N. Korean counterfeiting surges as Bureau 39’s checks bounce.

When the Secret Service first found high-quality counterfeit dollars circulating in the Middle East over three decades ago, North Korea wasn’t the prime suspect; Iran was. The counterfeits were so good that experts could only tell them from the originals by the superior quality of their printing, so the Secret Service named them “supernotes.” The Secret Service’s suspicions shifted to North Korea in 2000, after Cambodian authorities arrested Yoshimi Tanaka, a Japanese Red Army hijacker who had taken refuge in North Korea and was traveling in a North Korean diplomatic vehicle, on counterfeiting charges. Those suspicions eventually converged on Bureau 39 of the Korean Workers’ Party. Bureau 39’s function is money laundering. It earns money overseas, both legally and illegally, commingles it all together to make the dirty money untraceable, and launders the proceeds through slush funds that the regime uses to buy just about everything starving kids can’t eat. North Korean diplomats also help launder supernotes.

~   ~   ~

Since 2000, North Korea’s involvement in currency counterfeiting has been well documented. In 2004, the Justice Department indicted Sean Garland, the leader of a breakaway Marxist faction of the IRA, for buying supernotes from North Korean embassies and reselling them for a profit (an Irish court later refused to extradite Garland to the U.S. to stand trial). In 2005, the passing of supernotes was the principal basis for designating Banco Delta Asia as a primary money laundering concern and blocking it out of the financial system. In 2006, the Federal Reserve estimated that “approximately $22 million in supernotes has been passed to the public […] and approximately $50 million in supernotes has been seized by the U.S. Secret Service.” In 2008, a Las Vegas jury convicted Chen Chiang Liu of passing supernotes through casinos.

Although the supernote story invariably drew the usual assortment of conspiracy kookshack journalists, and North Korean sympathizers out of the woodwork, better quality investigative journalism makes a strong case against Pyongyang. In a 2006 report for the New York Times, Stephen Mihm explained how North Korean buyers went to the same Swiss suppliers who sold our own Bureau of Engraving and Printing, or BEP, its intaglio printing presses and optically variable ink. (The North Koreans’ interest ought to have raised immediate suspicions with the Swiss; after all, why would North Korea, whose own currency is non-convertible and worthless, need top-of-the-line presses and ink designed to foil counterfeiters?) 

David Rose followed Mihm’s reporting with a detailed 2009 story for Vanity Fair, explaining how the feds linked the counterfeits to North Korea, how North Korea smuggles supernotes into the United States, and how Condoleezza Rice’s State Department suppressed Justice Department indictment of Kim Jong-il for the counterfeiting operation. The International Consortium for Investigative Journalists has also reported on the smuggling of supernotes into the United States. Other reports have pinned control of the supernote operation on General O Kuk-ryol

North Korean counterfeiting costs Americans money. The BEP redesigned the $50 note in 2003 and redesigned the $100 note twice since 1996, in part to stay ahead of the supernote’s criminal craftsmanship. In a 2009 report, the Federal Reserve said that it “budgeted an average $610 million for printing, shipping, counterfeit deterrence and other currency-related costs,” and that a currency redesign would also cost “up to $390 million for nonrecurring equipment upgrades for manufacturers of cash-accepting devices.” The current design of the $100 note is from 2013. (The BEP’s website doesn’t mention a botched 2010 redesign.) All of these costs are passed on to American taxpayers and consumers.

Kim Jong Il counterfeit

In recent years, reports of supernote arrests waned, although the problem never went away entirely. In 2012, South Korean authorities arrested a woman for “attempting to infiltrate South Korea by pretending to be a defector, and … circulating some $570,000 worth of supernotes in Beijing and Shenyang from 2001 to 2007.” This was still old news, but in 2013, the Undersecretary of the Treasury for Terrorism and Financial Intelligence confirmed that North Korea continued “to try to pass a supernote into the international financial system,” although it was “less of an issue that it was a few years ago” and had “calmed down to some extent.” A recently as March of this year, Vice News figured that the supernotes had vanished. It quoted Michael Madden as saying, “I don’t think they’re currently involved in counterfeiting anymore.” According to Kathy Moon, supernotes are “not something people are seeing.”

~   ~   ~

Perhaps they spoke too soon. This week, Yonhap reported that authorities in Hong Kong recently found supernotes on a businessman arriving from Pyongyang. Last week, The Joongang Ilbo reported that “a North Korean agent was arrested in the border city of Dandong in Liaoning Province, northeastern China,” for his involvement in “distributing counterfeit U.S. dollars.” The story quotes an unnamed source as saying that the agent “brought $5 million in cash into China from North Korea” to buy “household goods and home appliances” as gifts for North Korean elites for Kim Il-sung’s birthday (April 15th) and the Workers’ Party’s congress (May 7th). The paper notes that because of new sanctions, “Pyongyang is being blocked from financial transactions giving it access to U.S. cash.”

“The $5 million was exchanged at the Industrial and Commercial Bank of China and the Agricultural Bank of China for some 30 million yuan [$4.6 million] and then deposited,” the source said. “But a number of the notes were found to be counterfeit $100 bills when they were run through the banknote counter by a bank employee, so Chinese authorities ordered the relevant account be frozen and arrested the North Korean agent.” [Joongang Ilbo]

In February, I posted about reports that the Industrial and Commercial Bank of China, China’s largest bank, had “suspended cash deposit and transfer services for accounts owned by North Koreans.” Either that report wasn’t true, the bank quietly unfroze some of those accounts, or China’s largest bank isn’t taking its Know-Your-Customer obligations very seriously and needs to fire its compliance officer. (On June 2nd, Treasury dramatically raised the risk to banks that service North Korean clients by designating North Korea as a primary money laundering concern, and banning all direct and indirect correspondent account services for North Korean banks.)

Picking up with our story, Chinese authorities then went to the North Korean’s home in Dandong, where they confiscated 30 million yuan and an unspecified quantity of gold bars. The agent’s use of counterfeit dollars, yuan, and gold provides further evidence that they are having serious cash flow problems. Last week, I posted about a Daily NK report that North Korean agents were defaulting on their debts to Chinese creditors, and an NK News report that some North Korean purchasers had inexplicably stopped buying goods from their Chinese suppliers in March. According to the Daily NK, those experiencing cash flow problems include Bureau 39 agents.

Intriguingly, the Daily NK also reported that a North Korean agent couldn’t raise the cash to buy flat-screen TVs from China to dole out as highly coveted swag for the elites (in violation of U.N. sanctions, which prohibit North Korea from importing “luxury goods”). I speculated then that the North Korean agents’ accounts may have been frozen by their Chinese bankers. These reports support that speculation and offer one possible explanation.

“North Korea’s economy is entering a state of paralysis because of a shortage of dollars, and there is a high likelihood that it is systematically counterfeiting notes and in the process of wide-scale distribution,” the source added.

“Starting from March, a large amount of supernotes were found in border regions between China and North Korea and China’s three northeastern provinces [Liaoning, Jilin and Heilongjiang], and many have pointed to North Korea as the source of production and circulation,” Park Byung-kwang, a senior researcher with the Seoul-based Institute for National Security Strategy, said.

A follow-up report from The Joongang Ilbo — which has historically done some outstanding reporting on North Korean money laundering — identified the North Korean agent arrested in Dandong as an officer in an agency “responsible for major espionage missions against Seoul.” That’s a good description of the Reconnaissance General Bureau, or RGB, which is also responsible for acts of international terrorism, including abductions, assassinations, and a 2014 cyberterrorist attack against the United States. Consistent with the Daily NK‘s report last week, the agent “was going to pay that businessman for trade goods but could not do so apparently because of his arrest.”

~   ~   ~

So why, after allowing Bureau 39 and RGB agents to operate on its territory for years, would the Chinese suddenly crack down? For one thing, counterfeiting harms the interests of China’s banking industry, which hasn’t seemed so steady recently.

Here’s an even better reason: a defector organization, North Korea Intellectuals’ Solidarity, says that North Korea is distributing “massive quantities” of “counterfeit Chinese currency under the supervision of Kim Jong Un.” Or so says “a source based in North Korea.” The Korea Times also reports that Chinese authorities are on alert for counterfeit renminbi after multiple Chinese press reports that counterfeits “have recently been circulated in several Chinese cities, including Shaoxing in Zhejiang Province.” Local press speculation has pointed fingers at North Korea. The state-run Global Times, known for its nationalism and anti-Americanism, has also reported that counterfeit renminbi found in Dalian “were identified as North Korean.”

The yuan has circulated widely in North Korea since a disastrous 2009 currency reform — really, a mass confiscation — backfired and obliterated the market value of the North Korean won. Printing fake yuan would be an easy way for the North Korean government to cheat the donju — the well-connected traders who obtain most of Pyongyang’s needs from Chinese vendors, and the Chinese vendors themselves. Bureau 39 agents who are under intense pressure to fund Kim Jong-un’s priorities may be tempted to use supernotes and superyuan to meet their quotas.

NKIS’s allegations are somewhat consistent with previous reports. Its source in North Korea says that the superyuan are printed in Pyongson. Stephen Mihm’s 2006 report for the New York Times identified Pyongsong as the city where supernotes were printed. On the other hand, NKIS also claims that North Korea started printing yuan in 2013, which contradicts a 2007 report by the journalists Hideko Takayama and Bradley Martin that North Korea was printing counterfeit renminbi nearly a decade ago. What seems more likely is that North Korea printed small amounts of yuan before 2007 and stopped when the story broke, given the obvious danger Kim Jong-il would have seen to his relationship with his principal backer. 

Today, with China’s banks having finally been forced to choose between their North Korean clients and their access to the U.S. financial system — and having largely opted for the latter — Kim Jong-un may feel less compunction about sticking it to China.

We can add these reports to the evidence that North Korean agents are under significant financial pressure, although I can’t say whether the chicken or the egg came first.* Did the North Koreans turn back to counterfeiting just because it’s their nature, thus causing their accounts to be frozen, or did sanctions and the freezing of their accounts cause the North Koreans to turn to counterfeiting out of financial desperation? Whatever the reason, dumping funny money into the Chinese economy will further strain Sino-North Korean relations, and will add fuel to arguments to expel the North Korean trading companies and agents who pass the counterfeit bills. This time, North Korea’s criminal activities are an even greater threat to China than they are to us.

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* Of course, the egg came first, silly. Dinosaurs laid eggs millions of years before the first chicken did, after all.

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U.S. to sanction N. Korean officials, possibly to include His Porcine Majesty, for human rights abuses

The Treasury Department has sanctioned the presidents of Belarus and Zimbabwe and their cabinets for undermining democratic processes or institutions and has frozen their assets in the international financial system. It has sanctioned top officials of the Russian government for Russia’s aggression against its neighbor, the Ukraine.

cheonan

It has sanctioned the president of Syria for human rights violations, censorship, and corruption, among other reasons. It sanctioned Iranian officials for censorship and human rights abuses. It has even sanctioned officials in tiny Burundi for human rights abuses.

Camp 16 HQ @4500

[Camp 16, where prisoners are forced to dig their own graves and killed with hammers.]

As of the time of this post, there are still no human rights sanctions against a single North Korean official. As bad as things may be in any of the aforementioned places, are they worse anywhere than in North Korea?

starving children

The Chairman of the U.N. Commission of Inquiry that investigated human rights abuses in North Korea has said that “the gravity, scale and nature of these violations reveal a State that does not have any parallel in the contemporary world” and described the abuses there as “strikingly similar” to those perpetrated by the Nazis during World War II.

Camp 25 crematorium

[The crematorium at Camp 25]

The Commission’s detailed 372-page report found the North Korean government responsible for “crimes against humanity, arising from ‘policies established at the highest level of State,’” including “extermination, murder, enslavement, torture, imprisonment, rape, forced abortions and other sexual violence, persecution on political, religious, racial and gender grounds, the forcible transfer of populations, the enforced disappearance of persons and the inhumane act of knowingly causing prolonged starvation.”

The lesson for every despot on earth is that nuclear weapons will immunize you from the consequences of your crimes against humanity.

Seeking to rectify this outrage, this year, Congress passed a law that gave the President 120 days to submit a report on human rights abuses in North Korea, along with a list of those responsible. The provision requires the President to make specific findings with respect to Kim Jong-un’s individual responsibility. Those found responsible must then be designated under section 104(a) of the law, which freezes their assets and threatens secondary sanctions against those who transact with them. The 120 days ran out on June 11th.

Even before the law passed, the administration could see the overwhelming bipartisan support for human rights sanctions and began hinting at imposing them. It still didn’t act, but after the law passed, it began dropping increasingly strong hints that it would finally impose human rights sanctions on top North Korean officials. North Korea’s latest missile launch now gives the White House new impetus to increase pressure on Pyongyang, as if that impetus was lacking after the U.N. Commission released its report.

According to rumors circulating in the press and in human rights circles, the President will finally sanction “about ten” top officials of the North Korean government today. [Update: Now we know that Monday wasn’t the day. Watch this space.] The rumor I heard last week is that His Porcine Majesty Kim Jong-un, the morbidly obese despot who rules over millions of malnourished and stunted children, will be among them.

His Porcine Majesty

That could be the first step in blocking the billions of dollars he maintains in slush funds in China, Switzerland, and elsewhere. It will be the first concrete action our government — or any other government — will have taken in the more than two years since the Commission of Inquiry led by Justice Kirby released its report.

The Obama administration will now speak with gravity and sagacity about the horrors in North Korea and its seriousness about addressing them. It will make a virtue of necessity and claim the mantle of moral leadership in holding North Korea’s rulers accountable for their crimes against humanity. I’d be content to let them carry it for their remaining months in office … if they really do lead. But this is not a moment for relief that our government may finally act, at least a decade after it should have. It is a moment to mourn for the victims, both living and dead, and for the forfeited moral leadership of a nation that acted so late, and only after Congress forced the President to act.

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Top Namibian official visits Pyongyang

 

In March, this blog reported on the revelation by the U.N. Panel of Experts that the African nation of Namibia, a desert country in the southwest corner of the continent, had hired North Koreans, including representatives of U.N.-designated KOMID, to build an arms factory near Windhoek. At the time, Deputy Prime Minister Netumbo Nandi-Ndaitwah came to her government’s defense, admitting that her government was the site of a North Korean-run arms factory, but denying that the arrangement violated U.N. sanctions.

Today, NK News reports that Ms. N-N arrived in Pyongyang last Friday for a state visit, where she posed for photographs with Kim Yong-nam.

Namibia

[via NK News]

Now, I can’t say whether the purpose of the visit itself is inappropriate unless I know what those present will discuss. After all, not all diplomatic interactions with North Korea are prohibited. I suppose the purpose of the visit could be to “sever ties and wrap things up,” as Daniel Pinkston suggests, but the level of the interactions and the coincident publicity don’t give me much confidence in that theory.

As noted above, Ms. Nandi-Ndaitwah is well aware of the North Korean arms factory in her country, but has denied that it violates U.N. sanctions. The U.N. Panel of Experts has correctly concluded that it’s a violation.

106. The construction of any munitions factory or related military facilities is considered to be services or assistance relating to the provision, manufacture or maintenance of arms and related materiel and therefore prohibited under the resolutions.

Here are the relevant provisions of UNSCR 2270:

“6. Decides that the measures in paragraph 8 (a) of resolution 1718 (2006) shall also apply to all arms and related materiel, including small arms and light weapons and their related materiel, as well as to financial transactions, technical training, advice, services or assistance related to the provision, manufacture, maintenance or use of such arms and related materiel;

“9. Recalls that paragraph 9 of resolution 1874 (2009) requires States to prohibit the procurement from the DPRK of technical training, advice, services or assistance related to the provision, manufacture, maintenance or use of arms and related materiel, and clarifies that this paragraph prohibits States from engaging in the hosting of trainers, advisors, or other officials for the purpose of military-, paramilitary- or police-related training;

Investigative journalist John Grobler later did an outstanding report on the factory for NK News, revealing the extent of the factory’s operations. Ms. Nandi-Ndaitwah has argued, however, that because the arms factory deal predates U.N. sanctions it’s permitted. Nonsense. UNSCR 2270 even has a force majeure clause in paragraph 47, clarifying that no claim shall lie for the termination of preexisting contracts that violate the sanctions. The resolutions clearly have retroactive effect.

The 2016 POE report found that the North Korean company running the arms factory is KOMID, which is designated by the U.N. and the U.S. Treasury Department — either “in cooperation with, or using the alias of, Mansudae Overseas Project Group companies.” The Namibian government is obligated to expel all KOMID representatives and freeze all KOMID property immediately:

13. Decides that if a Member State determines that a DPRK diplomat, governmental representative, or other DPRK national acting in a governmental capacity, is working on behalf or at the direction of a designated individual or entity, or of an individual or entities assisting in the evasion of sanctions or violating the provisions of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013) or this resolution, then the Member State shall expel the individual from its territory for the purpose of repatriation to the DPRK consistent with applicable national and international law. . . .

[….]

“32. Decides that the asset freeze imposed by paragraph 8 (d) of resolution 1718 (2006) shall apply to all the funds, other financial assets and economic resources outside of the DPRK that are owned or controlled, directly or indirectly, by entities of the Government of the DPRK or the Worker’s Party of Korea, or by individuals or entities acting on their behalf or at their direction, or by entities owned or controlled by them, that the State determines are associated with the DPRK’s nuclear or ballistic missile programs or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013) or this resolution, decides further that all States except the DPRK shall ensure that any funds, financial assets or economic resources are prevented from being made available by their nationals or by any individuals or entities within their territories, to or for the benefit of such individuals or entities, or individuals or entities acting on their behalf or at their direction, or entities owned or controlled by them, and decides that these measures shall not apply with respect to funds, other financial assets and economic resources that are required to carry out activities of the DPRK’s missions to the United Nations and its specialized agencies and related organizations or other diplomatic and consular missions of the DPRK, and to any funds, other financial assets and economic resources that the Committee determines in advance on a case-by-case basis are required for the delivery of humanitarian assistance, denuclearization or any other purpose consistent with the objectives of this resolution.

Either Ms. Nandi-Ndaitwah hasn’t read the resolutions or has chosen to defy them. If strong diplomatic appeals still haven’t secured commitments to bring that violation to an end, the State and Treasury Departments should act swiftly to sanction the North Korean and Namibian entities involved under section 104(a) of the North Korea Sanctions and Policy Enhancement Act. Anything less would signal to North Korea’s arms clients elsewhere in Africa that the U.N. Security Council’s resolutions are mere suggestions. This time, an example must be made.

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HRNK exposes N. Korea’s sale of crew services to Taiwanese ships, via Uruguay (Update: A violation of EO 13722?)

The HRNK insider blog carries a fascinating story that begins with “a recent speaking tour in South America.” Recently, a North Korean sailor arrived at the airport in Montevideo, Uruguay, from Beijing. The sailor and his minder must have been in quite a hurry to get to the port. They forgot his suitcase, which the airport authorities eventually declared unclaimed. The suitcase contained evidence that North Korea is renting crew services to third-country vessels via a Uruguayan broker. (HRNK claims it “has also received information on a similar operation being conducted in Peru, but has so far been unable to verify such reports.”) The scheme works like this:

Sources in the country have confirmed that a Uruguayan company is cooperating with the North Korean authorities to dispatch North Korean sailors and fishermen to work on foreign ships. Based on luggage tag information, prior to landing in Montevideo, the sailors transit through Beijing and Paris. Although HRNK hasn’t yet been able to independently verify this information, the company has been identified as “Grupo Christophersen Organizacion Maritima,” headquartered in Montevideo. In order to avoid scrutiny by locals and to deny the sailors contact with the outside world, the North Koreans are picked up as soon as they land in Montevideo. They are then taken to a foreign fishing vessel by taxi. Practically, unless they are accompanied by watchful North Korean minders, the sailors can’t set foot on Uruguayan soil. According to local sources, it is primarily Taiwanese ships that make port in Uruguay and take on groups of ten to twenty North Korean sailors. Two of these Taiwanese fishing ships identified by local sources are reportedly “Shengpa” and “Samdera Pacific.” [HRNK Insider]

Greg Scarlatoiu’s entire post is a must-read, if only for the photographs of the propaganda poems the heavily indoctrinated sailor wrote (or rewrote) by hand. The extensive maternal references strongly support Brian Myers’s analysis of North Korean propaganda.

If confirmed, such a scheme falls into a gray area in U.N. sanctions against North Korea. In March, the U.N. Security Council approved Resolution 2270. Although the resolution does not ban the provision of crew services by North Korea to other U.N. member states, it does call on (but does not explicitly require) member states “to de?register any vessel that is owned, operated or crewed by the DPRK.” HRNK’s post does not name the North Korean entity Grupo Christophersen contracted with, but if it’s designated by the U.N., the transaction would be a violation. For now, this warrants further investigation by the U.N. Panel of Experts, and some polite visits by State Department officials to the Uruguayan Embassy and TECRO.

If the Security Council is looking to impose an additional cost on Pyongyang for its latest missile tests, perhaps it can also ban the provision of crew services by North Korea to U.N. member states. If the Panel of Experts can’t figure out how His Porcine Majesty ultimately spends Grupo Christopherson’s money, it could add that partner to its blacklist. The Security Council is long overdue to ban labor-export arrangements that violate internationally accepted labor standards.

But the real lesson we learned today? Never forget your suitcase at the airport.

~   ~   ~

Update: What didn’t occur to me until after I posted this is that if the transactions are denominated in dollars, they’re subject to blocking under this provision of Executive Order 13722, which the President signed in March to implement the North Korea Sanctions and Policy Enhancement Act.

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

[….]

(iv) to have engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea;

So, who knows the name of the North Korean company involved? In what currency does it accept payments, as if I have to ask?

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North Korean trading companies can’t pay their Chinese creditors because of sanctions.

Lately, the news about the implementation and impact of sanctions has come in so thick and fast that I’ve been unable to follow it all, and have instead bookmarked it until I can identify patterns and put it into context. A report I saw yesterday, however, demands immediate attention. According to the Daily NK, starting in April, the trading companies the North Korean regime sends to China to earn hard currency began defaulting on payments to their Chinese creditors because of the effects of the new sanctions.

“Companies under the Ministry of External Economic Affairs and other trade agencies have recently been experiencing a severe foreign currency crisis,” a source from South Pyongan Province told Daily NK on Wednesday. “Even those under the Central Party’s Office No. 39 have insufficient liquidity (in foreign currency), and this is creating obstacles for trade with China,” he added.  [Daily NK]

This is a reference to Bureau 39 of the Korean Workers’ Party, which is effectively Pyongyang’s official money laundering agency, and is designated by both the U.N. Security Council and the U.S. Treasury Department.

Cross-border transactions had been proceeding relatively unhindered until just a few months ago. However, an increasing number of conflicts have been arising with Chinese trade companies over payments, reported the source. “A lot of trade companies in Pyongyang and provincial areas have not been able to pay on time after bringing in goods from their Chinese counterparts,” he explained.

“In the past, the principal at least was always paid on time for goods that had been brought in past customs. But foreign currency is drying up, so the settlement dates are being dragged out,” the source said. “Up until early May, payments normally wouldn’t be any later than 15 days, but now there are a lot of cases where companies have been unable to pay even half the amount owed over a month past the due date.”

Clear signs of payment difficulties started to become noticeable in mid-April. The North Korean leadership had traditionally secured funds through arms and other illicit trade, but sanctions have made that increasingly difficult, leading to a shortage in money to pay for transactions.

The word has now spread among Chinese creditors that North Korean trading companies are bad credit risks. As a result, other regime trading companies are also finding it harder to get lines of credit.

“Having faced this situation for two months, Chinese companies are now asking for cash payments only and have become extremely reluctant to allow deferred payments,” the source said. “If this lasts for a few more months, all of the previously amicable Chinese traders will start to avoid further business with the North,” he speculated.

Trade banks in Pyongyang have seen their foreign currency supplies dry up, making it particularly challenging for even official trading firms to obtain credit. Trade company heads have been overheard remarking that borrowing from banks is even harder than borrowing money from individuals at exorbitantly high interest rates (loan sharks), said the source.

The effects, so far, appear to be limited to companies that fund the regime. Food prices in North Korea have been stable since April and through North Korea’s spring lean season, despite the liquidity crisis experienced by the trading companies.

Although market prices in the North have remained stable, active trade directly tied to the leadership’s funds has plummeted, suggesting international sanctions targeting the regime may be proving effective.

The Daily NK claims to have multiple sources for its report, including “[a]dditional sources” in South Pyongan and North Pyongan provinces of North Korea. It shows discipline that the Daily NK waited this long to find multiple sources to corroborate an important story that began to emerge in April. I’d love to know who their source was for this anecdote:

“Not so long ago, the Cabinet Premier Pak Pong Ju failed to make a payment of 30,000 USD for a Chinese vessel that arrived at Nampo Port with some 1,000 flat screen televisions, thereby forcing him to return to Pyongyang empty-handed,” the source said, explaining that rumors of the incident quickly made the rounds, igniting concerns about the implications for the economy if even the regime’s trading bodies cannot follow through on a prearranged transaction.

So, how does this report jibe with other sources? Up until mid-April, I read a spate of reports observing that trade across the Yalu River looked outwardly normal, except for the lack of coal and ore shipments. From this, most of the reports concluded that sanctions weren’t working, although those reports didn’t do much to parse sanctioned from non-sanctioned trade. The Daily NK did, however, find evidence that sanctioned cross-border trade in bulk cash, military items and titanium continued through early April.

But when this NK News report dug deeper into the mechanics of the China-North Korea trade, it found something interesting. At the time, I bookmarked the report and decided I’d come back to it if a possible explanation emerged.

There have been interruptions to their business, however these stoppages came purely at the request of their North Korean partners. The two major interruptions to their business occurred in September and October 2011, prior to the announcement of Kim Jong Il’s death and again this year in March, coincidentally (or perhaps not) after the passing of the latest round of UN Security Council sanctions.

“Now, we have stopped and we will come back on the last week of this month (May) and the last shipment made was the second week of March of this year,” Whang told NK News. UN Resolution 2270 was passed March 2.

Whang received no further explanation for the interruption in business, which is the longest he has experienced. It is perhaps surprising given the type of trade he is involved in, as he said, Whang is not “selling Playstations … or Saddam Hussein’s rockets.” Whang has another theory.

“I think it was a security level appreciation, I think for the Party Congress … they would like to reach a (quieter) situation to restart again,” he told NK News. [NK News, Hamish Macdonald]

A few possible explanations for this come to mind. One is that sanctions are making it harder for the trading companies to trade and earn revenue. Around mid-April, Chinese customs reportedly increased its inspections, causing some North Korean trading companies to shift from sanctioned trade to the non-sanctioned trade in importing food into North Korea. Trade statistics also tell us that China is importing less North Korean coal and other goods, although this trend predates sanctions, and may be due to the slowing of China’s economy.

North Korea has also found it harder to buy Swiss watches directly from the makers. Although North Korea can ordinarily turn to Chinese suppliers to circumvent luxury goods sanctions, the anecdote involving Pak Pong-ju reminds us that not even Chinese merchants will sell North Korea luxury goods if its checks won’t clear.

This suggests a second and more likely explanation — that the trading companies’ bank accounts may be frozen. That is also consistent with reports we’ve seen from China as early as February. You wouldn’t necessarily observe the effects of that at border crossings. It would explain why North Korean regime-affiliated buyers can’t pay creditors despite the imperfect enforcement of border controls. While it’s too early to conclude too much, it bears careful watching.

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RFA: Poland to stop granting work visas to N. Korean laborers

Last month, I wrote about Vice’s must-see investigative documentary on North Korean workers in Poland and the exploitative and unsafe conditions in which they work for little or no pay. Via Yonhap, Radio Free Asia now quotes South Korean Foreign Ministry Spokesman Cho June-hyuck as saying that Poland will stop granting new work visas and renewing existing visas to workers from North Korea.

“The issue of overseas North Korean workers has increasingly caused concern within the international community from the perspective of human rights abuses and the flow of money into the North,” Cho said during a regular press briefing. “The Polish government also decided early this year to halt the issuance of new visas to North Korean workers.”

North Korea is believed to have more than 50,000 workers stationed in some 50 countries, including China and Russia, to earn money for its cash-strapped regime.

Several hundred North Koreans are currently estimated to be working in Poland. Under the new measure, they will not be allowed to renew their visas.

Cho said other countries in Africa, the Middle East and Europe have also taken steps to reduce the number of North Korean laborers they receive by cracking down on illegal immigrants and not renewing work contracts.

“Our government takes note of such efforts by the international community to address the issue of overseas North Korean workers and plans to continue to seek possible steps in cooperation with the international community,” he said. [Yonhap]

That’s not a bad start, although it falls short of the better answer — revoking the existing visas, and blocking the assets of the North Korean firms involved in this trade. According to the Leiden Asia Center, whose research contributed to Vice’s documentary, those firms include the Rungrado General Trading Corporation, the Korea Cholsan General Corporation, the Korea South-South Cooperation Corporation (which seems a deliberate effort to confuse researchers), and the Korean-Polish Shipping Company (a.k.a. Chopol). For good measure, blocking the assets of the Polish wholesalers of this labor would serve as a useful example to others. The Leiden Asia Center’s report also contains other newsworthy information, including the fact that some shipyards that use this slave labor receive EU subsidies … and repair NATO warships.

The end of Poland’s use of North Korean laborers would be financially significant. The Leiden Asia Center reports that Poland issues around 500 visas to North Korean workers each year, “one of the highest numbers of work permits issued to North Koreans” in Europe. Between 2008 and 2015, that amounts to more than 2,700 work permits. That’s still a small percentage of the estimated total of 50,000 North Korean overseas laborers, but each North Korean worker in Europe earns nine times as much as a North Korean worker in Africa.

North Korean workers are active all over the world, but mainly in China, Russia, the Middle East, the African continent and the EU. General statistics from the ILO show that on average US$3,900 is earned in Africa per victim of forced labour; US$5,000 per victim in the Asia-Pacific region; US$15,000 per victim in countries in the Middle East; and US$34,800 per victim in so-called developed economies. While the actual amount will vary according to the particular situation, the overall relative distribution of profits is correct. The ILO further notes that “[total] profits are highest in Asia (US$ 51.8 billion) and Developed Economies (US$ 46.9 billion), mainly for two reasons: the high number of victims in Asia and the high profit per victim in Developed Economies.” [Leiden Asia Center]

RFA’s report attributes Poland’s decision to sanctions — implicitly U.N. sanctions — but nothing in the Security Council’s resolutions directly bans the use of North Korean laborers. There is, however, a requirement to ensure that U.N. member states prevent the transfer of funds to North Korea that could be used for its WMD programs. (For years, I argued that the Kaesong Industrial Complex’s see-no-evil payments violated this requirement, and this year, after a decade of denying it, the South Korean government finally admitted that I was right all along.)

The more direct sanction against North Korea’s labor exports, however, is a unilateral U.S. sanction, found in Executive Order 13722, signed in March of this year. That provision allows the Treasury Department to block the assets of any person found to have “engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue” for the North Korean government or its ruling party.

It’s possible that sanctions played some role in forcing Poland’s hand, or even in deterring the users of the laborers, but it’s more likely that the terrible publicity of Vice’s documentary and the Leiden Asia Center’s publications caused the Polish government to make this decision than sanctions.

Like Kaesong, the restaurant trade, tourism, and arms sales to Uganda, the termination of the labor trade by one country will not, by itself, bankrupt Pyongyang. But since this year began, we’ve seen many of North Korea’s external revenue sources come under pressure.

The loss of all of these revenue sources collectively would cause serious financial distress, the loss of elite confidence in His Porcine Majesty’s rule, and inter-factional competition over increasingly scarce resources. We’re a long way from hearing Ri Chun-hee sing “A Bicycle Built for Two,” but this is how things start.

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Obama Administration, GOP Congress join forces in N. Korea sanctions push in Asia

It’s a rare day in any election year, much less this one, when anyone could write a post title like that about a major public policy issue. Now, for the first time since I began writing this blog, all of the cylinders — the President, the Congress, the U.N., South Korea, and Japan — are all firing in the same sequence to raise the pressure on Pyongyang and Beijing. Over the last week, we’ve seen the Republican Congress’s key foreign policy leaders and President Obama’s key cabinet secretaries all delivering the same message in Asia, calling for the strict and rigorous enforcement of sanctions against North Korea.

Ed Royce, the Chairman of the House Foreign Affairs Committee and the architect of the legislation that was the impetus for the Treasury Department’s 311 designation of North Korea last week, is in Seoul this week, where he emphasized that “all financial institutions, anywhere, who now have a choice to make between doing business with North Korea and being cut off from financial transactions with the United States and the international financial system.” Royce added, “Given the threat posed by North Korea, now is the time to make it really difficult for Kim Jong-un to pay his generals, make it difficult to keep the production lines open for missiles, and make it difficult for him to acquire parts on the black market … and we must move in unison to take decisive action.”

Senator Cory Gardner, without whom Royce’s legislation would never have passed the Senate, and who is just back from his own visit to Seoul, also welcomed the 311 designation of North Korea.

“I’m pleased the Treasury Department, as required by my bill, acted to apply additional pressure to North Korea through this important designation that will send a strong message to Pyongyang and its enablers,” Sen. Cory Gardner (R-CO), a key author of the sanctions legislation, said in a statement.

“I encourage Treasury to continue to vigorously pursue and implement additional sanctions outlined in my legislation, including designations against North Korea for cyberattacks and human rights violations,” the senator said.

Gardner said he held a meeting in April with Acting Under Secretary for Terrorism and Financial Intelligence Adam Szubin, who is responsible for enforcing U.S. economic sanctions policy, to call for vigorous implementation of the sanctions law.

“I urged him to fully implement NKSPEA, and particularly with regard to entities outside of North Korea whose illicit actions enable the regime’s survival,” he said. [Yonhap]

This is all good, but it’s the executive branch that enforces the sanctions authorities Congress gives it, and an important lesson from the 2005 squeeze on North Korea is that financial diplomacy and demonstrations of political will are essential to making sanctions work. Then, the Bush Administration dispatched senior Treasury Department officials to meet with bankers and finance ministers around the world to urge them to cut off Pyongyang’s cash flow.

I’d started to worry that the Obama Administration wasn’t demonstrating the same political will to enforce the new sanctions. The sum total of our financial diplomacy until this week had been one visit to the region by Adam Szubin in March, and a comment by the President in Vietnam since then. What is most essential is a strong demonstration to China that this is a U.S. national security priority. But after a slow start, this week, the secretaries of Treasury, Defense, and State are all in Asia, making it very clear to Tokyo, Seoul, and Beijing that this is a priority for us.

The U.S. will urge China to put further pressure on North Korea to give up its nuclear program during meetings in Beijing next week, a senior U.S. Treasury official said on Friday, days after Washington took fresh action to cut North Korea off from global finance.

“China has the ability to both create pressure and use that as a leverage that is a very important part of global efforts to isolate North Korea and get North Korea to change its policies,” said the official, speaking to journalists during a visit to Seoul by Treasury Secretary Jacob Lew.

U.S. officials, including Secretary of State John Kerry and Mr. Lew, will head to Beijing early next week for the U.S.-China Strategic and Economic Dialogue, an annual meeting on economic and security issues. [Wall Street Journal, Kwanwoo Jun]

So far, so good. When the Secretary of the Treasury and the Secretary of State are both in Beijing, directly pressuring China to enforce sanctions against North Korea, the Obama Administration really does appear to be making this a priority. If only it had begun doing so seven years ago.

In Seoul, Mr. Lew said the U.S. move builds on Congress legislation from earlier this year as well as Chinese-backed United Nations sanctions put in place in March to put the brakes on Pyongyang’s nuclear ambitions after the country conducted a fourth nuclear test in January.

“It reflects the fact that the global community will not just tolerate North Korea’s actions of developing nuclear weapons,” Mr. Lew said, while declining to elaborate on what specific steps will follow to sever global banking relationships with Pyongyang. [WSJ]

China’s banks and businesses will feel the most direct effects of the new sanctions. Kerry and Lew probably hope to secure China’s face-saving, voluntary cooperation to avoid the unpleasantness of directly sanctioning Chinese banks and businesses that continue to enable Pyongyang, either by adding them to the SDN list or the 311 list, or by imposing civil or criminal penalties on them. As the New York Times explains in a detailed, must-read report, disengaging from North Korea will cost small Chinese banks billions of dollars, but the sanctions make the risks of continuing to deal with North Korea are even greater.

Chinese banks that do business with North Korea stand to lose several billion dollars in the wake of new United States Treasury Department sanctions on all such foreign institutions, analysts said on Friday.

[….]

The Chinese banks most affected by the sanctions will be comparatively small regional ones that facilitate the bulk of North Korea’s business in China, the analysts said. Major banks in China suspended their North Korean accounts in 2013 after the Chinese president, Xi Jinping, criticized a nuclear test conducted by the North that year, the analysts said. [N.Y. Times, Jane Perlez]

Not quite, but go on.

The Bank of China, for example, which has been expanding its operations in the United States and did not want its American business tainted by cooperation with North Korea, closed the account of North Korea’s most important financial institution, the Foreign Trade Bank, in May 2013. [N.Y.T.]

Yes, except for the flagrant and willful violations of sanctions by the BoC’s Singapore branch.

The smaller banks in the northeast area of China that borders North Korea would probably not want to risk continuing to do business with the North because the cost of sanctions by the United States would far outweigh the benefits of such commercial ties, said Jin Qiangyi, dean of the institute of Northeast Asian Studies at Yanbian University in Yanji. [N.Y.T.]

Now, cue China’s objection to these “unilateral” sanctions, which the Times answers perfectly.

The Chinese government said on Thursday that it opposed the Treasury action, although Beijing signed onto a tough new round of United Nations sanctions imposed on North Korea in March as punishment for a nuclear test it conducted earlier this year.

“We consistently oppose imposing unilateral sanctions on other countries based on one’s domestic laws,” said a Foreign Ministry spokeswoman, Hua Chunying. Instead of creating new sanctions, countries should “fully implement” the United Nations sanctions established in March, she said.

The United Nations resolution called on member states to terminate “joint ventures, ownership interests and correspondent banking relationships” with banks in North Korea within 90 days. The Treasury move goes a step further with its prohibition against United States banks’ allowing North Korea access to the American financial system via third-country banks.

If China were committed to enforcing the United Nations sanctions it agreed to, then the Treasury move would not affect it.

The Foreign Ministry spokeswoman’s pointed use of the word “unilateral,” however, raised questions about Beijing’s commitment to the March sanctions. [N.Y.T.]

One question I’ve been asked multiple times since last week is how Treasury’s latest action will compare to the 2005 designation of Banco Delta Asia. I think this is mostly right, too.

The collective impact on the regional Chinese banks by the Treasury action will probably be much greater than the losses incurred by Banco Delta Asia, a bank based in the Chinese special administrative region of Macau, when it was designated a money-laundering concern in 2005 because of its dealings with North Korea, said Cho Bong-Hyn, an analyst at the Industrial Bank of Korea’s Research Institute in Seoul.

[….]

“The impact would amount to approximately a few billion U.S. dollars, considering most of North Korea’s foreign bank accounts are in China,” Mr. Cho said. Even so, he said, few of these banks are entirely dependent on North Korea’s business. He doubted that many banks had North Korean deposits amounting to more than 10 percent of the bank’s total deposits. 

“I don’t think these Chinese banks will be shaken by the said losses,” he said. “They may, however, worry about loss of future transactions.”

Most of them are in the major trading cities of Dandong and Hunchun on the border with North Korea, he said. These banks will now have to ensure that North Korea does not open bank accounts with them by using conduits.

“If such illegal accounts are detected, it could be fatal for these banks,” he said. “So both Korean and Chinese banks will have to do their best to prevent North Koreans from opening these irregular bank accounts with them.” [N.Y.T.]

But on the other hand, as Jim Walsh and John Park argued recently, North Korea has also done much work to diversify and conceal its financial flows since 2007, so it will likely take longer for sanctions to have as great an effect. As a senior Treasury official told the Wall Street Journal, “It will take a lot of continued, focused attention to make an impact,” that this will be a challenging year for the U.S. government to apply continued, focused attention to much of anything.

Inevitably, some Chinese banks, shadow banks, and non-bank institutions will play see-no-evil with customers they pretend not to know are North Korean. That’s where Treasury (specifically, its Financial Crimes Enforcement Network, or FINCEN) will have to show that it’s willing to drop some steel on target by enforcing its Know Your Customer rules strictly. (Note to FINCEN — your North Korea KYC guidance dates back to 2005 and may be in need of a refresh.)

It is not clear where North Korea might seek alternative places to conduct financial transactions outside the normal banking systems, the analysts said.

Certainly, North Koreans would want locations far away from financial hubs. Recently, North Korean businesspeople have mentioned Cambodia and Indonesia as possible channels, said a Singaporean analyst who declined to be identified because of the sensitivity of the matter.

Soon after the United Nations sanctions were imposed in March, Chinese traders in Dandong, the main gateway for transportation of Chinese goods into North Korea, were using alternatives to the Chinese-run Bank of Dandong.

In order to receive payments from North Korea, one major trader in Dandong said in April that he would receive a 50-percent down payment before a shipment. The money would be deposited in the Dandong office of the Korea Kwangson bank. [N.Y.T.]

Which may explain why Treasury singled that bank out in its 311 Notice of Finding.

That bank is North Korean and does business out of unmarked offices on the 13th floor of an office tower on the banks of the Yalu River. It was described as the last North Korean bank operating in the city.

The trader would pick up the remaining 50 percent payment once the goods arrived in North Korea, he said. The transactions would usually be in renminbi, although sometimes they were in dollars, he said.

In March, the Treasury singled out the Korea Kwansong bank for using front companies to gain access to the United States financial system and process transactions that supported weapons of mass destruction and ballistic missiles.

Previously, the Treasury had said that North Korean leaders had used one of the bank’s front companies to open accounts at a major Chinese bank under the names of Chinese citizens and to deposit millions of dollars in 2013. [N.Y.T.]

The Times also reported on Treasury’s 311 designation of North Korea here.

Separately, Defense Secretary Ashton Carter is in Singapore for the Shangri-La Dialogue, where he met with his Japanese and South Korean counterparts to talk missile defense, improving the coordination of their defenses against North Korean provocations, and ensuring that they don’t undercut each other diplomatically through side deals with Pyongyang. To that end, South Korea’s Defense Minister is saying his government isn’t interested in “meaningless” dialogue with North Korea until Pyongyang commits to nuclear disarmament. Until then, it will continue to push for “watertight” sanctions. It most recently did so in a meeting between President Park and French President Francois Hollande.

So the good news is that this time, the State Department isn’t going to undercut Treasury anytime soon, our Korean and Japanese allies are solidly behind the effort, and U.N. member states are finally beginning in earnest to implement new U.N. financial sanctions against North Korea. The bad news is that the election is certain to distract the U.S. government. Key administration officials will depart for private sector jobs. The next administration’s North Korea policy is an even greater uncertainty, as is the North Korea policy of the South Korean president who succeeds Park Geun-hye.

A final must-read is this Wall Street Journal editorial, commending the 311 designation. I’ll give the last word to North Korea, whose reaction undercuts its argument that it doesn’t care about sanctions and that sanctions never work. Only time will tell, but the signs so far are good.

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The Treasury Department just went full Alderaan on North Korea (updated)

For decades, North Korean drug dealers, counterfeiters, proliferators, arms dealers, money launderers, and most recently, bank burglars have used our financial system to move their profits into the regime’s offshore bank accounts, or into casinos. For years, the U.S. Treasury Department had to fight Pyongyang’s abuse of the financial system with its hands cuffed behind its back by the State Department, which sought a deal with Pyongyang at almost any cost.

But yesterday, in a move that was at least ten years overdue, the Treasury Department imposed the single most powerful sanction in its arsenal against North Korea. Using the authority of section 311 of the Patriot Act, it found North Korea to be a jurisdiction of primary money laundering concern, and cut its banks off from the financial system.

WASHINGTON – Today, the U.S. Department of the Treasury announced a Notice of Finding that the Democratic People’s Republic of Korea (North Korea) is a jurisdiction of “primary money laundering concern” under Section 311 of the USA PATRIOT Act.  [Treasury Dep’t Press Release]

A finding of primary money laundering concern allows for five sets of special measures. Of these, the toughest is to ban the target jurisdiction’s banks from using correspondent accounts in U.S. financial institutions. Invoking the Fifth Special Measure requires Treasury to issue a regulation. In its Notice of Proposed Rulemaking, Treasury elaborates:

The proposed rule would prohibit covered financial institutions from opening or maintaining in the United States a correspondent account for or on behalf of a North Korean banking institution. It would also prohibit the use of a foreign banking institution’s U.S. correspondent account to process a transaction involving a North Korean financial institution. As a corollary to this prohibition, covered financial

institutions would be required to screen their correspondents in a manner that is reasonably designed to guard against use by foreign banking institutions to process transactions on behalf of a North Korean financial institution, including access through the use of indirect correspondent accounts held by those foreign institutions. A violation of the special measure could result in the imposition of civil monetary or criminal penalties. [U.S. Treasury Dep’t, Notice of Proposed Rulemaking]

This is, without question, the single most powerful sanction the United States has ever imposed on North Korea. By cutting off North Korean banks’ access to correspondent accounts in the U.S. financial system, it cuts North Korea off from the system itself. The action will have an effect beyond its strict legal terms, by putting a black spot on North Korea’s entire banking sector. Third-country banks, which are fearful of the legal and reputational risks of running afoul of Section 311, will shun North Korean banks, and other North Korean entities that act like banks.

[I sense a great disturbance in the force, as if billions of dollars cried out in terror and were suddenly frozen.]

It would be correct to say that the announcement was very big news, and also, that it was a foregone conclusion. Congress had strongly urged Treasury to designate North Korea as a primary money laundering concern in H.R. 757, and in Paragraph 33 of U.N. Security Council Resolution 2270, passed on March 2nd, U.N. member states were given 90 days to close North Korea’s correspondent accounts. On March 15th, in Executive Order 13722, Treasury hit North Korea with sectoral sanctions on its financial services industry. So the designation and the special measure aren’t a surprise, but in this case, the details and the context suggest that while this action is based on the same authority as the Banco Delta Asia action, it is likely to have a less direct — but ultimately, a far greater — impact.

According to Treasury, North Korean banks do not access the U.S. financial system directly by keeping correspondent accounts in our banks. Instead, they use so-called “U-turn” transactions, using correspondent accounts with Chinese and other third-country banks that have their own correspondent accounts with U.S. banks. North Korean banks, non-bank institutions, and unlicensed money transmitters then use these indirect relationships, often disguised through deceptive financial practices, to access our financial system. By banning U-turn transactions and indirect correspondent accounts, Treasury makes clear that it expects banks worldwide to cut off North Korean banks’ access, at the risk of losing their own access to our financial system. 

“The United States, the UN Security Council, and our partners worldwide remain clear-eyed about the significant threat that North Korea poses to the global financial system.  The regime is notoriously deceitful in its financial transactions in order to continue its illicit weapons programs and other destabilizing activities,” said Adam J. Szubin, Acting Under Secretary for Terrorism and Financial Intelligence.  “Today’s action is a further step toward severing banking relationships with North Korea and we expect all governments and financial authorities to do likewise pursuant to the new UN Security Council Resolution.  It is essential that we all take action to prevent the regime from abusing financial institutions around the world – through their own accounts or other means.” [Treasury Dep’t Press Release]

Here, the enhanced due diligence requirements play an essential role in making the cutoff work. You may reasonably ask how that works. It begins with American banks notifying their foreign correspondents that if they service transactions for North Korean banks, their own correspondent accounts may be closed:

As part of that special due diligence, covered financial institutions must notify those foreign correspondent account holders that the covered financial institutions know or have reason to believe provide services to a North Korean financial institution that such correspondents may not provide a North Korean financial institution with access to the correspondent account maintained at the covered financial institution.

A covered financial institution may satisfy this notification requirement using the following notice:

Notice: Pursuant to U.S. regulations issued under Section 311 of the USA PATRIOT Act, see 31 CFR 1010.659, we are prohibited from establishing, maintaining, administering, or managing a correspondent account for, or on behalf of, a North Korean financial institution. The regulations also require us to notify you that you may not provide a North Korean financial institution, including any of its branches, offices, or subsidiaries, with access to the correspondent account you hold at our financial institution. If we become aware that the correspondent account you hold at our financial institution has processed any transactions involving a North Korean financial institution, including any of its branches, offices, or subsidiaries, we will be required to take appropriate steps to prevent such access, including terminating your account. [U.S. Treasury Dep’t, Notice of Proposed Rulemaking]

Treasury expects banks to apply a “risk-based” approach to identifying transactions involving North Korean banks, including by using commercially available screening software. It expects them to look for suspicious patterns, the use of front companies, efforts to conceal a requesting bank’s identity, and (oddly enough) reading wire transfer orders to see if they say, for example, “Central Bank of the DPRK.” Another important part of enforcement will be know-your-customer protocols, which have long been a key part of banks’ anti-money laundering compliance requirements.

In effect, Treasury uses KYC rules to outsource much of the hard work of investigating North Korean links to the rest of the banking industry. If you’re the compliance officer for one of two or three banks involved in a suspicious transaction, you have to consider the risk of being the only bank that doesn’t report it to Treasury.

As I’ve long argued, the U.S. has a special role as steward of the global financial system, but as the Cuba example also shows, we can’t make sanctions work alone. That’s why U.N. Security Council Resolution 2270 will be so important to making the new sanctions work. Last month, for example, the European Union approved a tough new sanctions regulation that banned its banks from maintaining correspondent accounts for North Korean financial institutions. Last week, the EU followed up with a round of asset freezes, a ban on funds transfers to or from North Korea, a ban on North Korean ships in EU ports, and a ban on Air Koryo departures, arrivals, and overflights. Switzerland and Russia have also imposed restrictions on North Korean banks and assets. Chinese banks, the obvious target of H.R. 757’s secondary sanctions, began blocking North Korean accounts almost as soon as H.R. 757 passed, even before the U.N. Security Council approved Resolution 2270.

Here is an important lesson in why good diplomacy matters. What is too seldom said about the designation of Banco Delta Asia was that it was only the beginning of a broader campaign of financial diplomacy that saw Treasury Department officials travel throughout the world to warn bankers that dealing with North Korea also risked their own access to the dollar-based financial system. Although Treasury’s section 311 action was limited — it never designated North Korea as a jurisdiction — the combination of a credible threat and broad-based diplomacy was devastating to Pyongyang while it lasted.

The key test will be the reaction of the Chinese. American officials will have a chance to find out next week: Secretary of State John Kerry and Treasury Secretary Jacob J. Lew are traveling to Beijing for the Strategic and Economic Dialogue, where the isolation of North Korea will be a major subject of discussion.  [N.Y. Times]

Given time, political will, and good diplomacy, this squeeze will put unprecedented financial pressure on Kim Jong-un.

[Which will, admittedly, have at least one beneficial effect for Kim Jong-un]

Today’s long-overdue measure is the death knell for Kim Jong-un’s byungjin policy. By cutting off his access to his sources of regime-sustaining hard currency, it denies him a viable, long-term strategy for financial survival unless he commits, irreversibly, to disarmament and reform. It bears emphasis that none of this would have happened if not for the leadership of Representative Ed Royce, who quietly built a bipartisan coalition for the most important change in our North Korea policy since 1994. Our task now is to enforce the new sanctions rigorously, let Kim know we’re always ready for serious, good-faith negotiations, and watch for a clear sign that Pyongyang is prepared to accept the broad transparency without which productive diplomacy will never be possible.

~   ~   ~

Update: Here are links to reports on Treasury’s action from Yonhap, the AP, Reuters, and The Wall Street Journal, which quotes a ChiCom spokesman calling the action “unilateral.” That is nonsense. Treasury’s action is fully consistent with UNSCR 2270, paragraph 33, which China voted for at the Security Council. That paragraph requires all U.N. member states to terminate “joint ventures, ownership interests and correspondent banking relationships with DPRK banks within ninety days from the adoption of this resolution.” To the extent anyone can argue that Treasury went beyond the resolution’s strict requirements, it was to ban the deceptive use of indirect correspondent accounts and U-turns through the U.S. financial system, something that wouldn’t be a problem at all if China was really prepared to enforce the sanctions it voted for. 

The Chinese government seems to be operating under the misunderstanding that North Korean money launderers have a sovereign right to use the U.S. financial system, as if it were a free global public utility for our friends and foes alike.

Frankly, the very objection calls China’s sincerity into question, especially right after Xi Jinping took time out of his busy schedule to meet with career money launderer Ri Su-yong. Ri reportedly stuck to the byungjin line and asked Xi to go back to helping Pyongyang break sanctions anyway, as China did for so many years. I wish Secretary Kerry good luck in persuading the Chinese that this is most certainly not in their interests. If not, Jack Lew and Adam Szubin might have better luck carrying that message directly to the bankers.

Obviously, Ri went to supplicate before Xi and beg him to help North Korea break sanctions, because sanctions never work and North Korea isn’t afraid of them.

Yonhap also carries this analysis piece with extensive quotes from your humble correspondent, and covers the South Korean government’s reaction, welcoming Treasury’s action. Really, until January 6th of this year, my sense of the South Korean government was that it was certainly interested in a Plan B strategy, but ambivalent about actually adopting it. Since then, Seoul really seems to have gone all-in, and despite my tendency to default to cynicism, I can’t deny that I’ve been both surprised and impressed by the determination and competence (no, really!) with which they’ve pursued it. Their facilitation of the restaurant defections in China also shows shrewdness about undermining Pyongyang politically, although Seoul still lags in fighting the information war — on both sides of the DMZ, I’d add.

Treasury’s Notice of Finding explains the reasons for its determination, as if those reasons aren’t already obvious.

North Korea is proposed for action under Section 311 because (1) North Korea uses state-controlled financial institutions and front companies to conduct international financial transactions that support the proliferation and development of WMD and ballistic missiles; (2) North Korea is subject to little or no bank supervision anti-money laundering or combating the financing of terrorism (“AML/CFT”) controls; (3) North Korea has no diplomatic relationship, and thus no mutual legal assistance treaty, with the United States and does not cooperate with U.S. law enforcement and regulatory officials in obtaining information about transactions originating in or routed through or to North Korea; and (4) North Korea relies on the illicit and corrupt activity of high-level officials to support its government. [Treasury Dep’t, Notice of Finding]

It does have some interesting facts, however, relating to Korea Kwangsong Banking Corporation and Daedong Credit Bank, which recently came up as part of the Panama Papers story:

In spite of its designation, KKBC has continued to evade sanctions and process financial transactions that support the proliferation of WMD and ballistic missiles by using front companies to clear U.S. dollar transactions through U.S. correspondent accounts. In 2013, senior North Korean leadership utilized a KKBC front company to open accounts at a major Chinese bank under the names of Chinese citizens, and deposited millions of U.S. dollars into the accounts. The same KKBC front company processed transactions through U.S. correspondent accounts as recently as 2013.

[….]

DCB also directed a front company, DCB Finance Limited, to carry out international financial transactions as a means to avoid scrutiny by financial institutions. DCB Finance Limited has conducted transactions through correspondent accounts at U.S. banks.

Although I could easily have written a much longer justification, it isn’t always wise to put all of your information out there if it could involve sensitive financial intelligence.

I should have clarified in my post that Treasury’s invocation of the Fifth Special Measure isn’t final until after it has considered and public comments on the proposed rule. I’ll check back and read the comments, which will be public, and if I have time, I’ll link or post the more interesting ones. After Treasury considers the comments, it will publish a Final Rule, which will include responses to the comments.

Finally, here’s a link to the European Union’s new North Korea sanctions regulation, its press release summarizing it, and a Wall Street Journal report about it. The EU’s move deserves a long post by itself, but frankly, there has been so much North Korea news recently that I just haven’t had time to write about all of it. If I’m certain about anything, it’s that the next year is going to be a very eventful one for North Korea watchers.

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Global wave of bank burglaries should revive calls to kick N. Korea out of SWIFT

In recent weeks, I’ve watched with keen interest, and some schadenfreude, as news reports have implicated Pakistani and North Korean hackers in a series of massive bank burglaries involving as many as 12 banks around the world, starting with the theft of $81 million (or $101 million, depending on which report you believe) from the Bangladesh Bank’s account in the U.S. Federal Reserve.

These burglaries did not involve guns or ski masks. They were something more like armored car burglaries, but they didn’t involve armored cars. They involved malicious code inserted into software used to connect the banks to SWIFT, the Society for Worldwide Interbank Financial Telecommunications. Although the Bangladesh Bank and SWIFT have been pointing fingers at each other, IT security experts are finding North Korean fingerprints all over the malware behind the theft.

It’s now clear the global banking system has been under sustained attack from a sophisticated group — dubbed “Lazarus” — that has been linked to North Korea, according to a report from cybersecurity firm Symantec.

In at least four cases, computer hackers have been able to gain a dangerous level of access to SWIFT, the worldwide interbank communication network that settles transactions.

In early February, hackers broke into Bangladesh’s central bank and stole $101 million. Their methods appear to have been deployed in similar heists last year targeting commercial banks in Ecuador and Vietnam.

Symantec revealed evidence on Thursday that suggests hackers used the same technique to slip into a bank in the Philippines in October. Symantec (SYMC) did not name the bank.

[….]

The “Lazarus” group has been linked to a string of attacks on U.S. and South Korean government, finance and media websites since 2009. Cybersecurity firm Novetta carefully documented how “Lazarus” hacked Sony Pictures in 2014, stealing data and destroying computers at the Hollywood movie studio.

The U.S. government has publicly blamed that hack on the government of North Korea. [CNN]

SWIFT has since released a series of increasingly panicked press releases about cybersecurity. The integrity of its system has never faced a greater challenge.

Security researchers have tied the recent spate of digital breaches on Asian banks to North Korea, in what they say appears to be the first known case of a nation using digital attacks for financial gain.

In three recent attacks on banks, researchers working for the digital security firm Symantec said, the thieves deployed a rare piece of code that had been seen in only two previous cases: the hacking attack at Sony Pictures in December 2014 and attacks on banks and media companies in South Korea in 2013. Government officials in the United States and South Korea have blamed those attacks on North Korea, though they have not provided independent verification.

On Thursday, the Symantec researchers said they had uncovered evidence linking an attack at a bank in the Philippines last October with attacks on Tien Phong Bank in Vietnam in December and one in February on the central bank of Bangladesh that resulted in the theft of more than $81 million.

“If you believe North Korea was behind those attacks, then the bank attacks were also the work of North Korea,” said Eric Chien, a security researcher at Symantec, who found that identical code was used across all three attacks.

“We’ve never seen an attack where a nation-state has gone in and stolen money,” Mr. Chien added. “This is a first.” [N.Y. Times, Nicole Perlroth & Michael Corkery]

And of course, North Korea isn’t the kind of place where hackers operate independently from their moms’ basements. Hacking by North Koreans means hacking by North KoreaIn a way, we should count ourselves lucky that the North Koreans only got away with Jed Clampett money; they tried to steal much more:

In the attack at Bangladesh’s central bank in February, the thieves tried to transfer $1 billion in funds from an account at the Federal Reserve Bank of New York. Fed officials became suspicious of the some of requested transfers and released only $81 million to accounts in the Philippines.

“If you presume it’s North Korea, $1 billion is almost 10 percent of their G.D.P.,” Mr. Chien said. “This is not small change for them.” [N.Y. Times]

Although I have no love of North Korean hackers or bank burglars, and no enmity against the utility of SWIFT’s services, I can’t help feeling some schadenfreude for SWIFT, given its resistance to enforcing U.N. sanctions, including sanctions against North Korea. SWIFT tried to stay neutral in the world’s (admittedly half-hearted) struggle to force North Korea to live by the world’s rules. Now, SWIFT may become North Korea’s greatest victim.

SWIFT is not a bank; it’s the virtual post office for banks. It’s a financial messaging service, a consortium established by the banking industry as a more efficient way to deliver messages between banks to debit and credit accounts. Think of SWIFT messages as sealed envelopes, with the name of the sender and recipient, and their addresses, written on the outside. SWIFT is an electronic network that delivers those envelopes, but doesn’t open them. Nearly every bank on earth relies on SWIFT, and in a sense, its reach is broader than Treasury’s, because SWIFT messages transactions in all currencies, not just dollars or Euro. SWIFT is based in Belgium, with large facilities in Switzerland and Virginia, and is regulated by EU law.

SWIFT has long had an uncomfortable coexistence with sanctions. In Treasury’s War, Juan Zarate tells the story of how a Treasury official persuaded a friend at SWIFT to share information from financial messages going to and from known terrorist financiers. The information made an invaluable contribution to Treasury’s early successes against Al Qaeda’s finances. Exposure of the program by the New York Times in 2006 was a severe setback to Treasury, and an embarrassment to SWIFT, which had cultivated a reputation for protecting the confidentiality of its transactions. That revelation has caused SWIFT to resist cooperating with international sanctions ever since, even sanctions approved by the U.N. Security Council.

Starting in early 2012, advocates of sanctions against Iran began to demand that Iran be disconnected from SWIFT, and it didn’t take long for that to happen — Congress introduced legislation that would authorize sanctions against SWIFT (see section 220), the EU passed a sanctions regulation clarifying that financial sanctions on Iranian banks also apply to financial messaging, and SWIFT cut off 30 Iranian banks, including its Central Bank. The SWIFT sanctions legislation was controversial and drew strong opposition from banking industry lobbyists.

At the time, SWIFT’s chief executive called the action “extraordinary and unprecedented,” but as an EU official conceded, it was “a very efficient measure” that could “seriously cripple the banking sector of Iran.” By most accounts, disconnecting Iran from SWIFT was one of the most effective sanctions against Iran, denying those banks the means to transfer money in any currency. The Economist later wrote, “The earlier SWIFT ban is widely seen as having helped persuade Iran’s government to negotiate over its nuclear programme.”

In 2001, the same year that SWIFT began passing information about Al Qaeda to Treasury, SWIFT welcomed North Korean banks to its network. As of 2013, SWIFT was only messaging about 50,000 transactions a year for North Korean banks (compared to about 1 million for Iran). This probably reflects the concentration of North Korea’s wealth in the state, and the almost complete absence of truly private enterprise with exposure to the financial system (in North Korea, truly private enterprise operates on cash, usually yuan and dollars, in the gray markets called jangmadang).

Since 2013, when the United Nations Security Council approved Resolution 2094, SWIFT has arguably been obligated to cut off certain North Korean banks by this paragraph:

“11.  Decides that Member States shall, in addition to implementing their obligations pursuant to paragraphs 8 (d) and (e) of resolution 1718 (2006), prevent the provision of financial services or the transfer to, through, or from their territory, or to or by their nationals or entities organized under their laws (including branches abroad), or persons or financial institutions in their territory, of any financial or other assets or resources, including bulk cash, that could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, including by freezing any financial or other assets or resources on their territories or that hereafter come within their territories, or that are subject to their jurisdiction or that hereafter become subject to their jurisdiction, that are associated with such programmes or activities and applying enhanced monitoring to prevent all such transactions in accordance with their national authorities and legislation;

Can SWIFT honestly argue that financial messaging isn’t a “financial service”? Can it excuse itself from the obligation to “prevent … the transfer” of funds to sanctioned banks and entities with the lame excuse that it doesn’t open the “envelopes,” it just delivers them?

Yet SWIFT has yet to announce any cutoff of North Korean banks — even those that the U.N. itself has designated. Stephan Haggard wrote in 2014 that North Korea’s SWIFT business had declined to almost nothing by 2012, but I have good reason to doubt this was true as of 2013, and let’s just leave it at that. (It has occurred to me that SWIFT actually did quietly cut the North Koreans off sometime after 2013, and that hacking SWIFT is Pyongyang’s way of inflicting some payback, but I have no evidence to support that speculative hypothesis.)

There are valid arguments against involving SWIFT in too many sanctions efforts — mainly, that less reputable services could arise to handle that business. The answer to those concerns is that the U.S. and EU should move aggressively to sanction and block any alternative messaging services that flout U.N. sanctions. Meanwhile, if any actor warrants disconnection from SWIFT, it’s North Korea, which is now the subject of six United Nations Security Council resolutions, imposing increasingly stringent sanctions on its heavily tainted banking sector. And as the North Koreans have shown again and again, if you deal with them, they’ll eventually burn you. For years, sanctions advocates have called for SWIFT to disconnect North Korean banks. Now, for the sake of SWIFT’s own integrity, would be a good time to heed those calls.

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Seoul’s diplomacy targets North Korea’s arms trade in Africa

Just last week, I wrote that South Korea’s diplomatic efforts to secure compliance with U.N. Security Council Resolution 2270 were putting ours to shame. Seoul is now offering fresh evidence of this by doing what I’ve said for weeks that our own diplomats should be doing — going on tour in Africa to pressure defense ministries to stop buying from Pyongyang.

Seoul’s direct approach to two countries with close military ties to Pyongyang highlights its push to stem North Korea’s cash flows from overseas after its nuclear test. Military exports have for decades been a major source of funds for North Korea. Earlier this year, the U.S. also accused North Korea and Iran of working jointly on a missile engine. [….]

Ms. Park will be accompanied in Uganda by South Korea’s vice defense minister to increase military cooperation with Seoul, according to a South Korean Defense Ministry spokesman. Officials in Seoul have made clear that North Korea is on the agenda for the Uganda visit.

“In light of the fact that Uganda is a strategic foothold in East Africa for North Korea, President Park’s visit will provide an important opportunity to strengthen cooperation…with regard to the resolution of the North Korean nuclear issue,” Kim Kyou-hyun, senior presidential secretary for foreign affairs and national security, said earlier this week. [WSJ, Alastair Gale]

President Park will also visit Kenya and Ethiopia, where Arirang News says she will bring offers of aid from an expanding assistance budget. But three visits won’t be enough unless this is only the first tour of many. Other suspected African arms clients of North Korea include Angola, The Democratic Republic of Congo, The Republic of Congo, Egypt, Ethiopia, Eritrea, Namibia, and Zimbabwe.

Meanwhile, North Korea’s Kim Yong-nam is currently in Equatorial Guinea, and has a more ambitious itinerary than President Park.

Pyongyang’s Korean Central News Agency (KCNA) reported that Kim on Friday had “friendly talks” with national leaders from Chad, Gabon, Central Africa, Congo and Mali. A day before, Kim met the president of Burundi and the former president of Mozambique. [NK News, Choi Ha-young]

That would be Mozambique, the only country with an AK-47 on its flag. The Democratic Republic of Congo is the latest addition to the list of probable North Korean arms clients, following a “confidential” report to the U.N. Security Council, prepared by six independent experts monitoring U.N. sanctions against the D.R. Congo.

The U.N. experts also reported that several Congolese officers told them North Korea has supplied Congolese troops and police with pistols and sent 30 instructors to provide training for the presidential guard and special forces.

There is a U.N. arms embargo on North Korea that prevents Pyongyang from importing or exporting weapons and training. An arms embargo on Congo requires states to notify the Security Council sanctions committee of any arms sales or training.

The experts said they found that several Congolese army officers, as well as several police deployed abroad in a U.N. mission, appeared to have North Korean pistols.

The Congolese officers said the pistols were delivered by North Korea to the Congolese port of Matadi in early 2014. “The group also found that the same type of pistols was available for sale on the black market in Kinshasa,” the report said.

The experts said they had asked Pyongyang and Congo for information but had not yet received a response. Congolese and North Korean officials had no immediate comment. [Reuters]

This is too big a job for South Korea to do alone. Not only must the U.S. State Department get into the game, it should try to recruit partners among close allies, such as Japan, France, and the U.K., to help persuade African states to buy their implements of death somewhere else. You’d think that in light of President Obama’s popularity in Africa and his origins on that continent, he’d be an especially effective advocate of our interests.

But let’s also give credit where it’s due. President Obama personally raised the enforcement of North Korea sanctions in a recent visit to Vietnam, another long-standing arms client of Pyongyang. More of this, please.

Previous posts on North Korea’s Africa arms trade here.

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N. Korea sanctions update: I sense a great disturbance in the force, as if billions of dollars cried out in terror and were suddenly frozen.

[First, thank you for your patience with the light blogging recently. Most of my limited spare time has been consumed by a project that must take a higher priority than this site. That project has been perpetually at the verge of completion for weeks now, but should be done soon.]

North Korea’s fourth nuclear test in January was a watershed in sanctions law and policy. Until then, the U.S. and the U.N. had mostly pretended to have tough sanctions against North Korea. Until then, South Korea’s policy was to subsidize and sanction the same government at the same time. Since March, with Congress’s passage of H.R. 757, the closure of Kaesong, the U.N.’s approval of Security Council Resolution 2270, and President Obama’s signature of Executive Order 13722, it has been at least plausible to claim that on paper, there are tough sanctions against North Korea. Whether reality will conform to the law will depend on political will, and the political will of many U.N. member states will depend on whether they believe the U.S. has the political will to use its own secondary sanctions against them if they flout the U.N. sanctions.

Here, the signs continue to be mixed. Almost as soon as Congress moved forward with H.R. 757, and even before the Security Council approved UNSCR 2270, big Chinese banks began to freeze North Korean accounts and close down the branches of North Korean banks. North Korea’s mineral exports to China have, at the very least, dropped sharply, and the drop-off in trade across the Yalu River has emptied office buildings in Dandong. Companies are scrambling to cleanse their supply chains of gold from the Central Bank of the DPRK. Elsewhere, I’ve written extensively about China’s hit-and-miss compliance with shipping sanctions, although the latest reports tell us that there are leaks, and that some designated North Korean ships are approaching Chinese ports with their transponders switched off.

This should be a topic of discussion between U.S. and Chinese diplomats.

Unfortunately, there is little publicly available evidence that the Obama Administration is making the same diplomatic effort to get countries to enforce the sanctions that the Bush Administration did between September 2005 and February 2007. It has now been two months since the U.S. government designated anyone under its North Korea sanctions programs, with the splashy launch of Executive Order 13722. Already, election season is consuming Washington’s attention. Political appointees who should be visiting Brussels, Shanghai, Windhoek, and Cairo to deliver veiled warnings act like they’re busy packing their files and job-hunting. If the administration wants to leave its successor more leverage than it had, it must show the world that it hasn’t lost its interest in implementing U.N. Security Council Resolution 2270.

Fortunately, South Korea has done much to fill this void. Park Geun-hye, ably aided by Foreign Minister Yun Byung-se, has followed her closure of Kaesong, and her lobbying of the European Union to implement sanctions, by lobbying France, Germany, Mexico, India, and even Iran. At least some of this has been effective. Park’s visit to Mexico seems to have played some role in its decision to finally seize the Mu Du Bong, although that action was also held up by questions of legal authority that UNSCR 2087 had already answered clearly and explicitly. India, which had shown signs of cozying up to North Korea, is now promising to implement UNSCR 2270 faithfully. (The outreach to Iran was admirably bold of her, and probably for the consumption of American audiences, but it’s unlikely that Park can offer Iran a replacement for what it really wants from North Korea.) The things Park doesn’t do well are obvious enough, but Park has proven herself a very skillful diplomat. It’s fair to say that she and her Foreign Minister have put our State Department to shame.

Meanwhile, implementation of the most important element of the sanctions — the financial sanctions — is finally beginning in earnest. We have just hit UNSCR 2270’s 90-day deadline for banks worldwide to close the correspondent accounts of North Korean banks. The EU has published strong new regulations implementing the resolution (h/t), and has also just announced a new round of designations, freezing the assets of 18 individuals and one entity, “mostly high-ranking military officials involved in agencies responsible for North Korea’s nuclear and ballistic weapons programs.” This will add pressure on the Obama Administration to follow. (Note to the EU: you’d send a clearer message if EU development funds weren’t being used at Polish shipyards that employ North Korean slave labor.)

Switzerland, which is not an EU member, has also just announced a new round of sanctions to implement 2270:

Measures in the financial sector include freezing assets and a ban on providing financial services. The group of people affected will now be widened. Any funds that are connected to North Korea’s nuclear or missile programmes have been affected, as have the finances of the country’s government or the Korean Workers’ Party.

The cabinet said that an exception has been made for the funds of diplomatic representations.

The sanctions mean that Swiss banks cannot open any branch or subsidiaries in North Korea, and existing banks and even accounts will have to be shut down by June 2. The same is also true in reverse – North Korean banks operating in Switzerland will have to leave.

An existing ban on exporting luxury goods will now include more products, and goods that would “increase the operational capabilities” of North Korea’s army are banned.

Any imports or exports will be checked at a customs point for the prohibited products, and exports to North Korea will require advanced authorisation from the State Secretariat of Economic Affairs (Seco). [SwissInfo]

This could be very important. For years, Switzerland had been one of North Korea’s most promiscuous suppliers of luxury goods, and was also rumored to be a haven for large regime slush funds — perhaps as much as $4 billion — under the control of former Ambassador to Switzerland and master money launderer Ri Chol. North Koreans in exile had called on the Swiss government to freeze those assets. Let’s hope that that’s what just happened.      

Even Russian banks are showing signs of compliance.

Radio Free Asia said in a report posted on its website that Russia’s central bank recently ordered other local banks and financial institutions to halt transactions with North Korea.

The central bank also said that transactions of bonds held by North Korean individuals, organizations and other groups subjected to United Nations’ sanctions should be banned immediately.

In addition, Russian financial institutions should close any accounts deemed to be linked to Pyongyang’s nuclear and missile programs, the report said. [Yonhap]

Kudos to South Korean Foreign Minister Yun Byung-se for exercising more global leadership than I’ve seen from a middle power in my memory. Even as the U.S. looks punch-drunk, the South Koreans are fighting above their weight.

“A perception has taken hold in the international community that sanctions and pressure of a different kind compared to the past should be applied to get the North to change and seek denuclearization,” Foreign Minister Yun Byung-se said in a speech at a forum.

“In the last couple of days, Switzerland the European Union took their own sanction measures. Our government will keep leading the international community’s pressure on the North from all possible directions going forward,” he added. [Yonhap]

Although the Obama Administration isn’t showing much strength now, a key test will come in July, when under section 304 of the NKSPEA, the President will have to report back to Congress on which North Korean officials, to include Kim Jong-un himself, will be designated for human rights abuses. Already, the State Department is saying that it will “identify and sanction those responsible for human rights abuses in North Korea.” It also offered these welcome words.

“The reason that that provision is in the executive order is to make it possible for us first to develop the evidence and second to act on it. The principle of accountability is a feature of U.N. Security Council Resolution 2270 as well,” Russel said. “I think that the prospect of officials being held to account for systemic abuses of universal human rights is a serious one and that is one way in which we and the international community can keep faith with the North Korean people.”

Russel also said he believes that North Korean people, when they are eventually liberated, will “ask who stood by them” and the U.S. is firmly committed to be among the supporters for them.

On Monday, Amb. Robert King, special representative for North Korean human rights issues, made a similar remark.

“We’re looking at the issue of how we might identify individuals that meet our legislative requirements to apply sanctions against individuals and there are a whole range of issues that we’re looking at. People involved in abductions will be one that we are looking at,” he said. [Yonhap]

A designation triggers the freezing of assets, which will further increase the financial pressure on the regime. And if, as now seems likely, Hillary Clinton is elected this fall, her words (and those of her advisors) offer Kim Jong-un no encouragement that this pressure will ease anytime soon. That’s good, because it will likely take between one and two years before Pyongyang starts to show signs of serious financial distress. It will take careful attention and patience to build the pressure needed to change Pyongyang without war. The greater challenge will be to maintain the determination to keep that pressure in place until Pyongyang shows that it will meet the hard conditions set forth in section 402 of the NKSPEA. Until Pyongyang is prepared to accept that level of basic transparency, no deal it signs will be worth the paper it’s printed on.

~   ~   ~

Update: The UK and Swiss governments have published guidance for their banks on their new sanctions regulations, here and here, respectively. Also, here’s more information about Russia’s sanctions implementation rules.

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Claudia Rosett: Shipping sanctions against North Korea are leaking

Unlike my friend, Claudia Rosett, I’d call the new U.N. sanctions against North Korea a qualified success, despite the fact that implementation is still a work in progress. This post, and the other posts it links, summarize the effects of just one aspect of the sanctions — their restrictions on North Korean shipping, which have idled dozens of North Korean ships. Since then, NK News’s Leo Byrne has reported that no North Korean ships have called in the port of Dandong since late March. Other Chinese ports continue to admit North Korean ships, none of which have been designated by the U.N. 

Given the importance of the coal and mineral trade in the regime’s finances, it’s not surprising that the regime is squeezing its people to make up the difference, but it’s finding that even this has limits. There isn’t much to squeeze out of them, and the squeeze also costs the regime in the loyalty of its subjects, including citizens once deemed loyal enough to send abroad. Obviously, this is no time to relax our diplomatic pressure for strict enforcement. Despite these encouraging signs, the long history of sanctions-busting by China, and by North Korea’s arms clients, demands eternal vigilance, and sometimes, the threat of harsh consequences, or sanctions will leak and fail.

There are already some warning signs of how that could happen. For example, one ship that was designated by the U.S. Treasury Department, but not by the U.N., continues to make crossings between North Korea and China. Another example is the case of the M/V Jin Teng. Three days after the Security Council approved Resolution 2270, and designated 31 ships “owned or controlled by” designated North Korean arms smuggler Ocean Maritime Management (OMM), the Philippines seized one of those ships, the Jin Teng. After the seizure, China successfully lobbied Security Council members to lift the designation of the Jin Teng, and even threatened to block the reauthorization of the Panel of Experts monitoring compliance with the sanctions. This week, among other revelations, Claudia Rosett informs us that the Jin Teng has since been released, “sending the message that it’s hardly worth rushing to enforce U.N. sanctions.” That’s worrying.

There are other worrying signs, too. Rosett points to three ships, the Deniz, the Shaima and the Yekta, which fly the North Korean flag and have made regular voyages between North Korea and Iran.

Since March 2015, the Deniz has made at least 10 calls at Iran, including at least four this year, shuttling among Turkey, Kuwait and Iran’s Bushehr port and Kharg and Sarooj terminals. According to Equasis, the Deniz’s registered owner since February 2015 is H. Khedri—or Hadri Khedri, according to the IMO’s shipping-company database—with an address for Siri Maritime Services in Tehran. The Yekta and the Shaima have been making runs between Dubai and the Iranian port of Abadan, which the Yekta visited as recently as April 5.  [Claudia Rosett, Wall Street Journal]

The ships are not designated by the U.N., although several facts here certainly call for further investigation by the U.N. Panel of Experts. Rosett points to the long history of WMD cooperation between Iran and North Korea, and any WMD-related commerce would clearly be forbidden by U.N. resolutions going back to 2006. To this, I would add the long history of North Korea supplying arms to Iran, for the use of its terrorist clients, which is also prohibited. The names of the ships aren’t Korean and don’t even sound Persian. If you forced me to guess, I’d say they’re Turkish.

This raises several potential violations of UNSCR 2270:

– The odds seem rather low that we can trust Iran to inspect the North Korean cargo as required by paragraph 18. This points to one loophole the Security Council should close after North Korea’s next nuclear test — to authorize the boarding and search on the high seas of vessels owned or controlled by North Korea when a member state at a vessel’s origin or destination has repeatedly failed to carry out its obligations under the resolutions.

– Rosett notes that “[t]he Deniz was reflagged from Japan, the Shaima and Yekta from Mongolia.” The reflagging (registration) of North Korean ships is banned by paragraph 19. Paragraph 19 also prohibits providing crew services to North Korean vessels.

– Paragraph 20 prohibits foreign ships from flying the North Korean flag, and also requires member states to prohibit the leasing and insurance of vessels flagged by North Korea.

The Panel, and Mongolian and Japanese authorities, should investigate, regulate, and prosecute as appropriate. And that is not all.

Among the North Korea-linked ships still on the U.N. blacklist, some are making fresh maneuvers that appear aimed at camouflaging their identities. The North Korean vessel the Dawnlight, which the U.S. has designated since last year, was flagged to Mongolia. In January it was renamed the Firstgleam and acquired by Sinotug Shipping Limited, a company set up just this past September in the Marshall Islands.

The U.N., having apparently missed the update, blacklisted this ship on March 2 under its old name of Dawnlight. A day later, despite a provision calling for member states to deflag North Korean ships, the Firstgleam was reflagged to Tanzania, according to Lloyds. As of this week, the ship, which the U.N. and U.S.-sanctions lists still refer to as the Mongolia-flagged Dawnlight, was signaling a position close to Japan. [Claudia Rosett, Wall Street Journal]

Anna Fifield reported extensively on the Dawnlight here, for The Washington Post, and I’ve also written about it in this post. If investigated, Sinotug may turn out to be another North Korean shell company, but to be clear, I don’t have evidence to conclude that, only that it merits investigation. Tanzania’s reflagging of the Dawnlight is just the latest case of non-compliance by African governments that either don’t know or don’t care that they’re in violation.* The job of our diplomats is to help them know and make them care.

Another continuing problem with China’s implementation continues to be the loophole allowing coal and iron ore imports for “livelihood” purposes. Not one person I know really understands what this ambiguous term means, or what its limits are. If Congress takes up another round of sanctions legislation in response to a nuclear test, it should seek to define “livelihood” more narrowly, perhaps as in-kind exports of food, to be distributed as aid. Coal exports continue to cross the Yellow Sea from North Korea to China. It’s a different story at the land borders, where coal export traffic across the Yalu River has slowed greatly or stopped, while the trade in consumer goods and food continues to flow freely (which, as I keep trying to remind people, is both important and good).

Despite the valuable service Claudia has done for us in this op-ed, I part ways with her when she writes: “It’s highly questionable whether sanctions, however watertight, can stop North Korea’s deeply entrenched nuclear program.” That depends on just exactly how one envisions stopping it. Will sanctions convince Kim Jong-un that it’s in his interest do disarm in good faith? I don’t know anyone who thinks so, although I think it’s important to leave room for that possibility. It may well be that there will be no diplomatic solution as long as His Corpulency weighs down a throne. As I’ve said repeatedly, sanctions are one part of a strategy to convince someone in Pyongyang — most plausibly, the generals surrounding His Porcine Majesty — that the system must change or perish.

Despite these implementation problems, more evidence suggests that shipping sanctions are working than not. Xi Jinping is feeling intense international pressure to seem to be enforcing the sanctions. Six weeks after the passage of UNSCR 2270 seems a bit premature for us to throw up our hands and give up on a promising strategy. What’s needed instead is targeted and tough diplomacy, backed by the threat of tougher national sanctions for those who won’t comply voluntarily.

~   ~   ~

* Corrected after posting, because the reflagging did, in fact, happen one day after the adoption of UNSCR 2270.

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Pyongyang’s sanctions are the ones that hurt the North Korean people the most.

Last month, I wrote about one slightly surprising consequence of sanctions against North Korea — sanctions have prevented Kim Jong-un from selling off and exporting resources needed by the North Korean people, which has flooded North Korean markets with cheap coal and seafood.

Now, we’re starting to see something like the converse of this, in which restrictions on what North Korea’s donju and purchasing agents can import is forcing them to find other ways to kick up steep “loyalty payments” to their overlords in Pyongyang. What’s a donju to do? Find something to send back to North Korea that isn’t covered by sanctions — like apples. The result has been to flood North Korean markets with cheap apples during North Korea’s lean season — called the “barley hump” — when winter food stocks have run out and home-grown crops haven’t been harvested yet.

For this reason, many trading companies have increased their import of daily goods and food products, neither of which are subject to the harsh round of unilateral and multilateral sanctions imposed on North Korea in early March in response to its fourth nuclear test and rocket launch. In particular, fruit such as apples are not included on the list of sanctioned items, so these trading companies can reliably earn foreign currency by buying and selling them. [Daily NK]

Making more food available during the lean season could also have a secondary and beneficial effect, by reducing the incidence of “pre-harvesting” of North Korean crops, which reduces the aggregate food supply.

“Right now the market is so flooded with Chinese apples that vendors are even selling one apiece to customers who don’t have a lot of money,” he said. “It seems like imported fruits are going to dominate the markets until North Korea’s first fruits of the year become available around July.” [Daily NK]

Radio Free Asia even publishes this image of apple boxes stacked up at the customs checkpoint at Dandong.

apples

[via AFP]

It also informs us that there might be more than apples in some of those boxes. 

“It has become impossible to send so-called ‘apple rice’ to North Korea now,” said a trader in Dandong, a border town in northeastern China, in a reference to rice that China sends to North Korea packed in apple boxes rather than regular rice sacks.

But in this instance the source used “apple rice” to describe goods shipped between China and North Korea that are falsely identified on their outer packaging to conceal their true contents, such as materials used to manufacture narcotics in North Korea.

The fact that Chinese traders are no longer able to send “apple rice” to North Korea means that Chinese customs authorities are performing more thorough inspections at the border, the source said.

If such goods are discovered during the inspections, the traders will be fined, and all their freight will be confiscated, he said.

“The trading companies whose ‘apple rice’ is found through random inspections will be in big trouble and have to pay a large fine,” said the source, adding that the customs inspections process has become stricter for goods entering China from North Korea. [RFA]

Why do traders hide rice in apple boxes? Beats me, but it’s not because of sanctions; maybe China has a rule against exporting rice. Either way, increased cargo inspections at the land borders compared to last month are good news, because Pyongyang has taken advantage of lax inspections to smuggle bulk cash and other contraband across the border. They’re also bad news, because smuggling brings food and information into North Korea.

Overall, however, it’s good news that the trade in food and consumer trade continues, because it means that sanctions’ impact on the North Korean people is being minimized, even if it can’t be eliminated completely. The critics who were (and still are) eager to complain that sanctions would starve poor North Koreans won’t find much evidence to support support their arguments. Despite this being the lean season, food prices have remained stable since sanctions were imposed. Motor fuel prices have risen in Pyongyang, although the reasons for this aren’t clear. U.N. sanctions ban the export of jet fuel to North Korea, but they don’t impose an oil embargo. It may be that North Koreans are hoarding, and it may be that the regime itself is, perhaps for political parades or military needs. Fuel prices do have the potential to affect food prices indirectly, so this bears close watching.

The only report I’ve seen of food shortages caused by sanctions is this report, unconfirmed by any others, that a member of the state security forces had begged a defector for money because he’d stopped receiving wages. That’s hardly a tear-jerking tale of woe, if true. Reports that China had cut flour exports to North Korea were likely a measure to alleviate flour shortages in China, and had no evident impact on food prices in North Korea.

But this is not to deny that sanctions have had some adverse impact on workers in state industries targeted by sanctions:

Signs of anxiety have been observed in certain areas near iron and steel mills as well as coal mines following strong international sanctions implemented against North Korea. These come as mine workers seek to secure their finances by moving to smaller and more affordable housing in anticipation of a prolonged period of stalled wages and tighter budgets at home.

“I haven’t seen any panic buying in response to the sanctions, but an increasing number of people living in coal mining areas like Hyesan and Musan are trying to sell their homes,” a source from North Hamgyong Province told Daily NK on Monday. “In one particular neighborhood, there was news that ten households are making efforts to sell their homes.” [Daily NK]

That’s unfortunate, but not that different from what we might see in other countries, including this one, where industries take sudden downturns. Indeed, China had already slowed its imports of North Korean coal a year and a half ago, and the effect of sanctions has been to impose an “abrupt halt on what had already been intermittent” wage payments. There are no reports of malnutrition or starvation among the miners, just reports that they’re retrenching their finances, cutting back on consumer purchases, and hoarding foreign currency. There is also the question of causation. There’s little question that sanctions have indeed hit the North Korean coal and steel industries hard, but it’s also possible that sectoral sanctions on the North Korean coal industry have only accelerated a decline in an industry that had already begun, and was likely to deepen for unrelated structural reasons. Recent reports tell us that China is cutting its own miners’ working hours because of a coal glut, which is probably a function of China’s own economic slowdown.

On the other side of this, critics who don’t understand what sanctions do or are intended to do, like CNN’s Will Ripley, see all evidence of cross-border trade as proof that sanctions aren’t working. But sanctions do not impose a blanket trade embargo on North Korea, for the very reason that the drafters of sanctions want food and other necessities to keep flowing into North Korea. If hunger in North Korea was a deterrent to Kim Jong-un, he wouldn’t be doing so much to enforce it.

The case of the Chinese apples suggests one way in which sanctions can be targeted and enforced to increase North Korea’s aggregate food supply, by shifting state resources back into the markets. Banning North Korea’s food exports might be another way. But those who depend on state industries and wages will invariably continue to lose their paychecks, and will become increasingly dependent on the markets.

The issue of the sanctions’ impact on the people bears close watching over the next year, as nations continue to implement them. On one hand, I think Sokeel Park is right that the (quasi-legal) privatization of agriculture and the food supply means that another famine in North Korea is unlikely. On the other hand, it’s unrealistic to believe that sanctions won’t affect the wrong people at all, in part because the regime will do everything in can to transfer their effects, and already is. This report did a particularly good job of covering this moral dilemma in an honest and balanced way.

But there is no question that times are much harder for North Koreans today than they were a year ago, and it’s not because of sanctions imposed by the U.N. or the U.S., but because of sanctions imposed by the North Korean government on its own people. Specifically, the North Korean government — with substantial help from China — continues to crack down on cross-border trade, smuggling, communications, and remittances, which are essential to the livelihoods of millions of poor North Koreans. It is cracking down on market trading and mobilizing people for exhausting make-work forced labor, denying them the time and the energy to pursue their livelihoods. Those are stories that bear careful watching, too, and which some sanctions critics consistently choose to overlook.

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Dozens of North Korean ships stranded by U.N. sanctions

Since this year’s nuclear test and the rounds of U.S. and U.N. sanctions that followed, I’ve tracked the implementation and enforcement of shipping sanctions closely on this site. For ease of reference, here’s a brief chronology of what I’ve observed since March 2, 2016, when the U.N. Security Council approved Resolution 2270, which —

  • required the inspection of all cargo to and from North Korea;
  • banned the reflagging of North Korean ships;
  • banned exports of coal and iron ore (except for “livelihood” purposes);
  • banned exports of gold, vanadium, and rare earths; 
  • designated a list of ships owned or controlled by Ocean Maritime Management; and
  • designated North Korea’s Reconnaissance General Bureau, which also operates a small fleet (though the ships themselves are not designated).

As I’ve repeatedly noted, China has a long and well-documented history of violating North Korea sanctions right after voting for them, which is why any evidence of China’s compliance with the new U.N. sanctions ought to be read skeptically. Still, since March, the signs of China’s implementation of shipping sanctions has been mixed, but mostly good. A short chronology of my posts:

This month’s reports reinforce the trend we’ve observed in those past reports — that for the most part, foreign ports are shunning the designated North Korean ships, including in China.

None of the 27 North Korean ships that are on a UN Security Council blacklist have been able to dock at foreign ports, the Voice of America reported Wednesday. They are either stuck in North Korean ports or marooned on the high seas. A diplomatic source said, “The UNSC sanctions are now biting, and North Korean ships are port-bound or stuck at sea.”

As of March 3, when the UNSC adopted the fresh sanctions, 15 of the North Korean ships on the blacklist were moored at foreign ports or traveling the open seas, according to VOA’s analysis of data from the private website Marine Traffic showing the real-time vessel positions. Four days later seven were still in foreign ports, and last month they had dwindled to two. The others returned to North Korea this month after they were denied entry to ports in China, Hong Kong, and Russia. [Chosun Ilbo, April 7, 2016]

Well … plus or minus. A rather confusing UPI report, citing the Voice of America, finds that all 27 of the North Korean ships designated under UNSCR 2270 are stranded at what UPI calls “various ports,” but also says that a number of ships continue to move between other North Korean ports, or have vanished from online tracking databases.

NK News’s Leo Byrne also finds that China and other countries have generally barred the designated ships from their ports, but with one exception — the M/V Victory 2, which continues to shuttle between Nampo and Lizhao. The U.S. Treasury Department designated the Victory 2 under Executive Order 13722 last month, but the U.N. did not designate it in UNSCR 2270. The Treasury designation links the Victory 2 to Korean Buyon Shipping Company Limited, presumably a shell company used by Ocean Maritime Management, the North Korean shipping company previously designated by the U.N. and the U.S. for arms smuggling.

So what does it mean to be designated by the U.S., but not by the U.N.? As an initial, practical matter, being on the U.S. SDN list means as much or as little as the Treasury Department decides it does. If Treasury doesn’t actually enforce the blocking of the ship or the shell companies behind it, it might scare some banks, and it might mean nothing. If Treasury does enforce it, it could mean that the dollar accounts of the shell companies are blocked, and dollar payments to provide fuel, insurance, registration, and bunkering services for the ship are blocked.

If China and North Korea are circumventing dollar sanctions, the new U.S. sanctions law and Executive Order 13722 would allow Treasury to block the dollar assets of the Chinese middlemen who are knowingly facilitating those non-dollar payments.

If the de facto de-listing follows the pattern of the Jin Teng and other de-listed vessels, China may have argued that the Victory 2 is not, in fact, owned or controlled by Ocean Maritime Management. What this means depends on whether the U.S. and China are dealing with each other forthrightly to enforce the sanctions, or whether China is simply testing the administration’s attention span.

This is all interesting enough, but the most interesting report may be the one that informs us that in early April, the Palau-flagged M/V Lucky Star-8 entered the Japanese port of Rumoi, on the northern island of Hokkaido, where the authorities promptly arrested the vessel’s Chinese captain.

It seems the captain failed to mention that between January 29th and February 1st, he’d stopped over in an unnamed North Korean port, and under new Japanese laws, ships that recently visited North Korea are barred from Japanese ports. Japanese customs found out about the North Korean port call during a cargo inspection, although the ship was carrying no cargo. The ship the left port without its captain.

This is a secondary shipping sanction, like the ones Congress passed in section 205 of the NKSPEA, only targeting third-country ships rather than third-country ports. This could have tremendous impact over time. North Korea’s maritime exports are almost exclusively used to generate revenue for the state and its priorities. It may not be a bad idea for Congress to consider when North Korea launches that missile, subject to an exemption for port calls solely for the delivery of food or humanitarian aid to North Korea. The effect could be that North Korea’s only maritime commerce would be from a few non-designated ships that go between North Korean ports and Chinese ports, and pretty much nowhere else.

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Angola may be defying U.N. sanctions against North Korea

A report last month by the U.N. Panel of Experts found that Namibia has been involved in joint projects with KOMID, a designated North Korean entity, to build an arms factory in the African nation. The finding drew a defiant response from the Namibian government, but as a defense to a sanctions violation, it was a blue answer to a red question. In response, I wrote this post — which attracted much attention in Windhoek — rebutting Namibia’s argument and explaining the potential legal consequences the Namibian Defense Ministry would face if its defiance continues. I also tweeted links to reports that Namibia may also have sold uranium to North Korea.

This week, it’s Namibia’s neighbor to the north, Angola, that’s sharing unwanted headlines with North Korea. First, Radio Free Asia reports that “[a]round 10 North Korean workers dispatched to Angola have died of yellow fever” during an outbreak that has killed 178 people. 

It said some 1,000 North Korean workers are in Angola, including construction workers and medical staff, the report said, referring to the workforce North Korea dispatches overseas to earn money.

The recent deaths of the North Koreans calls into question the quality of North Korea’s yellow fever vaccine and the veracity of North Korea’s claims to have inoculated its workers sent to the African country, according to the report.

Those who became sick have asked to be repatriated, but the North Korean government has opted to not comply out of fear that they could cause the disease to spread at home, the media company said. [Yonhap]

Second, the Angolan government may also be defying UNSCR 2270’s ban on security cooperation with North Korea. Like Namibia, Angola was named in the most recent report of the Panel of Experts. The panel found that Angola bought “items for military patrol boats” from a (subsequently) U.N.-designated North Korean trading company, Green Pine, with the help of our old friend, Josef “Boaty McBoatface” Schwartz.

Then, last week, the official Angolan news agency Angop published this cryptic report, defending the country’s unspecified sharing of “experiences in public security” with North Korea. Meaning?

On the occasion, the board of the Angolan Ministry of the Interior thanked the contribution of the people and government of North Korea have made to Angola, since the early period of the African country’s struggle for national liberation.

The friendship and co-operation relations between the governments of Angola and the Democratic People’s Republic of Korea are based on a politico-diplomatic framework, as well as on the General Agreement signed in May, 1977, a time that Angola’s first president, Dr António Agostinho Neto made an official visit to North Korea.

The Democratic People’s Republic of Korea was among the first states to recognize the independence of Angola (11 Nov, 1975), which the Asian country officially acknowledged on 16 November 1975, a date that marked the start of official relations between the two states, immediately followed by the opening of the Asian country’s diplomatic mission in Luanda (Angola’s capital). [Angop]

The Angolan government may be under the illusion that this kind of argument helps its situation. In fact, it only attracts more attention from troublemakers like me by highlighting the Angolan government’s spurious reading of the sanctions. Like Bill Newcomb, I’ll reserve final judgment about whether Luanda’s security dealings with Pyongyang violate UNSCR 2270 until I know exactly what those dealings are. Still, it’s hard to imagine any form of security cooperation with Pyongyang that wouldn’t violate it.

For the Angolan government to answer that it enjoyed comradely relations with the North Koreans is irrelevant. The sanctions don’t require Luanda to sever diplomatic relations with Pyongyang; they do require it to cease its military cooperation, arms trafficking, commerce in dual-use items, and dealings with designated entities. A reader could reasonably infer that Angop’s report was a response to the panel’s revelations about Angola’s purchases from Green Pine. And why would Angola still feel the need to defend its dealings with North Korea if they’re all in the past? At the very least, it merits further investigation by the Panel of Experts. (This isn’t the full extent of Angola’s questionable commerce with North Korea, which would violate UNSCR 2270 if proven, but I’ll keep the rest to myself.)

Of course, one lesson we’ve learned over the last ten years is that U.N. sanctions don’t enforce themselves. The world’s less responsible actors will continue to engage in opportunistic (and prohibited) trade with North Korea until they confront the risk of consequences. In 2005, the U.S. Treasury Department presented banks around the world with that choice by designating Banco Delta Asia, and by sending Treasury officials around the world to clarify those consequences for banks that didn’t immediately get the message.

It’s time for a similar approach to North Korea’s arms clients in Africa, whose patronage is probably a significant source of income for Pyongyang, and continues to fuel conflict in Africa. The radical idea I’m calling for here is for our State Department to practice some diplomacy. If State is serious about enforcing sanctions against North Korea, it should promptly arrange a tour of Africa, to warn the appropriate ministries in Luanda, Harare, Kampala, Windhoek, Asmara, Addis Ababa, and Cairo that in addition to the unenforceable U.N. sanctions, the NKSPEA attaches serious mandatory sanctions to military cooperation with North Korea — including the blocking and forfeiture of assets, loss of aid, and visa bans.

Not only could such an approach enhance the credibility of the U.N. and cut off a key source of income for Pyongyang, it could also yield valuable information about North Korea’s arms trafficking, either from newly cooperative African governments, or from North Korean arms dealers who come under pressure from sanctions and are consequently induced to defect.

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Why an unprecedented mass defection could be a sign of instability in North Korea

Yonhap is reporting this morning that 13 North Koreans —12 women and a male manager working at one of its overseas restaurants in an unidentified country — have defected and arrived safely in South Korea. The impetus for this unprecedented mass defection? Sanctions — which never work, so we’ve been told.

“As the international community has slapped sanctions on the North, North Korean restaurants in foreign countries are known to be feeling the pinch,” Jeong Joon-hee, a ministry spokesman, told a press briefing. “North Koreans in overseas restaurants are believed to be under heavy pressure to send money to their country.” [….]

The spokesman said that the latest defection indicates that the tougher U.N. sanctions have begun to generate impacts on curbing the North. [Yonhap]

Feel free to insert your own “women cross DMZ” snark in the comments. There was another factor at work here, too: “[T]he North Koreans recently decided to defect to Seoul because they realized the reality of South Korea by watching South Korean TV dramas and movies and were disillusioned with the North’s ideological campaigns.” 

So … a combination of information operations to undermine the regime ideologically and sanctions to undermine its capacity to control its subjects unraveled Kim Jong-un’s control, and with astonishing speed.

I wonder why no one ever thought of that before.

I wrote about the financial difficulties North Korean restaurants have faced recently in this post, but I still find this report astonishing and deeply significant on several levels. Mass defections from North Korea are still relatively rare. The few we do hear about tend to involve fishing boats that “drift” south, sometimes while inexplicably carrying women and children. Even then, the regime’s psychological hold is so strong that some of those aboard go back.

What’s extraordinary about this mass defection is that these restaurant workers are hand-picked, core-class loyalists. Here’s a short list of the levels of significance here:

1. Sanctions are undoing the regime’s financial bindings;

2. The regime is incapable of duct-taping those bindings together with resources from other state organs, possibly because those organs are functioning as semi-independent and competing feifdoms;

3. If the financial bindings come undone, loyalty and ideology aren’t enough to hold people;

4. At least some members of the core class — indeed, some of its most visible members — are disgruntled;

5. Disgruntled members of the core class are willing to share and conspire about their disgruntlement with each other, including the guy whose job it was to “manage” them, and act on it;

6. The South Korean government is willing to help North Koreans act on their disgruntlement; and

7. The South Korean government is willing to talk about all of this publicly, and thus inflict severe wounds to the regime’s morale, and possibly encourage other defections.

I can’t think of any other example of a mass defection by members of North Korea’s elite class. This is unprecedented. One likely consequence of it is that the regime itself will begin to call its restaurant workers home, and possibly shut down its other restaurants. As I’ve noted, the restaurants are probably more important as a cover for money laundering than for the income they generate. That means that the closure of the restaurants will put additional pressure on the regime’s foreign income streams.

~   ~   ~

This report comes just as I’d finished smelting down weeks of reporting on the question we’re all asking ourselves right now — could sanctions also destabilize North Korea itself? The people with the best information — the North Korean security forces — seem to think so. Various reports have emerged to suggest that sanctions are contributing to a decline in morale at all levels of North Korean society. Some cadres are revealing a loss of confidence in Kim Jong-un’s leadership, and in his capacity to survive. 

“Party cadres these days do not feel a true sense of loyalty towards the regime, but have rather been forced to demonstrate it for a long period of time. Cadres have been saying among themselves that the recent string of events is yet another example of Kim Jong Un putting his own gains ahead of the fate of the nation.” [Daily NK]

The closure of Kaesong hurt the morale of cadres who knew of its importance in the regime’s finances, and the workers who found it a better place to work than any of the alternatives, despite the ethical problems it raised from our perspective.

For poor North Koreans, food prices are still mostly stable. The state gives them next to nothing, and another word for “nothing left to lose” is “freedom.”

A resident in Samsu County, Ryanggang Province, who is aware of the fresh sanctions levied against North Korea, also weighed in, noting, “It’s not as if this is our first or second round of international sanctions, so from a citizen’s perspective none of this is really a surprise, but the cadres appear to be smoldering. This is because support from South Korea and the UN never trickled down to us; the high-ranking cadres sucked it all up for themselves.”

As word of looming sanctions churns in North Korea’s rumor mill, the public’s belief in the regime’s propaganda is wavering. Domestic media outlets and official rhetoric are devoid of any mention of the sanctions, instead attempting to craft a narrative of international support for the endeavors. But for the public, past is prelude, and they therefore fully expect ramifications. [Daily NK]

People are questioning the propaganda that’s being fed to them. Many of them appear to have a vague sense that Kim Jong-un provoked the U.S., the U.N., and South Korea to imposing and enforcing sanctions.

“The TV [Korean Central Television, or KCTV] and the Rodong Sinmun [Party-run publication] say it was a satellite, but people have already heard about KIC shutting down and they automatically connect the dots that the launch served another purpose. The other thing is that in the footage surrounding the event, the scientists commended for their efforts were seated right next to soldiers. So some people are saying it seems as though whatever happened might have had some connection to the military.”

For some, like one North Korean resident currently in China on a personal travel visa, these seeds of doubt grow into full blown certainty with the right exposure. “When I came to China, I felt as  though we have really been living in the dark. The propaganda that says Kim Jong Un is guiding us so that the people can live well is nothing more than him trying to build up his ‘achievements,’” she told Daily NK.

“If the public at large were to see and understand this, it would blow things wide open. People would doubtless point their finger at Kim Jong Un’s inept governance and its direct connection to their suffering.” [Daily NK]

The regime (with help from China) has also clamped down on the borders, as I discussed here. That may have a greater impact on the food supply in the markets than sanctions. Although the development of private agriculture and markets makes another North Korean famine unlikely, if the people suffer economic hardships, they could blame the regime.

That the average North Korean will be hit by these economic shifts is inexorable. With people relying solely on China to secure essential goods, a cutback on trade will challenge the supply of these daily goods. [….]

Another North Korea watcher explained, “These days, the subject of admiration and respect in the North is not the top leader but the money people secure from the markets to sustain their livelihoods.” Given this, once the sanctions start to influence the daily lives of North Koreans, it could turn people’s sentiments against Kim Jong Un and potentially lead to groups of unrest in society, the expert added.

“This is why we should work to let these people know that the international sanctions come from Kim Jong Un’s ambitions for nuclear and missile development in order to drive a wedge between the leadership and the general public,” the expert concluded. [Daily NK]

For North Korea’s poor and middle-class people, sanctions are only an indirect source of hardship, so far. The regime is squeezing them, both to extract cash from them, and to keep them busy and tired.

Complaints are rising as the people can’t receive wages or rations even if they go to work places. Several inside reporters informed that the people are coerced to deposit 1,000 won to banks every month during the period of the 70 days battle. [Rimjin-gang]

It’s pushing gold miners to increase production, extracting more “loyalty” payments from overseas party cadres and merchants, and mobilizing them for make-work projects before the party congress and Kim Il-sung’s birthday. Shockingly enough, the effect of waking people up at dawn to perform “loyalty” labor and make “loyalty” payments hasn’t been as good for loyalty as some may have hoped.

“It may just be some individuals, but there are residents who have been vocal about how mobilization is driving them crazy,” a source in South Hamgyong Province said. “Some even get into altercations with their inminban leaders, angry at the fact that people are constantly being mobilized and asked for money.” [Daily NK]

There is only so far the regime can go with these tactics before they instigate unrest, like what we saw after the 2009 currency redenomination, effectively a mass confiscation of savings. The people don’t have much to give, and what they have, they hoard.

~   ~   ~

Meanwhile, His Corpulency’s Secret Service is working overtime to head off political instability, just as Pyongyang prepares for a May party congress where Kim Jong-un will seek to “bolster his legitimacy” by promising his subjects prosperity.

Sources who are familiar with the internal situation of North Korea say that the North’s intelligence agency has beefed up its surveillance, notably on families of defectors, and dispatched more agents to the pubic areas such as markets, train stations and Mansude, where the statues of founder Kim Il-sung and the late Kim Jong-il stand in central Pyongyang.

“Ahead of the 7th Party congress, the North’s State Security Department held a convention recently, promising to gift Kim Jong-un ‘silent borders,’” a source said in a phone interview with Yonhap News Agency, adding that the State Security Department “is strengthening control over residents, blaming them for internal information leaks to South Korean media.”

It is reportedly said that the North’s intelligence agency is cracking down on people who are trying to cross the border to China, as well as people who are talking with South Koreans by phone.

According to a civic activist group, No Chain for North Korea, Pyongyang has recently set up barbed-wired fences along the Chinese border, which were originally being used at Hoeryong concentration camp, officially known as Camp No. 22, in North Hamgyong. [Joongang Ilbo]

The regime has told the State Security Department and the Ministry of Public Security (MPS) to get ready for war, presumably against its own population. In the provinces, the officers are on alert, working late nights, “inspecting their weapons storage,” and employing their inminban neighborhood-rat system.

In Pyongyang, senior officials are now required to check in and report their whereabouts every hour, and to turn in daily logs of what they did, who they met, and what they talked about. I’ve previously aggregated evidence of discontent among the higher castes, and it’s clear that Kim Jong-un is worried enough that they’ll move against him that he’s taking stringent precautions against that. The purge of Ri Yon-gil in February must surely have contributed to unease among the elites.

For what it’s worth, there is also an unconfirmed rumor that the security forces arrested “[a]t least two suspects who attempted to assassinate” His Porcine Majesty, near the border with China.

As the regime watches the elites, it’s also expecting the elites to keep the wavering classes in line by serving as role models and parroting the state’s anti-American propaganda. The MPS also has the waverers under close watch “to nip in the bud any rumblings of political unrest engendered by members of society more likely to speak out about the pressure squeezing North Korea.” Those under close watch also include “those with family members originally from South Korea prior to the war” and “the Hwagyo [overseas Chinese community].” It’s also worried that sanctions could cause a backlash among the well-connected merchants called donju, who have substantial influence over North Korea’s economy, and whose loyalty the regime is eager to hold.

So, that’s pretty much everyone, then. Which means the surveillance system may have reached its saturation point. Even MPS officers are grumbling about the long hours they’re working: “Do we really need to watch these people every single day?” “Who would do something when things are as tense as they are right now?”

~   ~   ~

The best North Korea experts agree that Kim Jong-un needs a steady stream of hard currency now more than ever to maintain and consolidate power. Let’s start with Ken Gause, probably the single most respected student of North Korean Kremlinology. Even before this year’s nuclear test and the resulting sanctions, Gause thought the royal economy was losing money and was spending at twice the rate Kim Jong-il had to buy the support of the elites. He concluded that Kim Jong-un “doesn’t have the resources to be able to consolidate his power and buy relationships.” Gause also noted Kim Jong-un’s failure to surround himself with trusted regents and advisors since the purge of Jang Song-thaek in late 2013. This leaves Kim Jong-un exposed to power struggles around him, which would marginalize him “within the next two to five years.”

Although the recent construction boomlet in Pyongyang and the widening gap between rich and poor caused me to suspect that the regime’s finances had improved, other reports support Gause’s view that the North Korean economy declined last year, due to falling coal and iron ore prices and declining demand in a slowing China. Trade accounted for around half of its official economy and the regime’s income. About 70 percent of its manufactured goods and half of the agricultural products trade in its markets came from China. Thus, the North Korean economy entered 2016 in a more vulnerable state that Kim Jong-un may have realized. Consequently, “additional pressure” on the North’s trade relations could throw its economy into “a serious crisis,” and “an economic crisis could lead to a political one.”

Seoul National University Professor Kim Byung-yeon also believes that the “[g]ood times have gone for North Korea” because of economic mismanagement and a lack of willingness to institute meaningful reforms. He also notes that “[c]ontrary to common assumptions … the North Korean economy is highly open, with trade making up half of GDP, close to the average of the Organization for Economic Cooperation and Development member nations. If it is correct that “North Korea’s exports of mineral resources … account for 40 percent of its total export earnings,” the sudden loss of this revenue will hurt His Corpulency’s status as an economic breadwinner.

Experts cited by The Daily NK also noted that mineral exports had been a particularly important source of “loyalty funds” for Bureau 39, and that disrupting that funding “may lead to a disruption in unity among cadres of all affiliations” as they’re forced to compete for diminishing resources. 

A study by the Industry-Academy Cooperation Foundation, which is affiliated with the Seoul National University of Education, speculates that without continued economic growth, the military could also become disgruntled and feud with the ruling Workers’ Party over limited resources. Kim Jong-un has recently enhanced the status of the party and purged a number of senior military leaders.

The Director of the Korea Institute for National Unification, Choi Jin-wook, was the most unequivocal: “Collapse is coming.” Choi believes “economic weaknesses” compounded by “worsening isolation from the international community will destabilize” the regime. Its choices are to maintain its isolation or “accept institutional changes that reform and open up the country,” but seems incapable of making that choice. Consequently, “the Kim Jong Un regime’s days are numbered.”

To keep the money flowing, the regime is smuggling gold and cash, which will keep it alive for a while, at least until the press and various governments push China to ramp up its border inspections. But the implementation of U.S. and U.N. sanctions has only begun, and deadlines are approaching for implementation of the new U.S. sanctions law. That means that whatever pressure the regime is feeling now will only increase over the next year. No wonder the regime is railing about sanctions. No wonder it has begun to mix its threats with calls for dialogue and negotiations. Kim Jong-un’s survival may depend on breaking the collective political will of the states that are strangling his regime.

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Does our State Department want denuclearization or an exit strategy?

I’ve long wished that I could attend more ICAS events, but they tend to coincide with busy times in my work schedule. That was also the case when Assistant Secretary of State Danny Russel spoke to ICAS earlier this week. The State Department has since published this transcript. A reader (thank you) forwarded it, and asked for my views. 

Sending a consistent message to North Korea and China is very important at this moment, and it hardly serves that purpose to try to be Jimmy Carter and John Bolton in a single speech. Russel’s message begins with a lengthy defense of Jimmy Carter, Chris Hill, and the failed Agreed Frameworks of the past, and strongly suggests that our goal now is a freeze deal and another agreed framework — in other words, a return to business as usual. He eventually gets around to threatening stronger sanctions enforcement, but says that sanctions are designed “to bring [North Korea’s] leaders to their senses” but “not to destroy North Korea.”

As one of the designers, I’d respectfully ask Assistant Secretary Russel to speak for himself. But the greater problem with Assistant Secretary Russel’s statement is that it reveals a fundamental misapprehension of the nature of our problem. North Korea’s leaders haven’t taken leave of their senses; they’re deliberately and methodically pursuing nuclear weapons to extort their way to hegemony, and with obvious success. As long as we mirror-image their interests in terms of our own logic, we will continue to misapprehend them. If Kim Jong-un is as invested in his nuclear weapons programs as most observers think he is, and if we’re unwilling to use sanctions to undermine and destroy his misrule, then the message we’re sending to Pyongyang and Beijing is that they should cut a freeze deal, get the sanctions relaxed, wait a few months for the administration to leave town, and renege on the next president’s watch.

The irony is that diplomacy stands little chance of success unless we openly consider other alternatives — alternatives that frighten Pyongyang and Beijing more than the idea of a negotiated denuclearization.

In my youth back in South Dakota, on the way to the used car lot one day, I learned an expression that’s as wise as it is ungrammatical: if you want a deal real bad, a real bad deal is what you’re going to get. Next year, we will have another president. Let’s not throw away her leverage just yet.

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