leaky existing sanctions at Part 510, and you can see the difference clearly.

(What Part 596 would not do, of course, is hit North Korea’s third-party enablers, or its very access to the financial system, as the North Korea Sanctions Enforcement Act would.)

Companies such as the Associated Press and DHL that do business in North Korea would have to scramble to obtain licenses or withdraw. Any U.S. subsidiaries operating in the Kaesong Industrial Park would also be affected. Although Treasury could grant licenses to those choosing to deal with this regime, a re-listing would nonetheless send a powerful signal to lenders and investors everywhere that providing Kim Jong Un with regime-sustaining cash is politically and financially risky.

A re-listing would also require U.S. diplomats to oppose foreign assistance grants and loans by international financial institutions, such as the World Bank, the International Monetary Fund, and the Export-Import Bank. A state sponsor of terrorism also loses its sovereign immunity from civil lawsuits for personal injury caused by the acts of terror it sponsors. North Korea recently lost several such suits in U.S. federal district courts, relating to actions that took place prior to North Korea’s 2008 de-listing. The plaintiffs are now trying to collect nearly $500 million. As recently as July of this year, U.S. District Judge Royce Lamberth found North Korea liable for sponsoring rocket attacks by Hezbollah.

Other effects would be less significant, such as restricting the availability of non-immigrant visas to North Koreans. Theoretically, restrictions on the export of munitions and sensitive technology to North Korea would be further restricted, although the Commerce and Treasury Departments presumably aren’t granting licenses for those exports now.

The re-listing of North Korea is long overdue. President Bush’s decision to take North Korea off the list in October 2008 was an inducement for a disarmament deal on which North Korea had already begun to renege. It was a decision President Obama (while still a candidate) promised to reverse if North Korea didn’t keep its word, but it was President Obama who didn’t keep his when North Korea conducted two additional nuclear tests. North Korea’s de-listing did not follow any North Korean acknowledgement of its past support for terrorism. It actually marked the beginning of a period in which North Korea increased its terrorist threats against the U.S. and South Korea, its assassinations of (and assassination attempts against) exiles and human rights activists, and its shipment of weapons to Hamas and Hezbollah.

A re-listing, if President Obama actually goes through with it, would effectively foreclose the possibility of another nuclear deal with North Korea during the remainder of President Obama’s term, particularly if Kim Jong Un’s reaction is as impulsive as I suspect it would be. It would belatedly challenge Pyongyang’s sense of impunity.