Archive for Sanctions

Another North Korean money man vanishes

The head of a foreign currency-earning enterprise, which is said to be involved in managing Kim Jong Eun’s slush fund, has disappeared, raising questions as to why. The company, which is based in Yangkang Province, operates under the No.121 Department, a bureau that specializes in timber supplies. [Daily NK]

Based on my reading of the reports, it doesn’t sound like the same person as that guy who was reported in August to have defected in Russia, but I’m not 100% certain.

On Europe, the U.N., luxury goods, and the ethical limits of engagement.

The latest rant from Professor Lee and me is published here, on CNN International, in the hope that it will catch the eyes of European audiences (and maybe even give Felix Abt a migraine).

Mind you, I think the EU’s leadership of the U.N. response to the Commission of Inquiry report has been commendable, but Europe has to do a better job of enforcing U.N. sanctions, and curbing the actions of unethical profiteers who would sell Kim Jong Un cigarette-making machinery and ski equipment, cash his checks, and let North Korean kids starve.

If Yoon Sang-Hyun’s information is correct, North Korea spends six times as much on luxury goods as on food for its hungry (corrected).

South Korean Saenuri Party lawmaker Yoon Sang-Hyun, citing Chinese Customs data and “studies on North Korean trade patterns” compiled by the National Intelligence Service South Korean government,* has leaked a report alleging that in 2013, Pyongyang imported $644 million in luxury goods. Yoon says this is enough to buy “more than 3.66 million tons of corn or 1.52 million tons of rice, far more than the country’s food shortage of 340,000 tons estimated by the U.N. Food and Agriculture Organization and World Food Program for the year 2013-2014.”

Now, to be completely fair to the North Koreans here, Pyongyang told the WFP that it was going to import 300,000 tons of that amount commercially. Still, North Korea’s spending on luxury goods again raises the question of why North Korea needs food aid at all, or why anyone there has to go hungry.

According to the World Food Program’s most recent published data, North Korea was expected to have a food deficit of 507,000 metric tons for the year between November 2012 to October 2013. In the year from November 2013 to October 2014, North Korea had a better harvest, and that deficit fell to just 340,000 tons. In each of these years, the North Korean government said it would import the same amount — 300,000 metric tons — leaving international donors to cover the remaining 207,000 metric tons (2013) and 40,000 tons (2014).

In 2012, perhaps projecting from that year’s leaner harvest, the World Food Program asked donor nations for $200 million for a two-year program to feed 2.4 million pregnant women, nursing mothers, infants, and children in North Korea.** The donors, however, have stayed away in droves, and if you put all of these import statistics into one chart, it goes far to explain why***:

Screen Shot 2014-10-17 at 9.02.25 AM

As the WFP explains, nearly a third of North Korean children are chronically malnourished or stunted, 20% of breastfeeding women are malnourished, “more than 82 percent of households do not have acceptable household food consumption during the lean season,” and many have “poor dietary diversity,” which means they survive on corn and other cheap carbohydrates, and maybe some vegetables.

The statistics on North Korea’s commercial food imports come from WFP/FAO assessments, here and here. Of course, those figures are what the North Koreans promised the WFP, and I don’t have to explain the value of a North Korean promise to you. The figures are for cereal imports only, and probably also exclude other, higher-end or luxury food imports. They are simply that percentage of North Korea’s unmet cereal needs that Pyongyang itself says it intends to fill.

While one should always be wary of Pyongyang’s manipulation of need assessments, plenty of reporting from inside North Korea confirms that for most people, the food situation is dire. Publicly, the WFP attributes this situation to a number of reasons, including a long series of droughts and floods that never caused anyone to starve in South Korea, and also on Pyongyang’s “scant foreign currency reserves to buy food on the international market.” It is this assertion that I intend to refute as conclusively and embarrassingly as possible, if only to prod the WFP to address it truthfully.

Screen Shot 2014-10-11 at 6.15.36 PM

[Yoon Sang-Hyun, Yonhap photo]

Yoon has made an annual event of releasing these data, as reliably as a [circle one: flood/drought] destroys North Korea’s entire corn crop, but not South Korea’s. In 2011, Yoon gave The Telegraph a year-on-year accounting of North Korea’s increasing luxury goods imports for the years 2008 to 2010, including $216 million for TVs, digital cameras, and other electronics, and $9 million in whiskey and other expensive liquor. In 2012, a report Yoon released, citing (in part) Chinese Customs data, claimed that North Korea imported $446 million in luxury goods in 2010 and $585 million in 2011:

Imports were especially pronounced for high-end cars, TVs, computers, liquor and watches. Inbound shipments of luxury cars and associated components almost doubled to 231.93 million dollars last year from 115.05 million dollars in 2009. [….] Artworks and antique imports reached 580,000 dollars last year, more than 10 times the figure of 50,000 dollars in 2009. Perfume, cosmetics and fur saw their inbound shipments double. Among items that saw sharp drops in imports were leather products and musical instruments. [Dong-A Ilbo]

Later that year, NPR reported on how the other four-fifths were getting by:

But all five North Koreans I met in China say that’s not the whole story. The markets are full of food, they agree, but most ordinary people can’t afford to buy it. State rations aren’t being distributed, and even some soldiers are going hungry. One man who gave his name as Mr. Kim described the drastic action one family he knew took.

“I saw one family, a couple with two kids, who committed suicide. Life was too hard, and they had nothing to sell in their house. They made rice porridge, and added rat poison,” he recalls. “White rice is very precious, so the kids ate a lot. They died after 30 minutes. Then the parents ate. The whole family died.” [….]

The U.N. report found that in Ryanggang province, where the situation is worst, almost half of the children are stunted from malnutrition. Even in the showcase capital, home to the elite, one in five kids is stunted.

“I saw five people who died of starvation right before I left this year,” says another interviewee, Mrs. Kim, who lives on the outskirts of Pyongyang and is not related to Mr. Kim. Talking to reporters is risky for North Koreans, so NPR is using only the surnames of the people interviewed for this story. “There was one father, who worked in the mines, but his job provided no rations. His two children died. Apart from that family, I know of one other woman and two men who starved to death.” [NPR, Louisa Lim]

In 2013, Yoon again provided data “gathered by South Korean agencies” to The Asahi Shimbun, which reported that Pyongyang imported pet dogs from Europe, sauna equipment from Germany, along with plenty of watches ($8.18 million) and expensive booze ($31.11 million). The imports totaled $323 million in 2009, $584 million in 2011, and $646 million in 2012, representing a doubling of known luxury imports in just two years. The Telegraph cited the same source and statistics in this report, noting that the Pyongyang also imported $37 million worth of electronics.

[The same year this video was taken, incidentally.]

In addition to doling out swag to the elite, the regime has recently used some of this to stock the shelves of elite department stores in Pyongyang, which presumably means that the regime expects to make a tidy profit. I’ll say this for state capitalism — it’s a more efficient way to separate the hoarders from their loot than old-fashioned confiscation.

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[They damn well better have my Emmental]

Had donors fully funded the WFP’s program, its one-year food cost would have been half of $137 million, or $68,500,000, just 10.6% of what North Korea spent on luxury goods in 2013. Put another way, what Pyongyang spends on luxury goods, according to the best available statistics, is 9.4 times higher than what the WFP pays to import food to feed pregnant women, nursing mothers, and children in North Korea.

And obviously, Pyongyang is also spending a lot of money on weapons on top of that.

One problem with taking these data too literally is the risk that the South Korean government is inflating them to disinform us. On the other hand, because luxury goods imports violate U.N. Security Council Sanctions, and also the national laws of the United States, the EU, and Japan (among others), many of the sellers have good reasons to conceal some of these imports. This means that there are risks of the data being overstated and understated. It may never be possible to authenticate precisely what North Korea spends on luxury goods, but it is possible to corroborate, based on other sources, that that spending is very substantial, and rising.

This report in The Chosun Ilbo, accompanied by photographs, show shops in Pyongyang selling the wares of “Chanel, Lancome, L’Oreal’s,” “expensive jewelry by Cartier and Swarovski,” and “luxury watches by Rolex and Omega, and clothes by Italian designers.” In 2011, South Korean government officials told The L.A. Times’s John Glionna that while North Korea continued to receive foreign food aid, Pyongyang’s appetite was for all things Gucci, Armani, and Rolex. It also imported $500,000 in high-grade beef, a description that can’t possibly include the Big Macs Kim Jong Un had flown in on Air Koryo. In 2013, Reuters reported that members of the North Korean elite jammed bags of luxury imports onto every flight from Beijing, right under the noses of Chinese Customs.

[Also that year]

Is there evidence to corroborate the dramatic rise in luxury imports that Yoon’s figures suggest? There is, to a degree. In January 2012, Wall Street Journal reporter Jeremy Page examined Chinese customs data and U.N. reports, and found that “Since 2007, North Korea’s imports of cars, laptops and air conditioners have each more than quadrupled, while imports of cellphones have risen by more than 4,200%.” Page’s report was rich in interesting detail:

The U.N. data show that China has replaced Japan as the biggest exporter of cars to North Korea since Tokyo added them to the luxury list in 2006, and that in 2010 China overtook Singapore as the biggest exporter to the North of tobacco products, which many countries consider luxury items under the sanctions. [….]

“The sanctions don’t work because as long as China allows the export of luxury goods, the North Korea elite will be paid with them to support the regime,” said Jiyoung Song, an associate fellow at London-based think tank Chatham House, who has studied North Korea since 1999. [….]

Among the exports of liquor to North Korea from Hong Kong in 2010 were 839 bottles of unidentified spirits, worth an average of $159 each, and 17 bottles of “spirits obtained by distilling grape wine or grape marc” worth $145 each, according to the U.N. figures.

In 2010, North Korea also imported 14 color video screens from the Netherlands—worth an average $8,147 each—and about 50,000 bottles of wine from Chile, France, South Africa and other countries, as well as 3,559 sets of videogames from China, the U.N. data show. [….]

In 2010 alone, North Korea imported 3,191 cars, the vast majority from China—although one, valued at $59,976, placing it in the luxury category, came from Germany.

Page even produced this graphic:

WSJ graphic on NK luxury imports

[Wall Street Journal]

This trend is also both mirrored and amplified by a very visible increase in spending on leisure and sports facilities. The ROK National Intelligence Service, estimates that North Korea spent $300 million on those facilities in recent years. It’s not clear whether Yoon’s figures include those costs, or how much of them.

Much of the luxury goods trade in China is done openly, at shops near the North Korean Embassy in Beijing that cater to an elite clientele. After China, Europe was the second-worst offender. An Austrian man was implicated for selling North Korea luxury sedans, and attempting to sell them Italian yachts. Despite Italy’s success on this occasion, North Korea directly imported jet skis from Italy, and also “imported sauna equipment from Finland and Germany.”

It’s also possible to search the U.N. Comtrade database for some corroboration. I ran a quick search, which revealed multiple exports of alcoholic beverages and electronics by China and various European countries in 2013. Perhaps in the coming months or years, I’ll try to aggregate some of these data myself to look for patterns, and to identify countries whose enforcement of the Security Council resolutions is particularly suspect.

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* Oops. Forgot the strikethrough when I posted this.

** Of the requested $200 million, just $137 million would be for food costs (page 1). The rest probably consists of salaries of shipping and support costs, some of which will be paid to Pyongyang for the costs of storage, transportation, fuel, and labor — costs whose accounting the WFP Inspector General questioned recently. (See Annex A-I).

*** Correction 17 Oct 2014: I took a second look at my math and realize that I either used the wrong figure for 2012 and 2013 or made an error in calculating cereal prices. Although I can’t find where the WFP reports a dollar cost of the cereals Pyongyang said it imported, one can arrive at a reasonable estimate by calculating the commercial price from the data in Annex A-1 (42 million divided by 115,000) and multiplying that price by 300,000. The WFP data tell us that food prices and Pyongyang’s commercial cereal imports were both relatively constant for both years (page 8). That works out to a higher figure of $110 million, about a sixth of what Yoon’s ROK government figures say Pyongyang imported in luxury goods. Note that this is consistent with the 2010 figure (the 2011 figure is probably a partial-year figure, so don’t put too much stock in it). I regret the error and have corrected the chart accordingly.

Kurt Campbell: We need tougher sanctions on North Korea.

Kurt Campbell, President Obama’s former Assistant Secretary of State for East Asian Affairs and now CEO of The Asia Group, continues to debunk the pair of academic urban legends that North Korea sanctions (a) are maxed out, and (b) therefore, not a promising policy alternative. At a forum in Seoul last week, Campbell called on his former boss to “further toughen financial sanctions against North Korea” if it continues to refuse to give up its nuclear program and continues its military provocations.

“If we face real serious provocations going forward with North Korea, we have to keep one option … The fact is that if we choose, we can make life much more difficult through financial sanctions on North Korea,” Kurt Campbell, the assistant secretary of state for East Asian and Pacific affairs during the first term of President Barack Obama, said in a forum in Seoul. [Yonhap]

Unlike most journalists and academics who parrot these urban legends, Campbell has actually had the benefit of an informed examination of the authorities.

“I thought North Korea was the most sanctioned country in the world, but I was (proven) wrong when I was involved in the previous U.S. efforts to lessen sanctions on Myanmar in the past,” he said. “Myanmar is sanctioned about 10 times (more than) North Korea.” 

It would be interesting to know whether Campbell is taking a jab at his successors, or whether (as I suspect) he’s really sending a message on their behalf. Campbell also offered this elegant critique of the Sunshine Policy and its many variations:

The U.S. has for the past 20 years tried to give North Korea a choice between engagement with the international community and isolation, he said.

“The North Korean answer has always been both as opposed to choice … and it’s not clear we would be able to try to accommodate this,” he said.

Then, Campbell made another provocative suggestion: perhaps Six Parties are too many for regional diplomacy with North Korea. The question Campbell didn’t answer is who should be kicked out. There are so many good candidates for expulsion that it’s hard to see who ought to remain. North Korea itself has consistently reneged on its commitments with the other parties; talks about North Korea have proceeded before when North Korea boycotted them, and could continue as a place for the other five parties to coordinate policy and improve sanctions enforcement.

That China has demonstrated a consistent pattern of double-dealing and sanctions-busting is beyond serious debate. Talks could continue without China, among parties that really are serious about disarming North Korea. Dealings with China would have to continue in other venues, of course, but won’t make progress until China sees that the other parties are serious about enforcing sanctions.

I’ve always thought Russia’s inclusion in the 6PT was a me-too afterthought. Including Russia mostly served to give China a partner in reluctance. Since Putin’s invasion of the Ukraine, Russia has shifted toward propping Pyongyang up financially and flouting North Korea sanctions, notably by forgiving North Korea’s debt and hosting Ocean Maritime Management. Japan has also broken with its allies to go its own way, and so, for that matter, has the United States when it suited us.

Finally, there is South Korea, the country with the most direct security interest in disarming North Korea, and the beneficiary of billions of dollars in U.S. defense spending each year. It’s especially ironic that Seoul has never committed itself to offering North Korea the strategic choice Campbell is talking about. Its byungjin-friendly financial subsidy of North Korea has blunted the pressure that U.N. sanctions were intended to apply, signaling to North Korea that it can have both nukes and ski resorts.

Europe is not one of the six parties, but some Europeans have offered that it should be. Europe could be offered a place, but only if it commits to playing a more productive role than it has in the past. Until recently, Europe’s main interaction with North Korea had been to host Kim Jong Un’s offshore slush funds in its banks, to sell him the luxury goods that should have paid for food instead, to support byungjin-friendly (that is, largely unconditional, regime-focused) engagement with Pyongyang despite its manifest failure, and then to oppose the strong enforcement of U.N. Security Council sanctions on humanitarian grounds. Despite rising consciousness of North Korea’s crimes against humanity in Europe, its compliance with U.N. sanctions is still poor.

It’s not clear to me whether there should be fewer parties than six or more, or which nations should be represented in them. It is clear that the United States has failed to use the full extent of its financial, diplomatic, cultural, and military influence to unite around a strategy of effective pressure, and then to pursue it until North Korea is disarmed — completely, verifiably, and irreversibly. Ironically for a President and a Secretary of State who each had emphasized diplomacy in their respective campaigns for the presidency, neither has had diplomatic success in coordinating the North Korea policies of our allies and military dependents in Northeast Asia, to say nothing of our rivals.

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* Byungjin is North Korea’s term for a doctrine under which it will both enrich itself economically and continue to improve its nuclear weapons capability.

H.R. 1771: A response to Stephan Haggard

Stephan Haggard has published the second of two comments on H.R. 1771, the North Korea Sanctions Enforcement Act, at KEIA’s blog, following Bruce Klingner’s first post on the subject. Haggard and I have a history of genial disagreement about North Korea policy, but I find much more in this thoughtful and well-considered post to expand on than to argue with. Haggard has obviously read and understood the legislation before opining about it. (Marcus Noland, Haggard’s co-author at Witness to Transformation, has also commented on the legislation, at about 37 minutes into this audio.)

Among our perhaps narrowing differences, Haggard clearly has more reservations than I do about the impact of sanctions on nominally “legitimate” North Korean commerce:

One concern, however, is whether the legislation has intentionally or unintentionally blurred the line between WMD-related and commercial trade. The justification for doing so is arguably legitimate. In such a highly centralized regime, it is difficult if not impossible to draw the line between illicit and commercial activities. Nonetheless, to date the international community has sought to draw such a line, and for several reasons. [KEIA Blog]

What follows will merely expand on what Haggard acknowledges — that Pyongyang itself has blurred that distinction. Somehow, Pyongyang has found the financial means to finance its WMD programs and its brutal security forces, and although its finances are opaque, ostensibly lawful commerce such as mining almost certainly plays a key role in paying for it. Under its byungjin policy, Pyongyang asserts the intention of having it both ways, enriching itself economically while still developing an effective nuclear arsenal. H.R. 1771 seeks to force Pyongyang to choose between those priorities, without harboring any illusions about which alternative Pyongyang will choose, at least initially. But we’ll return to sub-topic that later in this post.

H.R. 1771 isn’t the first recognition of North Korea’s co-mingling of legitimate and illicit funds. Two months before H.R. 1771 was introduced, the U.N. Security Council adopted Resolution 2094 (2013), which also recognized the risk that North Korea misuses both commerce and consular activities. The resolution responded by “targeting the illicit activities of diplomatic personnel, transfers of bulk cash, and the country’s banking relationships,” and by requiring “enhanced monitoring” of “assets or resources, including bulk cash, that could contribute to” Pyongyang’s weapons programs. This language builds on Resolution 1718 (2006), which required member states to “ensure that any funds, financial assets or economic resources are prevented from being made available” to persons involved in breaking sanctions.

Then, In March of 2013, one month before H.R. 1771 was introduced, the Treasury Department sanctioned the Foreign Trade Bank of the DPRK, a bank that was heavily involved in financing nominally legitimate trade, transactions with humanitarian NGOs, and also, according to the Treasury Department, “transactions on behalf of actors linked to its proliferation network.”

Like H.R. 1771, Treasury’s action and the Security Council’s language acknowledge that North Korea, like all money launderers, hides its illicit transactions within otherwise lawful commerce. It also uses the proceeds of that commerce to finance more illicit activities. Its objective is to make the lawful and the unlawful as indistinguishable and inseparable as possible. Like Hamas, Hezbollah, and Al Qaeda, Pyongyang also shields its financial lifelines by entangling them with humanitarian activities—activities that are only necessary because of Pyongyang’s deliberate misuse of money that should be spent on food, and which it could easily disentangle from its proliferation by allowing humanitarian NGOs to bank elsewhere.

In practice, the targeting of some of these North Korean entities will require a careful, case-by-case weighing of costs and benefits based on good financial intelligence. That is why Section 207 of H.R. 1771 provides generous exemption and waiver provisions to avoid doing further harm to North Korea’s food supply, beyond the harm already being done by Kim Jong Un’s crackdown on market activities and cross-border smuggling.

I share more of Haggard’s concern that China will intensify its efforts to help Pyongyang evade sanctions:

One of the perverse effects of the post-2003 sanctions efforts is that North Korea has become increasingly dependent on China; my estimates with Marc Noland suggest that China may account for as much as 70 percent of the DPRK’s total trade. This growing dependence has had the odd consequence of reducing the influence of sanctions as trade has shifted toward the weakest links in the sanctions chain. China probably provides fewer direct supports than is commonly thought, but it remains strongly committed to a strategy of deep economic engagement with the country. It is possible that firms and particularly banks conducting business with North Korea will reconsider, and that is a good thing. But we should not have exaggerated expectations; there are plenty of firms and financial institutions that will continue to ply this trade, and we are unlikely to get much sympathy from Beijing in tracking them down. To the contrary, the Chinese government has already signaled its concern about the use of secondary sanctions and has shown little inclination to use the economic leverage over North Korea that it quite obviously has. Will this legislation make cooperation with China on North Korea easier or harder?

There’s little question that China will try to frustrate the enforcement of H.R. 1771, just as it has tried to frustrate the enforcement of every other effort to sanction North Korea. What distinguished the brief Banco Delta Asia episode from every other such effort, and contributed to its widely acknowledged success, was the Chinese government’s relative powerlessness to blunt it. Recent experience suggests that this hasn’t changed, although China’s willingness to sacrifice its own interests for Kim Jong Un’s may have waned since the purge of Jang Song-Thaek.

China’s adoption of state capitalism has enriched it, through the creation of businesses and parastatals that are highly dependent on global trade and the international financial system. It’s not surprising that a mixed economy has also had a mixed response to sanctions. At the state level, China routinely overlooks U.N.-mandated sanctions. China’s banks, on the other hand, have been highly sensitive to any veiled threat by Treasury to sanction banks that do business with North Korean money launderers and proliferators. We first saw this in 2005, shortly before Banco Delta Asia, when The Wall Street Journal reported that the Bank of China was under investigation for laundering North Korean funds. The report caused the Bank of China to spurn much of its North Korea business. Remarkably, even after Agreed Framework 2.0 in 2007, it still refused to help move $25 million in illegally derived funds back to Pyongyang, despite the express requests of the U.S. and Chinese governments.

As recently as May of 2013, two months after Treasury sanctioned the Foreign Trade bank and a little more than a week after the introduction of H.R. 1771, China’s four largest banks — the Bank of China, the Industrial and Commercial Bank of China, the China Construction Bank, and the Agricultural Bank of China  — all halted money transfers to North Korea. Other, smaller Chinese banks, like the Bank of Dandong, continued to move money for Pyongyang, and at the lowest reaches of the financial ecosystem, North Korean money launderers still operate in Guangdong with impunity, and more discreetly, in places like the British Virgin Islands. Enforcing sanctions is like mowing the lawn. If you don’t do it regularly, things grow back quickly, and it’s the weeds that will thrive the most. Unlike mowing the lawn, you can’t take a uniform approach to different enforcement targets.

That is why H.R. 1771 was designed to be scaleable, allowing harder sanctions for smaller banks that the financial system wouldn’t miss, and more subtle sanctions for larger banks that have historically been highly sensitive to reputational risks. Securing compliance at all levels of the financial ecosystem will require a great deal of hard work by financial investigators and lawyers, and a new demonstration of Treasury’s determination to deter such conduct, both in China and in other countries.

Post-BDA, and since the ascent of Kim Jong-un in particular, North Korea has also sought to diversify its trade, investment and financial links. The KPA and its associates have developed relationships with financial entities that are not concerned with access to the U.S. market, both in China and outside it; Russia will be particularly interesting to watch in this regard but there is also the open field of the Middle East. Throughout, the legislation recognizes that the administration will need to conduct a vigorous diplomacy to close the loopholes created by the fact that some firms and financial institutions will not be deterred by secondary sanctions.

Without question, North Korea’s response to Banco Delta Asia has been to decentralize its hard currency operations overseas. Recently, North Korean senior defectors have provide some direct evidence of this to bolster the suspicions of the U.N. Panel of Experts. One obstacle to untangling this is the laxity of U.S. sanctions against North Korea, which do not require the licensing of most financial transactions like investments, loans, and other transfers. (See 31 C.F.R. 510.201, which bans proliferation-related transactions, imports from North Korea, and little else, and compare that to the corresponding breadth of the Iran and Cuba sanctions regulations). This deprives Treasury of valuable financial intelligence that could help it enforce a sanctions program more effectively, if the President ever directed it to do so.

Even so, it’s probable that North Korea still remains dependent on a relatively small number of key overseas financiers, abetted by a few unethical banks that are still willing to violate the intent of U.N. Security Council sanctions (by “relatively” small, I’m comparing my best guess to the hundreds of persons and entities designated by Treasury for financing Iran or various terrorist organizations; just 62 North Korean entities are designated today).

Of course, there’s nothing new about rogue regimes, terrorists, and drug lords hiding their money. With determined enforcement, it took Treasury three years to bring Iran’s relatively large, diverse, and interconnected economy to the brink of collapse, and about five to force Burma to free Aung San Suu Kyi. Bankrupting a terrorist organization with a low overhead was far more difficult, but within ten years, even Osama Bin Laden died bankrupt and isolated, cloistered with his wives and his extensive library of pornographic videos. There’s more overhead required to run a country with a population of 23 million and a million-man mechanized army, even if one runs it into the ground. This can’t be done with briefcases full of cash. Given Pyongyang’s relatively fragile links to the global economy — its chief exports are coal, meth, and refugees — one could realistically believe that sanctions would create significant leverage as quickly as they did in the case of Iran.

Without question, this will be harder today than it would have been if pursued with determination in 2007. But to suggest that the absence of a single weak link like Banco Delta Asia means that there are no others is to ignore the vulnerability of Pyongyang’s own banking system. One alternative would be to simply shut that system down entirely and force Pyongyang to work through responsible foreign banks, as Section 207(d) of H.R. 1771 contemplates. As Haggard says, correctly:

The outside world has a strong interest in encouraging reform and opening of the North Korean economy, to shift its strategic orientation away from the byungjin line of trying to pursue economic development and nuclear weapons simultaneously. If this legislation were to have the effect of encouraging deeper economic integration, it would be through an initial phase of even greater isolation, autarchy and external controls.

I agree with this, but I believe we’ve gotten the sequence wrong. Reform won’t be possible until North Korea accepts transparency and broad interaction with the outside world, and those prerequisites clearly don’t exist yet. The consequence of shutting down the North Korean banking system would be to force North Korea to rely on foreign banks. Responsible foreign banks that apply stringent transparency and compliance requirements on North Korea’s business transactions could extract some degree of financial transparency from Pyongyang — I’m suggesting something like receivership — that would force it to spend its money more wisely and humanely. Naturally, Pyongyang would never accept this until it was cornered directly over the trap door to Hell.

Another question is whether the sanctions will have the broader strategic effect of moving the North Koreans toward serious negotiation of its nuclear program. I am extremely dubious. Proponents of such sanctions point to BDA as a success in gradually bringing North Korea back to the table after its nuclear test in October 2006. But this assessment confuses a tactical move with the failure of the broader get-tough policy of the first Bush administration, which probably contributed to North Korea’s determination to go nuclear in 2006 in the first place. The incremental progress made during 2007-8 rested on the lifting of the BDA sanctions and extending offers of assistance as well.

This may be my only point of sharp disagreement with Haggard. The history suggests that Pyongyang began a determined pursuit of nuclear weapons in the late 1980s, continued that pursuit despite nuclear disarmament agreements with Bill Clinton and George W. Bush, and after Barack Obama asked Kim Jong Il to unclench his fist in 2009. Since then, North Korea has tested two more nukes and broken another disarmament deal. The revelation of North Korea’s uranium enrichment program is strong evidence of the continuity of North Korea’s intent. It also suggests that what happened in 2007 and 2008 was not progress at all, but the premature relaxation of pressure before North Korea’s disarmament was verified.

The point is a general one. The paradoxical feature of sanctions is that they rarely have the direct effect of forcing the target country to capitulate. The HR 1771 sanctions will have effect only when coupled with strong statements of a willingness to engage if North Korea showed signs of interest in doing so. The legislation provides plenty of sticks; the administration will have to continue to articulate the prospective carrots in a way that is credible. Strong sanctions legislation makes that difficult to do if the legislation places a series of binding constraints on the president’s discretion. Why negotiate with the U.S. if there is no return from doing so?

The experiences of 2007 and 2008 explain those binding constraints. If H.R. 1771 represents a vote of no confidence in the Obama Administration’s North Korea policy, sections 401 and 402 represent a vote of no confidence in the State Department, after its premature relaxation of sanctions against North Korea, Burma, and Iran. The United States has gotten good at using sanctions to gain diplomatic leverage. It has had a much poorer record of using that leverage to achieve its interests.

It’s fair to notice that Barack Obama wasn’t President in 2008. Is it also fair to constrain him over the actions of Bush’s State Department? I think it is, because the number of holdovers from one administration to another belies the essential continuity of both policies. Another long-standing sore point in Congress is its perception that the State Department has failed to enforce the North Korea Human Rights Act as intended. To a great extent, then, these sections not only express Congress’s distrust of North Korea, but its concerns that the State Department has abused its discretion and requires more limits. In future budgets, it wouldn’t surprise me to see this reflected in more fiscal limitations on how the State Department spends its appropriations.

Haggard is pessimistic that Kim Jong Un will ever give up his nuclear weapons voluntarily, and it’s a pessimism I share. It’s entire possible that only a coup or some kind of crisis will make effective diplomacy possible, but it will certainly require extraordinary leverage — leverage we don’t have today.

The longer North Korea refuses to disarm, the more assets and income streams Treasury will identify, block, and cut off. The loss of access to his offshore wealth will leave Kim Jong Un unable to sustain his own lifestyle, advance his WMD programs, pay his ruling elite, or feed his military and internal security forces. His mechanized military will degrade for lack of spare parts, fuel, and ammunition. The capabilities, discipline, and cohesion of his military and internal security forces will degrade until they are unable to suppress internal dissent. One beneficial effect of this would be to degrade the regime’s capacity to suppress markets, track cell phones, seal the borders, and block remittances and information from abroad. It’s possible that sanctioning the “palace” economy will help the gray-market people’s economy to flourish again.

In due course, these developments will also begin to destabilize the core of the regime. That may cause China to reassess its North Korea policy, enforce U.N. sanctions, and pressure Kim Jong Un to disarm diplomatically. Failing this, it may seek to euthanize the Kim Dynasty to preserve its greater interest in stability on the Korean Peninsula.

Alternatively, the regime’s financial isolation and political destabilization could cause other senior officials to prevail on Kim Jong Un to change his policies, or to remove him from power in favor of more rational leadership. The question today — so many years after our last good options evaporated — is which crisis we’d rather deal with. One is a North Korea with an effective nuclear arsenal, the willingness to proliferate it to others, a proven disregard for human life, and a dangerously impulsive leader. The other will require us to confront the tension attendant to fracking the Kim Dynasty into something we can deal with. Haggard and I will probably never give the same answers to that question, but he makes honest, objective, and compelling arguments about things policymakers must pay careful attention to as they implement a tougher new policy. In the end, however, one does not derive a clear sense of what strategy Haggard believes would be more likely to achieve our interests, which may explain his conscientious ambivalence about this legislation.

~   ~   ~

Update: A reminder that the views I express here, including my inferences about the views of others, are mine alone.

U.N. should fund its aid programs from Kim Jong Un’s Swiss accounts.

The Wall Street Journal updates us on the dire financial state of the U.N. World Food Program’s operations in North Korea.

The United Nations aid program for malnourished North Koreans may close after raising only a fraction of the money it needs to operate in the country, a senior U.N. official said in a call for donations.

“We may need to scale down or think about closing altogether,” Dierk Stegen, the Pyongyang-based North Korea head for the U.N. World Food Program, said in an interview.

The agency, which has operated in North Korea since 1995, could shut early next year if there is no indication it will be able to raise needed funds by the end of October, he said. One complication is that North Korea’s humanitarian crisis has been overshadowed by the conflict in Syria and Ebola outbreak, he said. [Wall Street Journal, Jonathan Cheng]

Whatever your views on aid policy and what the U.N. should do, the situation is profoundly tragic for the North Korean people, who are starving because of their government’s deliberate policy choices. If this regime were overthrown tomorrow, the direct effects of this would still last for a generation:

“For many of the children of North Korea, it’s already too late,” said John Aylieff, the WFP’s deputy regional director for Asia. “They’ve been dealt a life sentence of impaired mental functioning and impaired physical development.”

The decline in foreign aid coincides with ration reductions by the regime, and more ominously, crackdowns on private food smuggling, growing, market distribution and finance, which have become the most important source of food to most North Koreans.

The Wall Street Journal article embeds a video in which I’m interviewed. It also a features graphic showing that Switzerland is now by far the largest donor to the WFP, at $6.7 million a year (think of it as a customer loyalty rebate). The next-highest donor, Russia, gives just $3 million a year. Although China is listed as contributing $1 million, it’s probable that other bilateral donations from China and South Korea are not counted in that graphic.

Of course, as I pointed out the other day, the Swiss may well have enough North Korean money laying around in their banks to fund the WFP’s operations for years. This isn’t just idle snark. After his death, assets of the Qaddafi family were confiscated from foreign accounts and returned to the new Libyan government. There is even a U.N. convention on point, as noted by an attorney from the Justice Department’s Asset Forfeiture and Money Laundering Section in a recent paper:

The UN Convention against Corruption (“UNCAC”), signed in Merida, Mexico, in December 2003, provides an entirely different, and mandatory, scheme for the recovery and return of corruption proceeds. In further discussing the G8 and global initiative against grand corruption, this paper will cover these provisions in greater detail in a subsequent section. The UNCAC took effect in 2005, and has been ratified by over 137 States Parties.

Section 104(b)(1)(F) of the North Korea Sanctions Enforcement Act authorizes the blocking — but not the confiscation — of funds derived from kleptocracy. Other provisions require the blocking of property of persons who knowingly contribute to money laundering, weapons trafficking, proliferation, censorship, and human rights abuses.

Blocked property remains the legal property of its owner, but can’t be moved or spent. Confiscated property is transferred from one owner to another by a government with the power to control it. For now, practically speaking, it’s a distinction without a difference, because food won’t reach the North Korean people unless the regime allows it to. There is plenty of precedent for blocking the assets of sitting dictators; the Treasury regulations are filled with examples of this. Until now, the confiscation of a kleptrocrat’s assets generally had to wait for the kleptrocrat to be overthrown, killed, or both.

Either way, how unfortunate it would be for the world to sit idle while action could still force real reforms and save lives. If and when the U.N. Security Council takes up the U.N. Commission of Inquiry’s report, it should consider authorizing either the blocking or confiscation of North Korean slush funds, which would then draw interest until North Korea allows them to be spent on food, medicine, and other humanitarian uses.

Report: Hollywood is interested in those MiGs Panama seized from a North Korean ship …

for a “Top Gun” sequel, no less, according to The Miami Herald (in Spanish). In case you’re wondering whether Panama can legally do that, yes it can. See Paragraph 14. HT: Oliver Hotham.

North Korean Gulag survivors call on Switzerland to freeze Kim Jong Un’s slush funds (Alternate title: Cursed are the Cheesemakers).

Switzerland has always been there for North Korea. When North Koreans were starving to death in heaps, Switzerland was there to receive Kim Jong Il’s personal shopper and sell him millions of dollars’ worth of its finest timepieces. When North Korea needed creative new ways to make money — literally! — Switzerland sold it the very same intaglio presses and optically variable ink our Bureau of Engraving and Printing uses to make money. When Kim Jong Un needed a place to spend his formative rumspringa torturing small animals, masturbating to bondage porn, flunking his classes, and developing the personality profile of a school shooter — a school shooter with nuclear weapons — his daddy picked Switzerland. Thanks to Switzerland’s narrow interpretation of U.N. sanctions on “luxury goods,” His Porcine Majesty is now eating himself into a mobility scooter on Emmental cheese.* And when the Treasury Department sanctioned North Korea’s Foreign Trade Bank for its involvement in WMD proliferation, it was the Swiss who yodeled that Uncle Sam was starving North Korean babies.

Above all else, when Kim Jong Il needed a place to stash somewhere between $1 billion and $4 billion in personal slush funds, Switzerland and its bankers received his money launderers with open arms. But for one regrettable violation of North Korea’s human rights last year, when Switzerland refused to sell North Korea $7 million in ski lift equipment,** Switzerland has always been there to provide North Korea the watches and numbered bank accounts that starving people need so desperately (and the finest cheeses, of course). Switzerland’s refusal to sell the ski lifts may have delayed the opening of the Masikryeong Ski Resort by several days, but the Swiss people can still take comfort in knowing that, thanks to their government’s laissez-faire policies, the death certificates of 2.5 million expendable men, women, and children (might, possibly) record the hour and minute of their sacrifice with Swiss precision.

The Swiss government has also done its share. Every year, as a token of appreciation for North Korea’s patronage, it refunds the equivalent of 0.7%*** of North Korea’s slush funds to the North Korean government … as humanitarian aid. It’s all part of a reputation for impeccable financial ethics that dates back to the Holocaust. You could say that Switzerland is to kleptocrats what Cambodia is to pedophiles, if this wasn’t so grossly unfair to Cambodia.

For a while, it was fashionable for North Korea watchers to suggest that Kim Jong Un’s Swiss education might have influenced him toward a more libertine style of governance, but things haven’t quite worked out that way. It may be that these scholars were working from a flawed model of Switzerland as a liberal European utopia — a land of cuckoo clocks, alpine meadows, open-air heroin-shooting galleries, and drive-in brothels. This, of course, is a crude stereotype. The real Switzerland**** is the home of Europe’s answer to Gitmo, except that it holds more people (476 men, women, and children) and kills one of them now and then (sound familiar?). It’s a land that values simple things, like racial purity (sound familiar?), and that tolerates all religions except the ones that it doesn’t (hello!).

Actually, until this moment, I’d never realized just how much Switzerland and North Korea have in common. There may be enough similarities that, with a little imagination, you could view Switzerland and North Korea as moral equals.***** One logical reaction to this would be to reject everything that any Swiss person says about North Korea — ever — regardless of its substantive merit.****** Another possible response would be to call for Switzerland to use its financial power to alter how Kim Jong Un uses North Korea’s wealth and rules over its people.

This latter view is now advanced by U.N. Watch, a Swiss NGO. Despite the fact that they are Swiss, perhaps we should suspend logic briefly and hear them out. After all, U.N. Watch is really just publishing a call “by 20 North Korean defectors,” including several survivors of North Korea’s prison camps, for the Swiss Government to block Kim Jong Un’s slush funds. I’ve reprinted the letter in full below the fold, but here is the gist of it:

In conclusion, based on international law and Swiss domestic law, prior Swiss precedents, and the basic principles of morality and humanity, we respectfully urge Switzerland to immediately freeze all assets of the North Korean leadership, whether held in their names or those of their associates, that are located within its territory.

Even better, the Swiss government could make every centime of those deposits available to buy food—provided the distribution of those purchases was better monitored than, say, the Oil-for-Food program, or the World Food Program’s current North Korea operations. There is a catch, of course. Funds that are blocked, as opposed to confiscated, still belong to the North Korean government. But surely Kim Jong Un wouldn’t deny starving people their fair share of his vast wealth out of spite alone.

~   ~   ~

* Or so say the unverified rumors. I guess you could verify the exports from trade statistics, but I hesitate to believe that anyone who knows what’s on Kim Jong Un’s table is telling.

** I wish this was a tasteless joke, but the North Koreans really did call this a “serious human rights abuse.” The value of the ski lifts, at $7 million, is almost exactly the same amount as what Switzerland donated to North Korea as humanitarian aid the same year.

*** Actually, it’s impossible to estimate that percentage without knowing how big the slush funds are or where they’re deposited, but if you divide $7 million by $1 billion, you get 0.007, or 0.7%.

**** Disclaimer: Author may not have actually been to Switzerland.

***** Especially if you’re really, really high.

****** Some might say that’s especially so of one who called the U.N. Commission of Inquiry’s report on North Korea’s crimes against humanity “a massive exaggeration.” The best thing that can be said of most Holocaust deniers is that they’re merely vicarious, post-hoc deniers. This cannot be said of Felix Abt.

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Must Read: Bruce Klingner on North Korea sanctions

Writing at the blog of the (cough, cough) Korea Economic Institute, Klingner, a former CIA analyst and a scholar at the Heritage Foundation, hammers home the weakness of our North Korea sanctions and their enforcement.

While still at the State Department, Campbell realized that “Burma had much more in the way of sanctions” than North Korea and correctly, if belatedly, concluded that “Clearly we have not been successful at putting substantial pressure on North Korea [and] it would be possible for us to put more financial pressure on North Korea.”

He is absolutely right about this.  And he’s not alone among Obama Administration officials acknowledging that there is far more it could do.   In 2009, the State Department’s sanctions czar commented that the administration was considering additional measures against North Korea. U.S. Six Party Talks negotiator Glynn Davies said in 2013, “I think that there are always more sanctions we could put in place if needed.”  President Barack Obama promised in 2013 a “significant, serious enforcement of sanctions” and a year later that the U.S. would consider “further sanctions that have even more bite.” A U.S. official said recently that Washington was considering a “list of blood curdling sanctions.”

The obvious question is why the Administration has not followed through.

Washington has targeted a mere 62 North Korean entities, primarily for illicit activities and weapons of mass destruction. By comparison, the United States has imposed more comprehensive sanctions against the Balkans (231 entities), Burma (164), Cuba (397), Iran (several hundred), and Zimbabwe (161).

The U.S. has targeted Zimbabwe, Congo, and Burma for human rights violations yet has not taken action against North Korea seven months after the UN Commission of Inquiry accused Pyongyang of human rights violations so egregious as to qualify as crimes against humanity. Nor has Washington designated North Korea as a primary money-laundering concern as it did Iran and Burma.

Well … yes!

I understand that a counterpoint post will follow in due course. I hope that counterpoint will do more than ring the same old cowbell. It’s getting very hard to deny that the old ideas have failed. After 20 years of engaging the wrong people, Pyongyang isn’t engaging us back, reforming, or disarming. We’re at a point where we’re entitled to ask for more plausible alternatives. No amount of doing the same thing over and over will lead us to a different result.

MUST READ: WSJ on Bureau 39 and North Korean money laundering, post-BDA

The Obama Administration has never talked much, or done much, about North Korean money laundering. There is a tendency to assume that a problem that isn’t discussed isn’t a problem at all, but The Wall Street Journal‘s Alastair Gale has just interviewed some senior defectors with inside knowledge of North Korea’s money laundering, and the product of those interviews was some outstanding reporting. Gale’s interviews confirm the continued importance of Bureau 39 to North Korea’s regime, and that it continues to engage in and profit from illicit activity:

High-level defectors, security officials and analysts say the fund still enables current ruler Kim Jong Un to underwrite comfortable lifestyles for the upper tier of North Korean society to ensure their support. His father, who died in December 2011, was known for throwing lavish parties for officials and importing luxury items such as cognac for himself and the elite.

Analysts and security officials say the execution of Kim Jong Un’s uncle, Jang Song Thaek, late last year may have been because Mr. Jang had interrupted the flow of funds to Office 39. [Alastair Gale, Wall Street Journal]

Admittedly, this much won’t be terribly surprising to many readers, but what I’ve long wondered was how North Korea has hardened its finances to avoid a recurrence of the Banco Delta Asia fiasco, in which a single bank became a point of vulnerability that, when closed off, nearly suffocated the regime itself. That is why Gale’s companion Q&A is, by far, the more interesting read, and possibly the most interesting thing I’ve read about North Korea all year:

How are financial transactions done for North Korea’s trade?

But because of the Banco Delta Asia sanctions, North Korea now does transactions through personal bank accounts under individuals’ names. So, for example, if there’s money from exporting zinc, North Korea divides it among a few individuals’ accounts. Likewise, an order may come from North Korea for individuals to pay out from their accounts to a certain company for an import shipment. Such accounts are in China and Macau. North Korea also works through small regional banks in Italy, Russia and Africa.

To understand the significance of these reports, you first have to understand how money laundering works, and the critical fact that it requires some legal lines of business to conceal the proceeds of the illicit ones. Law enforcement uses the terms “placement” and “co-mingling” to describe the process of blending the legal and illicit proceeds to disguise their origin, and to allow the launderer to claim that it’s all legit.

The co-mingled funds are then invested, spent on goods that are re-sold, and transferred multiple times to hide their origin and ownership. This is known as “layering.” Only then is the money used to buy Swiss watches, Italian yachts, aluminum tubing, cell phone trackers, and maraging steel. None of which is news to the Treasury Department.

What do you know about trade of weapons and other illicit items?

People come from North Korea to do individual deals for nuclear and missile material imports. Trade representatives located overseas don’t really know what’s happening. I was not involved with counterfeiting but I saw people around me getting involved with sales of drugs and counterfeited cigarettes. Drugs are sold in China, Taiwan and Japan and cigarettes mostly to Indonesia.

It’s uncertain whether the state is still involved with narcotics sales. But Kim Jong Un doesn’t care how the money is made if someone can make a million dollars.

This suggests two paths to exerting effective financial pressure on North Korea, either of which would be possible under H.R. 1771.

The first, which would be far less likely to be effective without the cooperation of China and other member states, would be to pursue the individual North Korean agents and accounts used for co-mingling, structuring, layering, and laundering North Korea’s offshore assets money. The term Marcus Noland has coined for this is “whack-a-mole.” This would be extremely resource-intensive for financial investigators. Like the process of bankrupting Al Qaeda, it’s a process that would take years. To be as effective, it would involve the designation of hundreds of individuals, entities, and assets. This clearly isn’t the case today; a total of 62 North Korean entities and individuals have been designated in a decade, most of them during the Bush Administration.

Once Treasury designated an individual or account as North Korean property, the bank holding the deposit would have little choice but to cooperate with Treasury. They key, of course, is identifying the asset as North Korean and associating it with illicit activity in the first place. Treasury’s means to identify non-dollar assets are much more limited if the jurisdiction that regulates that currency doesn’t cooperate.

The obvious limitation of this strategy is the lack of financial intelligence to implement it. The U.S., Treasury typically gathers financial intelligence through the Currency and Transaction reports (for transactions over $10,000), and Suspicious Activity Reports filed by banks. Needless to say, not all jurisdictions require North Korea to report its transactions in such detail, although the Financial Action Task Force has made good progress toward setting base lines for transaction reporting.

That limitation could be remedied if the next U.N. Security Council resolution expands on the “enhanced monitoring” requirement of UNSCR 2094 and requires member states to impose specific reporting requirements on transactions by North Korean persons and entities, and to share those data with the U.N. Panel of Experts, and with member state regulators. This, in turn, would create an international database of North Korean financial data that would be invaluable to regulators in identifying North Korean money launderers, procurers, and proliferators.

Such a database wouldn’t necessarily require the U.N.’s consent, but could be done under the umbrella of the Financial Action Task Force or the Proliferation Security Initiative. On the other hand, it’s hard to expect other nations to enhance their monitoring of North Korean transactions when the U.S. Treasury Department’s own sanctions regulations are as weak as they are, and don’t even require the licensing of most investments, loans, or other financial transactions in North Korean property. It would be fair to say that the U.S. itself is out of compliance with this provision.

The near-certainty that China would cooperate as little as possible, however, also calls for a second approach — to apply a rebuttable negative presumption to all North Korean entities and assets. That presumption finds some support in the burden-shifting language of UNSCR 1718 (“ensure that any funds … are prevented from being made available … for the benefit of such persons or entities”) and 2094 (“resources, including bulk cash, that could contribute to the DPRK’s nuclear or ballistic missile programmes”). Treasury could then apply appropriate exemptions under section 207 of the NKSEA for in-kind purchases of food, medicine, humanitarian goods, consular activities, and other legitimate exempt activities. North Korea’s banking system would be a particular vulnerability — collectively, North Korean banks are the BDA of today.

A combination of these strategies, but one that relied more heavily on the second approach, proved highly effective against Iran and Burma.

A strategy that falls somewhere between these approaches would be the designation of North Korea as a primary money laundering concern. This, along with the discretionary sanctions authorities in NKSEA section 104(b)(2), would allow Treasury to require banks known to service large numbers of North Korean customers to provide enhanced transaction reporting of their dollar-based transactions. This limitation on access to the financial system would be so costly that it could, by itself, cause banks to refuse all North Korean business. It would also help regulators identify suspicious individuals, entities, accounts, and transactions for specific designation.

The secondary effect of this strategy would be to channel North Korea’s dealings into a few financial nodes. Some of those nodes, no doubt, would be the scavengers of the financial ecosystem, the next Banco Delta Asias of the world. Those entities would then be easier to identify and designate as primary money laundering concerns themselves. Others, however, would be foreign financial institutions licensed to handle legitimate, transparent transactions as specifically authorized under section 207(d).

That would be a mechanism to force North Korea to accept financial transparency as a condition of access to the financial system, and would give U.N. member states a wide degree of control over how North Korea earns and spends its money. It would effectively put the North Korean economy into financial receivership, as responsible national governments sometimes do with corrupt unions and banks.

~   ~   ~

Correction: A previous version of this post incorrectly stated that the reporter, Alastair Gale, interviewed the subjects of his report in Leiden. Mr. Gale writes in to say that the interviews were actually done in Seoul. Thanks to Mr. Gale for spotting and correcting the error, and for his outstanding reporting for this story.

Former Obama Admin. official: Our N. Korea sanctions are weak and our policy is stuck

The Obama Administration’s North Korea team is stuck. Its thirst for fresh blood is so dire that it recently asked Keith Richards whether he still has the number of that secret clinic in Switzerland.* Don’t take my word for it. Last Friday, former Assistant Secretary of State Kurt Campbell spoke at the Center for Strategic and International Studies, as a friend and spy of mine was sitting in the audience (thank you). Campbell’s remarks are worth listening to in full, but the money quote — which went unreported in the press despite its significance, and despite the fact that Campbell emphasized it and closed with it — starts at 20:19:

And I must say — I’ll just conclude with this — when we think about our overall tool kit, there is one element of our strategy that I don’t think people fully appreciate. We often think of North Korea — I certainly did — as one of the most sanctioned countries in the world, with almost impossible objective … obstacles for people wanting to travel, invest, or the like.

It turns out, when I was at the State Department, working on Myanmar, or Burma, comparing Burma to North Korea is night and day. Burma has MUCH more in the way of sanctions and challenges associated with interactions. And I do think if we faced a set of further challenges with respect to North Korea, it would be possible for us to put more financial pressure on North Korea.

And I think we need to let our Chinese friends know and understand that some of the things that have been contemplated by the new regime, if followed through on, would entail and involve a reaction that is much more strenuous than [what] we’ve seen in the past. And I think that element of our diplomacy is likely to be necessary as we go forward. [Kurt Campbell, Speech at CSIS, Sept. 5, 2014]

Hallelujah: someone actually read the sanctions regulations for once. From this day forward, you’ll no longer have to take my word for that, either. Campbell may not know that Treasury recently relaxed Burma sanctions regulations, but his point stands — until quite recently, Burma sanctions were comprehensive, reached all kinds of trade and investment that used the dollar-based system, and included strong financial sanctions. Unlike North Korea, Burma is listed as a primary money laundering concern. Unlike North Korea, Burma’s human rights violators were specifically targeted.

Thus, contrary to a widespread misconception, our North Korea sanctions are not maxed out; in fact, they are relatively weak. Those of you in the news business owe it to your readers to challenge that assumption before you print it. Start by asking the “expert” who repeats it whether he’s actually read the sanctions laws or regulations. Factual ignorance is not entitled to a place of equivalence in any policy debate.

It gets worse. Yonhap did quote another part of Campbell’s speech, in which he described how “many U.S. government officials handling North Korea are suffering from ‘fatigue and a sense of exhaustion’ in terms of strategies, after various tools, including pressure, have failed to make progress.” That’s interesting, but without the other part of his quote for context, it could leave you thinking that sanctions have failed as an instrument of policy. What Campbell really said is that we’ve never fully harnessed their potential.

Campbell also said, “We are in a set of circumstances now where it’s not clear fundamentally the way forward.” He observed that Kim Jong Il’s playbook, and the State Department playbook for responding to it, really aren’t working anymore, and that many of the North Koreans we used to talk to aren’t around any more, for various reasons. Efforts by a generation of policymakers to effect changes, including domestic reforms in North Korea, haven’t worked. As a result, sentiment here and in Northeast Asia has shifted, and people in the U.S. and other countries have migrated to the view that reunification, not continued separation, is in the best strategic interests of most of the major players in Northeast Asia. He called for more subversive information operations, including broadcasting, and for stronger diplomatic efforts with China, and especially with South Korea, to pave the way for reunification.

At which point, a gargantuan white mustache sprang from Campbell’s upper lip.

Yes, I’m aware that other former State Department types, specifically Robert Gallucci and Stephen Bosworth, are out there saying very different things. Yet despite the relative recency of Campbell’s tenure and his relatively higher place in State’s hierarchy, the press largely ignored the key part of Campbell’s remarks, but covered Gallucci and Bosworth’s widely.

~   ~   ~

I have to think that if the Obama Administration disagreed with Campbell’s assessment, it wouldn’t have just transfused its North Korea team so thoroughly that the reader benefits from a diagram. Notably, Chief Negotiator Glyn Davies will move along to an ambassadorship elsewhere (possibly Thailand), Syd Seiler has moved from the White House National Security Staff to replace Davies, Allison Hooker will move from State to the NSS to replace Seiler, and Sung Kim will be a “special representative,” whatever that means.

The first thing Seiler did was to do no harm, by making it clear that the U.S. would not, contrary to rumors, hints, and China’s increasingly noisy demands, lower the bar on North Korea’s denuclearization to resume six-party talks, something that would effectively recognize North Korea as a nuclear state.

“We are not ideologically opposed to dialogue with North Korea, nor have we placed insurmountable obstacles to negotiations in our insisting that North Korea simply demonstrate it will live up to international obligations and abide by international norms and behavior,” he said in a speech at the Center for Strategic and International Studies.

“The bar has not been set too high by insisting that denuclearization talks be about denuclearization,” he said. [Yonhap]

That’s a lovely sentence for its elegance and clarity, and under the same circumstances, I probably wouldn’t have put it any differently. Seiler then summarized by saying that, “clearly, the ball is in Pyongyang’s court.” See also.

OFK regulars know that I haven’t been fond of Glyn Davies since this episode several years ago, and that the OFK archives have an elephantine memory. Josh Rogin described Davies as “a nuclear technology and Europe expert, having most recently served as the U.S. permanent representative to the IAEA in Vienna.” By contrast, Seiler has a very deep background in Korea. He’s a graduate of Yonsei University, has a Korean wife, and had nearly three decades of Korea experience at CIA and DNI before he went to the National Security staff. You’d expect such a man to know what a mackerel should cost, and how to haggle for a fair price. It helps that Seiler is no fool, either:

Like his predecessor, he agrees with the South Korean government’s North Korea policy and believes that the North should not be allowed to stall for time or be rewarded simply for talking.

A diplomat who has known Seiler for more than 10 years said, “He knows how the North cheated the U.S. and South Korea in the process of nuclear development.”

A Foreign Ministry official said, “If Russell, an expert on Japan, takes charge of Chinese and Japanese affairs as senior advisor at the NSC, Seiler will have enormous influence in Korean affairs.” [Chosun Ilbo]

If personnel is policy, then, the replacement of Davies by Seiler could herald modestly better policy. (If only we could have Kurt Campbell back….) At State, Seiler joins Danny Russel, his former White House colleague, who is now Assistant Secretary of State for East Asian affairs. The White House says that this shake-up doesn’t foreshadow a change in its North Korea policy, but that’s standard White House talk; the consequence of any other response would be a year of briefings, hearings, interviews, listening tours, and op-ed wars.

Seiler said the U.S. policy on North Korea is composed of three key elements — diplomacy, pressure and deterrence, and that Washington will continue to seek robust implementation of U.N. Security Council sanctions resolutions and its own sanctions on Pyongyang.

But he also held out the prospect of easing sanctions.

“If DPRK makes the right choice, returns to the negotiating table and embarks on a credible path of irreversible denuclearization and begins to comply with its international obligations and commitments, the appropriateness of sanctions will of course be reviewed,” he said. [Yonhap]

There’s little good that I could say about the robustness of that enforcement so far, or the quality of the diplomacy that’s been trying to hold our regional coalition together, but one can always hope. And not without some basis:

Douglas Paal, vice president for studies at the Carnegie Endowment for International Peace, also said that the United States is unlikely to lower the bar for restarting the nuclear talks. Reported personnel changes in the U.S. government rather point to the opposite, he said.

“Overall there is nothing that I can see that suggests the U.S. government is even considering softening its stance on the many issues between Washington and Pyongyang. The new U.S. personnel changes suggest, in fact, the opposite,” he said. [....]

“Neither can be viewed as soft toward the North,” the expert said of Seiler and Kim.

Paal also said that the “secret trip” that American officials reportedly made to North Korea, even if it is true, must have focused only on the three American citizens detained in the North. The three men’s appearance before CNN cameras a week later reinforces this suspicion, he said. [Yonhap]

If Russel, Kim, and Seiler have similar views and work well together, they have the potential to make significant policy changes while a politically weakened administration is otherwise distracted by crises in the Ukraine, Iraq, Syria, Libya, Afghanistan, Pakistan, and Gaza. That almost mirrors the situation of Chris Hill in 2006, when he ran away with a politically weakened Bush Administration’s North Korea policy while Bush was distracted by Iraq, Iraq, Iraq, and Afghanistan. And as I’ve noted, there are some signs that the administration could be laying the groundwork for a harder line, although I doubt that it will be more than incrementally harder.

There are alternative theories, too. One that seems plausible to me is that Washington’s tactic of strategic patience, the trend of ‘not doing anything,’ has not changed.” That’s likely because doing nothing is what governments usually do when no single view prevails. And I’m far from certain that any single view prevails.

The Hankyoreh‘s analysis isn’t as plausible, but it’s much richer in amusement. It begins with rumors of another secret diplomatic trip to North Korea and runs feral with them. Although the administration would neither confirm nor deny the rumors, they probably have some basis in fact. Even so, they almost certainly do not mean “that the US will make an effort before the mid-term elections to improve relations with North Korea in order to manage the situation on the Korean peninsula” and ransom out Kim Jong Un’s new hostages. According to what insider or authority, you ask? “[S]ome predict,” says the Hanky, after a three-block sprint from the pojangmacha behind the bus station, gochujjang-stained notepad in hand.

Maybe I shouldn’t be too dismissive of something that’s been tried before, but in light of today’s political environment and North Korea’s conduct since 2012, this is so delusional that it’s adorable. The Hanky really seems to believe that a significant number of Americans (a) cares about North Korea at all, (b) wants better relations with North Korea, and (c) would be more likely to vote for the President’s party if its cuts a pre-election deal with North Korea, rather than much, much less likely. That the President’s pollsters have identified Peace Studies grad students as a decisive voting bloc in Arkansas, Louisiana, West Virginia, Alaska, and North Carolina. That, after the Bo Bergdahl ransom, the President basked in the gratitude of a grateful nation.

I don’t have any special insider knowledge here, but I’ll go out on a limb and express my doubt that the White House would want that experience again between now and November 4th, especially for the likes of a doofus like Matthew Todd Miller, or anyone else who’d be dumb enough to visit North Korea of his own diminished volition. I’d be surprised if there’s a deal at all, and I’d be astonished if its terms are made public before the election, including the Louisiana runoff, is safely in the rear-view mirror.

*  Or so I’ve heard somewhere. It may have been Alex Jones. I lost the link.

U.N. Panel of Experts to investigate M/V Mu Du Mong

A U.N. panel that upholds sanctions against North Korea’s nuclear weapons program is sending personnel to investigate a North Korean cargo ship moored at a Mexican port, U.N. diplomatic sources familiar with the matter told Kyodo News. [Yonhap]

“Sending personnel” suggests that the POE will inspect the ship. The POE also sent personnel to inspect the M/V Chong Chon Gang after Panamanian authorities found it smuggling weapons last year.

The travels of the M/V Mu Du Bong were first brought to our attention by investigative journalist Claudia Rosett, while it was crossing the Gulf of Mexico after a stop in Cuba. When the ship ran aground in a Mexican port, I called on the U.S. government to ask Mexico to search it, explaining that under UNSCR 2094, Mexican authorities had the authority, and arguably a duty, to do so (see paragraphs 16 and 17).

The Treasury Department has since sanctioned the Mu Du Bong and 17 other North Korean vessels, probably for their associations with Ocean Maritime Management, the North Korean front company that brokered the shipment of arms from Cuba to North Korea aboard the Chong Chon Gang. NK News’s Leo Byrne has also done an excellent follow-up report, finding that Mexican authorities had impounded the Mu Du Bong for lack of proper insurance.

See also Capitol Hill Cubans.

~   ~   ~

Update: This post was edited after publication to correct the spelling of “Chong Chon Gang.”

N. Koreans are bootlegging liquor in Muslim countries

Last week, NK News published a detailed report on a black market in alcohol run by North Korean diplomats in Pakistan. Almost simultaneously, The Daily NK also reported that two North Korean “chauffeurs,” dispatched by the regime to Qatar, and nominally working for private companies there, had been arrested for bootlegging.

Two North Korean men are being detained in Qatar under suspicions of the distribution of illegal liquor; Voice of America [VOA] reported on September 4th, citing the Gulf Times, Qatar’s English language newspaper.

The men were alleged to have been selling the liquor to North Korean laborers there, as well as to citizens in surrounding nations, and if found guilty of the crime, will be deported back to North Korea. The Gulf Times was unable to confirm when or where the men were first arrested. [Daily NK]

Selling moonshine to thirsty construction workers is a novel, and typically exploitative, way to supplement those “loyalty” taxes expatriate workers must pay to the regime.

The report also references previous North Korean bootlegging arrests in Qatar, and arrests or investigations in India, Bangladesh, and Kuwait. According to a separate Gulf Times report from July of this year, another North Korean, who was working as an interpreter and has access to a car, was also arrested by Qatari police for selling alcohol and illegal drugs. (See also.)

North Korea’s bootlegging operations are not new, and probably as old as North Korea using diplomatic pouches to smuggle contraband and cash. Curtis Melvin points to a 1976 article in Time magazine about North Korean liquor and cigarette smuggling in Sweden and Denmark.

The earliest such report I found from the Middle East is from 2008, when “three North Koreans who converted their apartment into an alcohol factory” were arrested by Kuwaiti police, who also “seized 186 bottles of alcohol, 34 brewing barrels and gallons of alcohol.” There’s even a photograph.

Two other articles from The Arab Times, both undated, may describe separate seizures of 80 bottles and 200 bottles of liquor in Kuwait. Alcohol-related arrests of North Koreans are frequent enough there that annoyed South Korean diplomats monitor the local newspapers and ask them to clarify any reports that “Koreans” have been arrested for bootlegging.

With the exception of the NK News report from Pakistan, the reports do not directly implicate North Korean diplomats, but it’s difficult to imagine that overseas North Korean workers, whose movements and remittances are always carefully monitored — indeed, who have no means to send money home to their families directly — would engage in such activities without tacit official approval, and without being expected to hand the proceeds over to their regime handlers. The Chosun Ilbo described the arrangement this way, in a 2009 interview with a source in Abu Dhabi, in the UAE:

One source in Abu Dhabi said, “North Korean workers make between $300 and $500 a month, but the North Korean government confiscates $150 and even $250 as loyalty payments, leading to a lot of conflict.” North Korean labor export companies skim off an excessive amount of money from salaries. The level of discontent recently prompted the North Korean government to dispatch security agents who trawl construction sites on weekends to provide ideological “cleansing” sessions to workers. [....]

“The North Korean companies that sent the workers abroad are aware of the bootlegging but are turning a blind eye as long as the laborers pay portions of the profits,” one local source said. [Chosun Ilbo]

The construction companies, in turn, are almost certainly under the direct control of the local North Korean embassies. This arrangement has the advantage of putting two layers between the embassies and the retailers. That gives the embassies plausible deniability, and avoids disruption to the other business operations the embassies are involved in.

The real test of the regime’s culpability, of course, is how the profits move. At the end of the day, I’d wager that nearly all of the profits end up deposited in regime-controlled accounts, co-mingled with the proceeds of legal businesses to disguise their illicit origins, and wired through multiple shell companies to other regime-controlled offshore accounts.

I confess to some ambivalence about this line of business. I can certainly think of worse things North Korean diplomats have smuggled, but you can’t pick and choose what you allow a criminal organization to sell. You have to uproot all of it or none of it. And on balance, I don’t suppose North Korea’s bootlegging is any more likely to liberalize the Middle East than a few ChocoPies are to liberalize North Korea.

Yet again, as with the recent and not-so-recent arrests of North Koreans for illegal gambling (second section), we see that North Korea has no moral objection to capitalism, as long as it’s state capitalism. It just objects to granting economic liberty to its subjects, and to freeing them from hunger and dependency.

Just like France had an unparalleled defense wall on the German border in 1940

The spokesman said that the U.S. has instituted an “unparalleled international sanctions regime that has successfully impeded proliferation, constrained the growth of North Korea’s nuclear and missile programs, and driven up the cost Pyongyang’s misbehavior.” [Yonhap]

What utter nonsense. It would be charitable to accuse him of lying. I doubt he has any idea what he’s even talking about.

Radio Free Asia interviews me about North Korea sanctions.

Link here; hat tip to Adam Cathcart.

Top N. Korean money man defects to “third country”

A senior North Korean banking official who managed money for leader Kim Jong Un has defected in Russia and was seeking asylum in a third country, a South Korean newspaper reported on Friday, citing an unidentified source.

Yun Tae Hyong, a senior representative of North Korea’s Korea Daesong Bank, disappeared last week in Nakhodka, in the Russian Far East, with $5 million, the JoongAng Ilbo newspaper reported. [Reuters, Ju-Min Park and James Pearson]

Daesong Bank is sanctioned by both the U.S. Treasury Department and the European Union, and is closely linked to the infamous Bureau 39. This guy could know where a lot of bodies are buried, metaphorically speaking. Also, literally.

The Joongang Ilbo, which broke the story, says that Yun “officially worked as president of the bank” and “was in charge of raising and managing slush funds for Kim in Northeast Russia.” Apparently, Yun made a withdrawal of about $5 million from that slush fund before his defection, and North Korea has a substantial penalty for early withdrawal.

North Korea’s activities in the region include its infamous logging camps and the recently-sanctioned, Vladivostok-based Ocean Maritime Management, the agent for the Chong Chong Gangthe Mu Du Dong, and other sanctioned vessels. And, God-knows-what else.

“We were tipped off that Jon Il-chun, the first deputy director of the Central Committee of Workers’ Party who was effectively in charge of Office 39, is currently in a very unstable position in an ongoing power struggle [in the ruling party] following several recent incidents,” another source said. 

The allegation suggests to Seoul officials that in his third year of power, Kim Jong-un may be having problems managing his financial affairs.

Some sources said Yun’s defection could be part of the aftermath of the brutal execution of Kim Jong-un’s uncle, Jang Song-thaek, in December 2013.

North Korean officials in charge of foreign currency in China and other Western countries were allegedly part of Jang’s inner circle, sources said, and some of them felt threatened by Jang’s death and have vanished. [Joongang Ilbo]

After Jang’s purge, there were reports that dozens of North Korea’s offshore financiers had been called home, and (wisely) didn’t come. The Joongang Ilbo has done the best reporting of North Korean money laundering of all of the Korean papers.

God, how I hope the CIA and Treasury will have a chance to debrief this man. And that he brought his laptop with him. And that he isn’t the only one who has reached safety in the embrace of “third-country” intelligence officers.

Hat tip to a reader and friend.

Australian MP calls for divestment from mining venture in N. Korea

To maintain its iron-fisted hold over the North Korean population, the Pyongyang regime needs hard currency, and it is clear that these projects could provide billions of dollars to the North Korean leadership.” [Michael Danby, MP]

It won’t surprise you that I oppose any investment in an unreformed North Korea that continues to slaughter its own people and menace its neighbors. I believe that those who justify investment as a driver of reform have it completely backwards, that investing in the status quo only perpetuates and reenforces it, and that denying the regime the hard currency that sustains it is the only way to force change. As the North Korea human rights movement gains strength, I hope it will catalyze a divestment movement like the one that helped destroy apartheid.

But that’s not the only question I have about this particular investment. The Australian concern peddling this project is a British Virgin Islands-registered company called “SRE Minerals Limited,” which is doing so as part of a joint venture with a North Korean entity known as the “Natural Resources Trading Company of the DPRK,” or alternatively, as “Korea Natural Resources Trading Corporation.” North Korea watchers know that as a general matter, “North Korea’s mining resources are a major source of revenue for its nuclear and missile programs.” But what about this specific entity?

As the U.N. Panel of Experts recently reminded us, North Korean entities are notorious for their use of multiple similar aliases. Recalling something familiar about the name of that North Korean entity, I checked the SDN list and found several entities designated under executive orders 13382 or 13551 that have suspiciously similar names:

KU’MHAERYONG COMPANY LTD (a.k.a. CHO’NGSONG UNITED TRADING COMPANY; a.k.a. CHONGSONG YONHAP; a.k.a. CH’O’NGSONG YO’NHAP; a.k.a. CHOSUN CHAWO’N KAEBAL T’UJA HOESA; a.k.a. GREEN PINE ASSOCIATED CORPORATION; a.k.a. JINDALLAE; a.k.a. NATURAL RESOURCES DEVELOPMENT AND INVESTMENT CORPORATION; a.k.a. SAENGP’IL COMPANY), c/o Reconnaissance General Bureau Headquarters, Hyongjesan-Guyok, Pyongyang, Korea, North; Nungrado, Pyongyang, Korea, North [DPRK].

NATURAL RESOURCES DEVELOPMENT AND INVESTMENT CORPORATION (a.k.a. CHO’NGSONG UNITED TRADING COMPANY; a.k.a. CHONGSONG YONHAP; a.k.a. CH’O’NGSONG YO’NHAP; a.k.a. CHOSUN CHAWO’N KAEBAL T’UJA HOESA; a.k.a. GREEN PINE ASSOCIATED CORPORATION; a.k.a. JINDALLAE; a.k.a. KU’MHAERYONG COMPANY LTD; a.k.a. SAENGP’IL COMPANY), c/o Reconnaissance General Bureau Headquarters, Hyongjesan-Guyok, Pyongyang, Korea, North; Nungrado, Pyongyang, Korea, North [DPRK].

CHANGGWANG SINYONG CORPORATION (a.k.a. EXTERNAL TECHNOLOGY GENERAL CORPORATION; a.k.a. KOREA KUMRYONG TRADING COMPANY; a.k.a. KOREA MINING DEVELOPMENT TRADING CORPORATION; a.k.a. NORTH KOREAN MINING DEVELOPMENT TRADING CORPORATION; a.k.a. “KOMID”), Central District, Pyongyang, Korea, North [NPWMD].

To be clear, neither the “Korea Natural Resources Trading Corporation” nor the “Natural Resources Trading Company of the DPRK” is on the SDN list, but can anyone establish whether it is or isn’t an alias or subsidiary of one of the listed, blocked entities? I’ve put the question to Treasury’s Office of Foreign Assets Control; in the end, it’s their job to clarify that.

Perhaps one of my journalist friends can pursue this further.

Technically, John Kerry and the State Department didn’t violate their own Burma sanctions

… by staying in the hotel of a regime crony whose assets are blocked, but only because of the travel exemption at 31 C.F.R. § 537.210(d). Still, doesn’t patronizing a bloody-handed crony send a pretty lousy message — especially given Burma’s unsteady progress toward reform?