Our grand plans to engage North Korea must learn from their failures and evolve with the evidence

One of my cruel habits lately has been to ask the holdouts who still advocate the economic, cultural, and scientific “engagement” of Pyongyang to name a single significant, positive outcome their policies have purchased at the cost of $8 billion or more, over 20-odd years, as thousands of North Koreans died beyond our view and our earshot. I’ve yet to receive a non-sarcastic answer to that question. Yesterday, I salted this wound by pointing out that the largest remaining engagement experiment, the Pyongyang University of Science and Technology, has become a pool for hostages for Kim Jong-un, exactly as the Malaysian Embassy in Pyongyang recently was, and exactly as the Kaesong Industrial Complex will be if Moon Jae-in is foolish enough to reopen it — and if we’re foolish enough to let him draw us into this potential flashpoint for conflict (think Desert One with nukes).

It is now beyond serious debate that the Sunshine Policy (and every rebranded variation of it) has failed, and that it will never succeed as long as Kim Jong-un weighs down a throne in Pyongyang. Engagers will answer that it is essential to keep open lines of communication to prevent war. Fine, but such communications are best left to diplomats who can meet their North Korean counterparts in safe, neutral locations, not to anyone addlebrained enough to visit or take up residence in North Korea in times like these.

Engagers will also argue that North Korea will never change if North Koreans aren’t exposed to better ideas and ways of life. But if you were to interrogate the engagers and me, you’d find that I believe this point more strongly than the engagers themselves do. We differ in their belief, and my skepticism, that Pyongyang-approved engagement programs have the potential to catalyze positive change from the top down. Rather, it’s the smuggling and broadcasting of media that Pyongyang is waging an unrelenting war to suppress that have the proven potential to change North Korea from the bottom up, and for the better. Remember 2012, when the engagers figured Kim Jong-un for a Swiss-educated reformer? Instead, his signature domestic policy has been a counterinsurgency campaign — a violent war by his regime against an unorganized popular uprising. Except that in this war, only one side is organized and armed, and consequently, the other side has done all of the dying.

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The evidence that has accumulated over 20 years yields no basis — none — to believe that we will see a kinder, gentler Kim Jong-un if we just throw enough money at him. Indeed, the legacy of the Sunshine Policy is far worse than its mere failure to succeed. It has also set back the cause of reform, opening, and change by financing the machinery of oppression and terror (of both the domestic and foreign varieties) that guards the status quo.

Several years ago, for example, I linked to reports that the dreaded State Security Department finances its salaries and expenses through a China-based trading company. Since then, the Treasury Department has designated three North Korean trading companies that sell coal and iron ore — Daewon Industries, which supports the Munitions Industry Department; the Kangbong Trading Corporation, which supports North Korea’s military; and Paeksol Trading Corporation, which supports the Reconnaissance General Bureau, the spy agency that carries out most of North Korea’s terrorist and cyber attacks. To these, the Wall Street Journal‘s Jay Solomon adds another example, involved in financing North Korea’s nuclear programs.

From this evidence, it follows that we would do more to disarm and transform North Korea by targeting those companies with sanctions and bankrupting them, and by forcing the soldiers and cadres that rely on their revenue to turn to corruption, than by financing them. If we’re serious about bringing change to North Korea, our sanctions policy should preferentially target North Korea’s security forces and border guards as much as it targets its proliferation network. That’s the part of “maximum pressure” the Trump administration gets.

The even greater potential source of pressure, which the Trump administration may or may not understand, is to employ an engagement strategy that seeks to reach the North Korea people directly, using technology to bypass Pyongyang’s minders and censors. The people of North Korea are looking for that bypass from within:

Amid heightened levels of surveillance and border control, an increasing number of North Koreans in the border areas are purchasing South Korean smartphone, which they perceive as more secure from detection by the authorities.
“Most smugglers own mobile phones that enable them to communicate across the border, but recently an increasing number of residents are looking for South Korean touch-phones (smartphones). There are rumors that the South Korean phones are not as easily detectable by the devices used by the security agencies,” a source in North Hamgyong Province told Daily NK on May 1.
“Some say that residents with South Korean smartphones are able to send texts and pictures more quickly and evade detection. For this reason, individuals are paying large sums of money to smugglers for South Korean phones.” [Daily NK]

An engagement strategy that goes directly to the North Korean people has far more potential to achieve cultural, social, and political change than another rebranded variation of Sunshine. It would follow the plan I’ve written about at length and described as “guerrilla engagement” — one that directly engages North Korea’s discontented by harnessing the jangmadang economy and North Koreans’ hunger for information about the outside world. It would use entertainment and practical information (weather and market reports) as gateway drugs for those who might later opt to listen to overtly religious and political content. An essential reagent for the second phase of that strategy will be deploying the technology that not only allows North Koreans to hear our messages, but also to communicate and organize with each other. In time, it would organize and coalesce their grievances into a broad-based popular resistance movement with the capacity to broadcast photographs and video of the regime’s human rights abuses, stage strikes, deny the regime control of the market economy, and further strain the regime’s finances.

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True, the election of Moon Jae-in threatens to reanimate the old, failed approach to engagement, though without much of a popular mandate. In due course, a revival of Sunshine will collapse under the weight of Kim Jong-un’s predatory and impulsive nature, just as Kim Jong-Il’s conduct eventually discredited Roh Moo-hyun’s policy. Until then, neutralizing South Korean opposition to “maximum pressure” will require us to bargain harder with Seoul that George W. Bush or Barack Obama ever did. Moon’s election may require us to find information strategies that circumvent his obstructionism by relying on our own technological innovation, and perhaps by shifting toward a closer operational partnership with Japan.

We tend to forget that until just over a year ago, engagement and sanctions worked at cross purposes — effectively, sanctions and subsidies were mutually canceling. But consider the potential of those two strategies if we ever coordinated them. It is one thing to bankrupt the border guards, but entirely another to do so while helping smugglers bribe or evade them. It is one thing to bankrupt the security forces, but entirely another to do so while helping clandestine journalists show their abuses to the world. It is one thing to bankrupt the military’s commissary system, but entirely another to do so while empowering clandestine humanitarian NGOs to minister to, and provide for the material needs of, demoralized, hungry, and mistreated soldiers. If the Sunshine experiment was allowed so many years to double and triple down on failure, might we at least experiment with an engagement strategy designed to shift North Korea’s internal balance of power, gradually enough so that Kim Jong-un never faces the dangerous use-it-or-lose-it proposition that our loose talk of “decapitation” raises?

Engagers will say this means regime change, and it’s certainly some kind of change, but a kind that looks less like Iraq than the unkept promises of glasnost and perestroika we heard from the engagers themselves 20 years ago. As Professor Lee, Bruce Klingner and I pointed out in the pages of Foreign Affairs recently:

The failure of engagement was just as inevitable as the failure of the Agreed Framework. Its premise—that capitalism would spur liberalism in a despotic state—was flawed. After all, over the past two decades, both China and Russia have cracked down on domestic dissent and threatened the United States and its allies abroad, even as they have cautiously welcomed in capitalism. In 2003, even as it cashed Seoul’s checks, Pyongyang warned party officials in the state newspaper that “it is the imperialist’s old trick to carry out ideological and cultural infiltration prior to their launching of an aggression openly.” For the regime, engagement was a “silent, crafty and villainous method of aggression, intervention and domination.” Given this attitude, it’s no surprise that Kim Jong Il never opened up North Korea. The political change that engagement advocates promised was exactly what he feared the most.

That is to say, the Sunshine Policy could never work because it was a strategy for regime change that depended on the very people with the most to lose if it succeeded — the ruling class in Pyongyang. (Either that, or Sunshine was really a marketing strategy for overcoming U.S. objections to subsidizing Pyongyang and canceling out the effect of sanctions by clothing it as regime change. In which case, it succeeded brilliantly.)

Taking the aims of Sunshine at face value, however, its manifest failure calls for a complete rethinking. Engagement must appeal, first, to the people who seek change, rather than those who resist it. The information component of this strategy must be tailored to different constituencies — soldiers, the elites, and of course, the poor who are trapped at the bottom of the songbun scale. By engaging the North Korean people directly, we can help expand the private farming and trading that fill the markets. We can broaden the cracks in Kim Jong-un’s blockade to expand the freedom of information that really can bring social and political change. We can slow the pace of proliferation and relax the grip of the state’s oppression on the people. We can hasten the erosion of belief in Kim Jong-un’s personality cult, promote peace, and help prevent (or shorten) a war.

We will also need a separate strategy to engage the elites in Pyongyang, to persuade them not to resist change, to abstain from crimes against humanity, and to refuse (as much as they are able) to attack civilian targets in South Korea. This must be an appeal to the interests of the men with the guns. We should seek to undermine their confidence in Kim Jong-un and convince them that they have a better and safer future in a reunified Korea. That may require the difficult choice to offer some form of clemency to those who have taken innocent life, but only if they save innocent North or South Korean lives at critical moments. We must speak to them with candor about the recent purges in Pyongyang — how the status quo eventually means physical obliteration for them and a slow death in the prison camps for their families. If we employ these strategies in tandem, the elites will realize that time is not on their side, and that their reward for preserving Kim Jong-un’s reign will be physical extinction for themselves, a bleak future for their families, and a legacy on the ash-heap of history.

No pressure can ever be “maximum” if it excludes this reinvented, disruptive new approach to engagement.

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Former Treasury Undersecretary David Cohen on N. Korea, China, and secondary sanctions

A recurring theme in the North Korea sanctions debate is that most of those who really understand what our sanctions on North Korea do and don’t do, and how they work, think they can work against North Korea, if we ever bother to enforce them (see, e.g., Juan ZarateAnthony Ruggiero, Peter Harrell, George A. Lopez, and Bill Newcomb). Unfortunately, the actual experts are at variance with another group, consisting mostly of academics, retired politicians, retired diplomats, and experts in other fields, who say that sanctions either won’t work, or aren’t an alternative to a deal Kim Jong-un doesn’t even want. What most of these people have in common is a lack of any significant training or expertise on sanctions. Yet for whatever reason, some editors just can’t get enough of their op-eds, although it should be said that the editors of the Washington Post are more persuaded by the actual experts).

Because I see a very real danger that the policy views of those who’ve misjudged North Korea’s intentions all along, and who did so much to bring us to the worst nuclear crisis since 1962, could drown out the views of professional sanctions practitioners who offer us our last, best policy alternative to a devastating war, I do what little I can to amplify the views of experts who step forward to inform us. The latest example is David Cohen, who served as Deputy CIA Director and Undersecretary of the Treasury under President Obama:

In dealing with North Korea, the Trump administration should look to Iran. Specifically, it should take a page out of the Obama administration’s Iran sanctions playbook and apply against North Korea the tool used successfully to bring Iran to the nuclear negotiating table — “secondary sanctions” on those who do business with the regime. [David Cohen, The Washington Post]

As I’ve been shouting from the rooftops of this isolated outpost and elsewhere, until the reinforcements began to arrive …

North Korea is not, by any stretch, “sanctioned out.” Despite a broad set of international and U.S. sanctions, North Korea has gotten off relatively easy, especially as compared with Iran. That is largely because the United States has historically been reluctant to impose secondary sanctions to isolate North Korea, particularly against China, the regime’s principal legitimate trading partner. Certainly, the Trump administration should do its best to bring the Chinese government on board. But if China drags its feet, President Trump should proceed anyway.

And, consistent with the strategy behind the NKSPEA, hopefully soon to be strengthened by H.R. 1644

Secondary sanctions are both simple and enormously powerful. They work by presenting a stark choice to a foreign bank: It can process transactions for a bank already facing sanctions (for example, one of the many North Korean banks that have been listed by the United States) or it can maintain its access to the U.S. financial system, but it cannot do both. That presents an easy choice, because access to the U.S. financial system, which also means access to the U.S. dollar, is a practical necessity for almost any bank anywhere in the world.

Cohen then adds facts that are undoubtedly informed by financial intelligence to which he would have had access.
Adopting secondary sanctions against North Korea could cut the last tendrils of its access to the international financial system. As a recent assessment by a special U.N. committee reportedly concluded, North Korean banks and trading companies operate in China through China-based front companies. These front companies, in turn, have accounts at Chinese banks, from which they are able to do business globally, including in the United States.

Cohen then addresses the question of how “China” would react. Some experts, including some officials who continue to occupy senior posts in the State Department, insist that sanctions can’t work without Beijing’s voluntary cooperation. Certainly, there are some sanctions, such as customs inspections at China’s ports and borders, that can only work with China’s cooperation, although the NKSPEA and H.R. 1644 both have provisions to sanction uncooperative ports, shippers, and shipping registries.

I’ve also argued for a more nuanced view of “China,” in that such a large and complex country is not a monolith, but a collection of constituencies within both government and industry that would have different responses to secondary sanctions. In Cohen’s view, it’s the views of the financial sector that really matter, and just as with Banco Delta Asia, China’s banking industry responded cooperated.

When I was serving in the Treasury Department during the Obama administration, we employed secondary sanctions to significantly ramp up pressure on the Iranian government. Hundreds of foreign banks that had been transacting with sanctioned Iranian banks voluntarily severed those relationships, thereby isolating much of the Iranian banking system.

But two banks in particular continued to work with sanctioned Iranian banks. One was China-based Kunlun Bank, a midsize institution that, our financial intelligence told us, “provided hundreds of millions of dollars’ worth of financial services” to a half-dozen sanctioned Iranian banks. Despite repeated warnings to the Chinese government, Kunlun refused to stop such activity. So in August 2012, Treasury used the secondary sanctions tool and cut off Kunlun from the U.S. financial system.

What happened next is instructive. The Chinese Foreign Ministry issued a relatively tepid and formulaic protest — and, behind the scenes, the Chinese government directed Kunlun to stop. Despite what some had feared, employing secondary sanctions against Kunlun neither led China to stop cooperating on Iran nor soured our relations with Beijing in any other respect.

And just as our strategic bombing campaign against Germany only had to paralyze a few critical industries (fuel) to be effective, targeted financial warfare against Pyongyang can be effective without targeting North Korea as a whole, if it can paralyze the regime’s finances.

I’ve pushed the boundaries of the Fair Use Doctrine far enough for one day, so read the rest of Cohen’s op-ed on your own. He goes on to suggest that the White House’s saber-rattling, which I view as harmful to our interests in Korea and Japan, may be designed to show China that the alternative to sanctions would be far worse, and that enforcing sanctions is a prerequisite to effective disarmament negotiations. He then advocates for a strategy of hitting the mid-sized Chinese banks that deal with North Korea first and leaving the bigger ones for later.

I don’t object to the first part of this strategy, although I also believe that some of the bigger banks, which are more likely to have branches in New York, should be targeted now with subpoenas to audit their compliance with the new Treasury regulation cutting off North Korean banks’ provision of indirect correspondent banking services. That’s one way to get the big banks to clean up their acts without actually taking legal action against them.

Banks that turn out to have violated the correspondent ban can don’t have to be targeted with measures as drastic as designation under NKSPEA 104 or Patriot Act 311; rather, they can be hit with civil penalties such as those applied to European banks that violated Iran sanctions. Under those circumstances, I’m confident that Congress wouldn’t object to a waiver under NKSPEA 208(c). In fact, we specifically wrote the exemption in 208(c)(1) to allow banks to agree to cooperate and provide additional financial intelligence, and to clean up their acts on money laundering compliance, pursuant to deferred prosecution agreements. Our options against non-cooperative banks are not all binary or nuclear, but vary across a wide spectrum of options.

For now, it looks like the Trump administration has decided to give China an opportunity to act on its own. I hope that opportunity is brief. Despite reports of fuel shortages and non-functioning ATMs in Pyongyang, you can color me skeptical; I’ve seen it all before. China’s strategy seems to be to generate headlines that it’s enforcing sanctions, only to ease off the moment those headlines reach the eyes of busy White House and congressional staffers. Then, as soon as Washington quits paying attention, it’s back to business as usual. The latestdevelopments with the so-called coal ban are only the latest example of China’s long record of broken commitments to enforce sanctions against Pyongyang.

I don’t object to giving China a brief opportunity to cooperate voluntarily, but it’s important to understand a few things. First, with China, the negotiation really begins after the contract is signed. Second, cheating is inevitable. Third, all of those diverse constituencies in China are watching how we react very carefully. Fourth, deterrence is as important in financial matters as it is in military matters. In the same sense that we keep forces in South Korea to deter North Korea from a military attack, having a strong legal and investigative team in place can help deter China from abusing our financial system. Right now, that force is badly understaffed and lacks political backing — and China knows it. There is no better way to show Beijing — and more importantly, China’s banking industry — that we’re serious than by staffing up the inter-agency working group that will investigate, enforce, and prosecute the violations of our money laundering laws that keep Kim Jong-un on his throne.

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전쟁이 아닌 법으로 북한의 핵무기를 어떻게 멈출 수 있는가?

안녕하세요, 한국의 친구들. 저는 워싱턴 DC에있는 미국 변호사입니다. 1998 년부터 2002 년까지 저는 한국에서 군인이었습니다. 저는 아름다운 문화와 사람들로 인해 한국에서의 생활을 사랑했습니다. 1999 년에, 저는 가장 정직하고, 아름다운 사람을 만났고, 그래서 저는 그녀와 결혼했습니다.  오늘 우리에게는 두 명의 자녀가 있습니다.

한국은 제가 사는 한 제 삶의 일부가 될 것입니다. 그래서 저는 북한에 대해 걱정하고 있습니다. 우리는 전쟁을 피해야만 하지만 우리는 또한 대한민국을 자유롭게 해야 합니다.

1998년 젊은 군인으로 처음 한국에 도착했을 때, 한국은 재통일에 대한 희망으로 들떠 있었습니다.

김대중이 대통령이었고, 북한의 경제를 변화시키고 개방하기 위해 원조와 북한과의 무역을 약속했었습니다.

김대중 정권아래 그리고 후에 노무현 정권에서 북한에 100억 달러를 지원했습니다. 그러나 그 누구도 북한이 그 돈을 어떻게 사용했는지 알 수 없습니다. 개성과 금강산은 단지 시작에 불과했습니다. 이제 북한은 외국 공장들로 채워 져야만 합니다.

김대중 정권이 그의 정책을 시행한 후 20년, 이제는 이 정책이 성공적인지를 알아 볼 시간이 되었다고 봅니다. 실패했다면, 햇볕정책의 목표가 달성될 가치가 있는 것일까요? 그 목표를 달성할 다른 전략은 없는 것일까요? 햇볕정책은 북한을 변화시키지 못했습니다. 남한의 원조는 핵실험이라는 그리고 남한의 영토 공격으로 그리고 남한의 장병들을 살해하

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What North Korea sanctions? Busting the myths in five charts and one long essay.

Bruce Klingner, Professor Lee, and I have a new piece out in Foreign Affairs, in which we continue to ask the question, “What North Korea sanctions?” As regular readers know, I’ve spent the last several years waging | a jihad | against junk analysis and fake expertise about North Korea and sanctions, usually from people who don’t bother to read or research them, and who often flat-out misrepresent what they are and do. These people feel compelled to argue that sanctions can’t work because the possibility | that | they | can | work undercuts the argument that we should keep trying to appease our way out of this problem. For reasons that must be more psychological than empirical, some people are just stuck on the idea that we can only seize the Holy Grail by building that Large Wooden Badger, and that sanctions are an impediment to diplomacy rather than an enabler of it.

I keep a mental tally of these people, to which I’ve added David Kang (“Given the extensive sanctions already imposed on the country, it’s hard to believe that even more pressure will somehow lead the country to choose a new direction.”), Kevin Gray (“North Korea remains one of the most heavily sanctioned states in the world today.”), and Jeffrey Lewis (“[W]e imagine that our sanctions are somehow insufficient or, more darkly, being undermined.”)

Kang and Gray are mostly polemicists anyway, so I can easily believe that neither has actually read what the U.N. Panel of Experts has published on this topic. Gray does add some useful research in his post, although (by which I mean “because”) it undercuts his conclusion that sanctions can’t work. Lewis, on the other hand, clearly has read portions of the U.N.’s reports, which is more damning, because it suggests that he’s selectively ignoring the overwhelming | evidence | thatsanctions | are | indeed | being | undermined | by | China.

Happily, we now have more data to push back this tide of misinformation. In my inbox this morning was an email from David Maxwell, pointing to a new online tool called the Enigma Sanctions Tracker, which has done something I’ve meant to do for years and never found the time to do — make a graphic, comparative representation of how North Korea sanctions stack up against other sanctions programs.  And as you can clearly see, North Korea is not the most sanctioned country … not by the range of a Taepodong II.

One important caveat here is that while the vast majority of the WMD designations are against Iran and other targets, a significant number are against North Korean targets, and a small number of third-country enablers. Note that Cuba has fallen on this list because of a large number of sanctions removals. The Zimbabwe number seems suspiciously high; I’d calculated that Zimbabwe is about on par with North Korea if you count all the North Korean ships and planes that have been designated individually. Overall, however, this looks about right to me. Here’s another graph, comparing North Korea designations (yellow) to those of other targets (light gray).

We can also see how it took a push from Congress to get the Treasury Department off the dime. The next graph notes North Korea’s third nuclear test in 2013, but doesn’t mention that shortly thereafter, Congress told the administration that it had started drafting what later passed as the North Korea Sanctions and Policy Enhancement Act. And just look at what happened in 2016, when that law passed — a yuuuge spike in designations.

We can also see that even today, we are still not designating North Korea targets faster than we’re designating targets in the Ukraine, Russia, or Iran. This isn’t to say that those targets don’t richly deserve to be designated, but it’s certainly not because there’s | any | shortage of North Korean targets, either.

And finally, we see that China is still getting a free ride. Again, I have a small quibble here, because I don’t see any little gray dots in Dandong. Still, this is broadly accurate.

This Reuters fact-box is also useful on the subject of U.N. sanctions.

As Enigma correctly notes, the number of designations doesn’t tell the whole story. Designating a low-level retailer doesn’t have the same impact as designating the agency he reports to, and designating Kim Jong-un means nothing if we don’t go out in search of his bank accounts and apply enough muscle to the bankers to get those funds frozen. A few pictures are worth three five thousand words, but by all means read the three five thousand words, too.

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The MKP Group’s website is a feast of mendacity, quackery, possible illegality, and web design hilarity

The aftermath of Kim Jong-nam’s assassination, and the attention it has drawn to North Korea’s connections to Malaysia, continues to yield new revelations about Pyongyang’s illicit finances overseas. Reuters, having already exposed Glocom as a front for the Reconnaissance General Bureau, now adds to what the Wall Street Journal reported two weeks ago about the MKP Group.

To summarize Reuters’s extensive and detailed report on MKP: it was founded by a North Korean named Han Hun-il and a Malaysian named Yong Kok-yeap in 1996. According to its own promotional materials, MKP “operates in 20 countries in Asia, Africa and the Middle East, piling up contracts worth at least $350 million,” mostly for construction (such as building houses in Africa that Africans can’t afford). Reuters has since located a defector named Lee Chol-ho, a former employee of Han. Lee says Han is a former official in North Korea’s Reconnaissance General Bureau and has funneled cash to Pyongyang for years — through Jang Song-thaek until his execution in 2013, and more recently, to the Central Committee of the Workers’ Party. Although Reuters and Lee couldn’t say how Pyongyang used those earnings, we can safely assume it wasn’t to buy grain or baby formula.

MKP’s website — which appears to have been designed by Borat — lists a much earlier founding date of 1964, and a diverse set of products and services it provides, many of them either sanctioned by the U.N. (luxury yachts) or having dual-use applications (machine tools). I’ve posted numerous screenshots from MKP’s site here, for reasons that will become evident later.

Given MKP’s operations in Africa and its involvement in exporting art from North Korea (see “entertainment”), it probably also has links to the Mansudae Art Studio, whose subsidiary, Mansudae Overseas Project Group, exports those grandiose statues North Korea builds in Africa and the Middle East, most infamously this one in Senegal, where half the population reportedly lives below the poverty line. Mansudae Overseas Project Group also works in collaboration with U.N.- and U.S.-designated arms dealer KOMID in Namibia, and was itself designated by the U.S. Treasury Department last December for “exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea,” under Executive Order 13722. The U.N. Security Council banned the export of statues by North Korea last November 30th, in Resolution 2321.

MKP is also involved in North Korea’s chain of clinics in Africa, using North Korean doctors, despite North Korea’s own chronic shortage of doctors to care for its people. A report by Radio Free Asia a year ago exposed that some of those clinics in Tanzania provided quack medicines to their patients. The Tanzanian government subsequently closed two of those clinics.

[* Actual clinics may not contain white people.]

It also lists several trading companies as subsidiaries (lower left sidebar).

Fortunately, when Reuters called, MKP’s reaction wasn’t at all suspicious.

Han, also known as Dr. Edward Hahn, hung up the phone and blocked a Reuters reporter on his messaging app when contacted for comment.

MKP did not respond to requests for comment on Lee’s assertions. The company issued a statement dated March 23 saying MKP had “no reason to hide the fact” that Han is North Korean. It denied owning ICB or any other North Korean bank and said nobody from the United Nations has contacted the company. [Reuters, James Pearson, Tom Allard and Rozanna Latiff]

For reference, here’s what the U.N. Panel said in its 2014 report about the relationship between MKP and ICB:

According to Reuters, “ICB is among several banks the U.N. is currently investigating for possible breaches of various U.N. Security Council resolutions.” U.N. resolutions ban joint ventures with North Korean banks. If the U.N. designates MKP or ICB, member states would be obliged to shut them down, freeze their assets, and expel all of their representatives. The Treasury Department could (and should) designate those joint ventures, and penalize any foreign banks that provide the joint ventures or North Korean banks with the correspondent services and thus help them access the financial system.

At this point, things get really ridiculous:

In its March 23 statement, MKP said its website had been “hacked” to insert ICB under its list of service companies and place a “doctored photograph” of “MKP personnel”, including Yong, visiting ICB’s office in Pyongyang.

A search of archive.org, a database of old websites, shows ICB has been listed on MKP’s website since 2009, including under its earlier name, Sungri Hi-Fund International Bank. As of April 10, ICB was still listed on the website.

Sharp-eyed readers will recall that in this post, dated February 27th, I posted this screenshot from the MKP Group’s website:

[Diamonds are forever. So are screenshots.]

As of this morning, you can still click the “services” tab of the MKP Group’s website and see this image. So evidently, the North Koreans would have us believe that MKP’s website was hacked a month before Reuters called, and yet its website — the website of a multi-million-dollar international conglomerate — remained functional and unrepaired for the entire time until March 23rd, and even today. MKP’s website also lists another bank as a part of its group:

Click here for a summary of what we know about North Korea’s use of Malaysia as a base of operations for smuggling and money laundering, here for a summary of U.N. financial sanctions against North Korea, and here for a list of North Korean banks that are or aren’t sanctioned by the U.N. and the U.S. Treasury Department.

This report reinforces what I’ve said before: the combination of good investigative reporting and good investigative work by the U.N. Panel can expose and destroy the financial networks that fund Pyongyang. These are not fly-by-night operations, but long-established and well-capitalized groups that have put down deep roots in states where corrupt officials and ex-officials allow the North Koreans to ingratiate themselves. Uproot those networks, expel their representatives, and freeze their assets, and Pyongyang will have lost hundreds of millions of dollars and decades of work. It’s anyone’s guess why our own government has abdicated the work of investigation and coercive diplomacy to reporters and the U.N. Panel. Imagine what could be accomplished if our government devoted the political will and the resources to using the tools that Congress has given it.

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Sens. Gardner & Markey call on Trump administration to enforce North Korea sanctions law

Here’s the kind of story you hear too seldom in Washington today: A conservative Republican (Cory Gardner of Colorado) has joined forces with a liberal Democrat (Ed Markey of Massachusetts) to write a letter to the new secretaries of State and Treasury, asking them to fully enforce the North Korea Sanctions and Policy Enhancement Act (NKSPEA), which passed Congress with the overwhelming support of both parties last year. (Even Bernie Sanders would have voted for it had he not been campaigning in New Hampshire at the time.)

Gardner emerged as the Senate’s leader on North Korea policy just under two years ago, and went on to lead the Senate’s efforts to pass the NKSPEA. Markey, arguably the Foreign Relations Committee’s most liberal member, has also been keenly interested in North Korea for some time, particularly on human rights and the risk that loose talk about preemptive strikes might lead to miscalculation and war. His decision to become more vocal on sanctions enforcement is welcome, particularly for those of us who believe that human rights must be at the core of our policy.

The senators’ letter drives directly at the very issue I raised in last Friday’s post — it’s no use for Congress to pass new laws unless the President puts enough cops, lawyers, and intelligence analysts on the job to enforce them. The letter asks the new secretaries for detailed reports on how many people they’ve assigned to North Korea sanctions investigations and enforcement, how many investigations they’re currently conducting, how much money they’ve asked Congress for to staff up, and whether they agree that the government should form an interagency task force to enforce the NKSPEA.

I know a few people who’d love to answer those questions. I’ll take a shot at the last one myself: yes, if Trump wants to avoid the paralysis-by-analysis that consumed all eight years of the Obama administration. For years, cabinet departments tripped over one another on North Korea policy for the same reason different parts of the Chinese government are also imperfectly aligned — they deal with different people and prioritize different interests. The difference is that China has exploited our differences skillfully, while we’ve mostly failed to exploit China’s conflicts of interest.

It’s old news that State has taken a deferential approach to China. Treasury is (somewhat understandably) keen to guard its authorities, avoid litigation, and maintain good relations with the banking industry. The enforcement agencies are frustrated that too often, after a great deal of hard work, they aren’t allowed to clean and fry the big fish they think they’ve hooked.

I also suspect that other agencies aren’t taking full advantage of the data the intelligence agencies could add to a shared map of North Korea’s finances. It’s too easy for DNI, CIA, and NSA to become victims of the tyranny of small distances. They’re sited out in northern Virginia or Maryland, which makes it logistically burdensome for them to share classified information with State, Treasury, Justice, and FBI, despite the fact that each may hold the missing pieces that the other might need to perfect cases they’re working on. A task force, as contemplated in NKSPEA 102, isn’t just needed to coordinate priorities at the cabinet and executive levels; smaller inter-agency strike teams are also needed to coordinate possibilities at the working, civil servant level.

When we drafted the NKSPEA, we knew that a fire-and-forget approach wouldn’t work. We knew that Congress’s aggressive oversight would be essential to overcoming bureaucratic resistance and prioritizing enforcement. That’s why it’s gratifying to see Chairman Gardner and his Ranking Member, Sen. Markey, make good use of the law’s oversight provisions.

Read their letter in full below the fold (click “continue reading” –>).

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What the Trump administration’s first North Korea sanctions designations tell us

Last Friday’s designations of 11 individuals and one company by the Treasury Department are the first North Korea designations of the new Trump administration. So what do they tell us about the direction of the administration’s North Korea policy?

On the positive side, the designation of a North Korean coal company affiliated with the military should, in theory, send a strong message to its Chinese clients, although they don’t seem to have taken the last hint. Also on the positive side, the designated individuals are mostly front-men for North Korean banks, trading companies, arms dealers, and shippers in Russia, China, and Vietnam. It’s good that North Korean operatives in China — and Russia — aren’t off-limits. As I explained here, those governments are already obligated to expel most of these people by U.N. Security Council resolutions.

These are the kinds of targets we should be focused on to uproot His Porcine Majesty’s proliferation and money laundering networks, particularly in China. The designations will send a strong message to Russia and China to kick them out. They’ll also fill the Treasury Department’s SDN database — and consequently, the anti-money laundering compliance software the banking industry uses — with the names and addresses of North Korean agents and front companies. That will help make it harder for those agents’ bankers to defend their due diligence and compliance later, if and when Treasury files civil penalty cases against them.

On the not-so-positive side, this still isn’t what needs to be done — holding the Chinese banking industry accountable for breaking our laws and laundering North Korea’s money through our financial system. For a critical reaction to the new designations, see Anthony Ruggiero’s tweetstorm. As Anthony notes, all 12 entities designated last Friday are North Korean, so these are not the secondary sanctions we need to make North Korea sanctions effective.

Maybe it was too much to expect that some of North Korea’s Chinese front-men would be designated right before Xi Jinping arrives at Mar-a-Lago. I’ll be very interested in seeing what happens after Xi departs. If Trump really is the corrupt empty suit his harshest critics say he is, Xi Jinping will come to Mar-a-Lago, offer to turn a few Lotte stores into Trump hotels, and do what China always does when under sufficient pressure about North Korea — lie like a cheap rug until our national case of Attention Deficit Disorder sets in again.

Overall, however, I may be slightly less pessimistic than Anthony. For one thing, there is this report on the outcome of the administration’s policy review, which sounds like what I’d expected. For another, I interpret Trump’s statement that he’ll act against North Korea with or without China’s help as a threat to act against Kim Jong-un’s Chinese bankers and freeze his accounts. For another, although I might have expected Treasury to sanction Chinese enablers and trading companies now, I would not expect it to start nuking banks just yet. Instead, Trump’s message to Xi should be that the Bank of China is under investigation by the Treasury Department, soon to be followed by the Bank of Dandong and the 12 other banks that held accounts for Dandong Hongxiang and its many front companies and shell companies.

Finally, Trump can drop a veiled hint that ports that don’t inspect North Korean cargo, as U.N. Security Council resolutions require, can expect to be targeted with extra customs inspections. That could drive shippers away from those ports and damage the economies of those cities. Then, Trump would have someone leak that to the press and watch for signs like this.

As of today, however, it’s possible that none of those banks are under investigation because the investigative agencies simply don’t have enough staff to do it all. We’ll turn to that topic, and to this letter from senators Cory Gardner and Ed Markey, in tomorrow’s post. A full list of those designated last Friday below the fold (“continue reading” –>).

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Congress is marking up North Korea bills faster than I can write about them

Congress’s sentiment about Pyongyang today equates roughly to Cato the Elder’s sentiment about Carthage. (I mean this figuratively, for now, although I increasingly fear that sanctions are our last plausible strategy to prevent war.) It’s now moving more North Korea legislation than it has in the entire decade leading up to the passage of the North Korea Sanctions and Policy Enhancement Act just over one year ago. I can no longer keep up with all of the bills, amendments, markups, and resolutions in what little spare time I still have.

  • H.R. 1644: The Foreign Affairs Committee has moved very quickly in marking up H.R. 1644, the KIMS Act, which toughens the NKSPEA to match or exceed new U.N. sanctions under UNSCR 2270 and UNSCR 2321. It would impose tough new secondary sanctions on foreign ports that fail to inspect North Korean cargo, foreign banks that discreetly connect North Korean banks to the financial system, governments that allow the use of North Korean slave labor, and states that reflag North Korean ships. The Committee Chair, Ed Royce, amended the bill at an action-packed Committee markup earlier this week. I haven’t had a chance to do a line-by-line comparison, although I noticed that the newer version expands a humanitarian exception for North Korean imports of gasoline and diesel fuel.
  • H.R. 479: Ted Poe and Brad Sherman’s bipartisan bill to force the Secretary of State to re-list North Korea as a state sponsor of terrorism was amended to look like Ted Cruz and Cory Gardner’s bill. That means the House and Senate are coordinating their efforts and are serious about putting that bill on the President’s desk. I continue to predict that the Secretary of State will act on his own before that happens, but only because that legislation is advancing toward the President’s desk at such a deliberate pace. Frankly, I’m surprised the Secretary of State hasn’t already acted. This bill may be a necessary incentive to focus the administration’s priorities.
  • H. Res. 223: Ted Yoho, the new Asia Subcommittee Chairman, says China has been sanctioning the wrong Korea, and has introduced a new resolution calling for Xi Jinping to knock it off. (China’s escalation of this crisis, by waging economic war on South Korea, may call for a deterrent escalation of our own. The closure of a South Korean factory in China gives me the idea that our secondary sanctions against North Korea should focus their impact on regions in China that already have higher rates of unemployment. By joining forces with Japan and South Korea to concentrate the effect of sanctions on those regions, we can raise the political pressure on Xi Jinping. As with Kim Jong-un, it may take a threat to Xi’s political control to influence his behavior, or the behavior of those around him.)
  • H. Res. 92: Another bipartisan House resolution condemns North Korea’s missile tests, calls for the quick deployment of THAAD and the improvement of our missile defenses, and calls for the full enforcement of the new sanctions authorities that the U.N. and the U.S. have approved over the last year.
  • S. Res. 92: By a striking numerical coincidence, S. Res. 92, introduced by Senator Mike Lee of Utah, is also North Korea-related. It calls on the government to investigate the disappearance of David Sneddon. Members of Sneddon’s family have raised suspicions that North Korea may have been behind his disappearance in China in 2004.
  • What’s still missing is a reauthorization of the North Korean Human Rights Act, which has to happen this year or the law will expire. Expect to see that effort begin in the Senate and work its way back to the House later.

If there’s another nuke test in North Korea, you can expect to see a flood of member amendments and resolutions. There is, of course, still more that Congress can do, including:

  • tourist travel ban authority,
  • provisions that would require the public disclosure of which companies have investments in North Korea,
  • immunity and encouragement for fund managers to divest from those companies,
  • requiring the public disclosure of any North Korea-related beneficial ownership interests,
  • a flat-out ban on access to the dollar system by any bank or person that transacts with North Korea, and
  • perhaps most importantly for now, a comprehensive transaction licensing requirement for North Korea, although this loophole would be closed by putting North Korea back on the list of state sponsors of terrorism.

Congress could also name and shame more of the banks and other entities that were dishonorably mentioned by the U.N. Panel of Experts. It could also make its voice heard on Kaesong, which Moon Jae-in has promised to reopen, despite the fact that this would violate multiple U.N. Security Council resolutions. If South Korea violates U.N. sanctions, China, Malaysia, and Africa will draw the conclusion that the world isn’t serious, and a global enforcement coalition will never coalesce.

As with the U.N. resolutions, although there is still more Congress can do to create legal authorities for sanctions, Congress is approaching the point where it will have completed its to-do list, and the focus must shift to enforcement and implementation of the existing laws. Making sanctions work is increasingly about putting enough of the right people into the right positions to make an enforcement program effective. The slow pace of political appointments isn’t encouraging. Many of the necessary improvements to our North Korea policy await those key appointments: how we award grants, what we broadcast to the North Korean people, which refugees we admit, how we exploit the intelligence they provide, who coordinates the broader policy among squabbling agencies, and what we do about foreign governments that violate sanctions, use North Korean slave labor, or repatriate refugees to North Korea.

The vast majority of federal employees, of course, aren’t political; they’re career civil servants appointed under Subchapter I of Title 5. They’re the technocrats and experts who faithfully execute the laws and the President’s policies, regardless of who the president is. Although President Trump’s hiring freeze may be affecting their numbers to some degree, the freeze has broad exemptions for national security and public safety, which most eligible agencies have already invoked. The key enforcement agencies are badly understaffed with the career employees needed to enforce sanctions, but not because of the new hiring freeze. Many are working late nights and weekends out of dedication alone. The simple truth is that North Korea investigations, sanctions, and prosecutions just weren’t a priority for previous administrations, so most career employees were assigned to other duties. If personnel is policy, the new administration hasn’t yet changed that policy. Let’s hope it does soon. The administration says North Korea is a top priority, but so far, I’ve seen little evidence that its actions have matched its words.

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Investigative journalists expose North Korean front companies in Malaysia

The coincidence of the Panel of Experts report’s release and the assassination of Kim Jong-nam continues to focus some of the finest investigative journalism I’ve seen in years on North Korea’s front companies in Malaysia. First up, the MKP Group, a Malaysian-North Korean joint venture that earned “tens of millions of dollars” through construction projects in Zambia, Angola, and elsewhere in Africa. To further reinforce Bill Newcomb’s comments about the links between slave labor, money laundering, and proliferation, MKP often uses North Korean laborers, who “typically must give most of their earnings to the regime as a condition of going abroad, according to human rights groups.”

The Panel of Experts is now investigating MKP and its affiliates in Malaysia, including at least one bank, for sanctions violations. So are the Malaysian authorities, who recently shut down another large North Korean front company, Glocom after the U.N. Panel and Reuters exposed it:

Malaysia is specifically trying to determine whether North Korea used the Southeast Asian nation as a hub for earning foreign exchange in violation of the U.N. sanctions, which were designed to cut Pyongyang off from global financial flows, according to a person familiar with the inquiries. [Wall Street Journal]

A specific focus is International Consortium Bank, which I wrote about earlier this week, as a likely violation of U.N. prohibitions against joint ventures and correspondent relationships with North Korean banks, and of new requirements that member states close foreign branches of North Korean banks and expel their representatives. The key to MKP’s welcome until now appears to have been close ties to local politicians:

MKP is now the main focus of Malaysia’s inquiries, though other companies are also in the mix, according to the person familiar with the Malaysian investigations. MKP lists former Malaysian government officials, including a former senior member of parliament, as shareholders or directors in corporate registration documents. [….]

In the late 2000s, MKP built 5,000 low-cost houses in Angola’s capital, Luanda, using North Korean workers, and later sold them to the government for $50,000 each, a total of $250 million, the person familiar with MKP’s business activities said. Angola’s government didn’t reply to requests for comment.

In Zambia, the chief executive of a private joint venture between MKP and the state-run National Housing Authority said it had built 428 houses there and was constructing another 253, sometimes with North Korean workers.

“We don’t really have a problem with” using the workers because MKP is a Malaysian-registered entity, said the chief executive, Charles Holland. He said he last met Mr. Han, the MKP director, about five years ago.

Two Zambian government officials said that Mr. Han, also known as Han Hun Il, has been an influential businessman in the copper-rich African nation for almost two decades. MKP implemented $50 million in contracts in Zambia between 2006 and 2015, according to a foreign ministry official.

But in the end, few Zambians could afford the houses, most of which are empty now.

In Malaysia, MKP sought to hire or award ownership stakes to politically connected Malaysians to build local support and win contracts, including a road-building deal, another person familiar with the company’s activities said.

The person said people awarded stakes included Malaysia’s former navy chief, Adm. Mohd. Ramly bin Abu Bakar, a shareholder of an MKP subsidiary, according to corporate records, and a senior retired Malaysian member of parliament, Karnail Singh Nijhar, who is a director of the subsidiary.

Other information I’d heard about MKP is that they may have a history of not necessarily building the things they contract to build. One possible explanation for that is that African client was really paying for some other good or service, and the construction contact was a sham. Or, maybe the financing just fell through. When the Panel has completed its investigation of ICB, it should look into CCCL Bank and other MKP companies next.

Then, there is this report, via a site I hadn’t heard of before now, that North Korea was running a sham IT start-up in Kuala Lumpur, which raises strong suspicions about links to hacking:

From the heart of the Malaysian capital of Kuala Lumpur as well as the nearby financial center of Singapore, North Korean spies covertly ran a technology business that, until last year, publicly sold a wide array of products including iPhone apps, web development apps and even cybersecurity tools. Virtually nobody knew who really controlled the company until recently. Even today, nobody is entirely sure how it worked.

Now, CyberScoop has learned that United Nations officials are currently looking into the business as part of larger inquiries into sanctions violations by North Korea.

The connection between Adnet and the network of front companies was first uncovered by Reuters journalists who, alongside U.N. officials, began last year looking into the individuals and entities connected to North Korean companies in Malaysia. Many of the companies were said to be directed by the Reconnaissance General Bureau (RGB), the North Korean intelligence agency responsible for clandestine operations and cyber activity. Over the course of the investigation and publication of the U.N. report, most of the companies stopped operations. [Cyberscoop]

In most cases, these operations either involve blocked North Korean entities like the RGB, which member states are obligated to seize and shut down, or whose continued operation violates other provisions of the U.N. sanctions. There will be no excuse for the Malaysian (and Zambian, and Angolan) governments to let these companies continue operating, and no excuse for our own Treasury Department to allow them continued access to our banking system.

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UN report shows China, others are still havens for North Korean money laundering

Due to a convergence of other commitments, it took me longer than I’d hoped to digest the U.N. Panel of Experts‘s latest findings about North Korea and financial sanctions. If you only read the bottom line and stop there, you’ll either be discouraged or find support for an argument that sanctions are futile.

210. Despite expanded financial sanctions adopted by the Security Council in resolutions 2270 (2016) and 2321 (2016), the Democratic People’s Republic of Korea has continued to access the international financial system to support its activities.  Financial networks of the Democratic People’s Republic of Korea have adapted to these sanctions, using evasive methods to maintain access to formal banking channels and bulk cash transfers to facilitate prohibited activities. At the time of writing, Democratic People’s Republic of Korea circumvention techniques and inadequate compliance by Member States are combining to significantly negate the impact of the resolutions.

But you shouldn’t just stop there. If you read the entire report, you’ll find ample evidence that with sufficient resources and political backing, competent investigators can find, expose, and destroy Pyongyang’s financial networks. The Panel has shown us how it’s done. But even if financial sanctions can work, they are not yet working. Pyongyang’s money launderers are experienced and sophisticated, and they’re still accessing the financial system. Member states (read: China, and to lesser degrees, Russia, Malaysia, Singapore, Namibia, Zambia, and the Seychelles — and by default, the U.S.) aren’t complying with, are ignoring, or aren’t enforcing the resolutions.

In many cases, Pyongyang’s money launderers are the same people who’ve plied their trades from the same Chinese cities for years with impunity. Increasingly, they work through local agents, from offices in storefronts or hotel rooms. They may have formalized links to North Korean banks, or they may conceal those links and work through trading companies to move funds and conduct transactions on their behalf. These techniques aren’t new; they’re the same ones terrorists, drug lords, and other rogue states have used since the passage of the Bank Secrecy Act years ago. What else isn’t new? Pyongyang’s reliance on the dollar system:

Most of the financial activity investigated by the Panel was denominated in United States dollars, euros and renminbi. (Para. 213.)

To help you understand the meaning of the Panel’s findings, I’ve organized this post around a few simplified rules I synthesized from seven different U.N. Security Council resolutions. I’ve also blended in information from last year’s report and from other relevant posts I’ve written about North Korea’s finances.

Some caveats are also appropriate here. First, two of these resolutions (2270 and 2321) are fairly recent. Some member states whose names don’t start with “ch” and end in “ina” may still have been in the process of complying when the Panel’s reporting period closed.

Second, in this post, I use “money laundering” to mean the deceptive financial practices that Pyongyang uses to conceal the ownership, origin, and use of its funds to help it violate U.N. sanctions. In most cases, those practices will also meet the U.S. (or domestic) legal definition, but not always. In U.S. law, “money laundering” is defined in two fairly complex statutes, but can be simplified to mean moving money that’s “involved in” certain categories of unlawful activity, either because the funds are proceeds of a crime (say, spending the take from a bank fraud scam), are the corpus of a crime (such as a payment by a blocked person through a U.S. correspondent), or are being used to conceal a crime (for example, Pyongyang Restaurant profits that are commingled with drug money to obscure the illicit origins of the latter).

Rule 1: Member states must freeze the assets of designated entities.

States must freeze the assets of designated persons and “ensure that any funds, financial assets or economic resources are prevented from being made available to or for the benefit of” them. That includes denying them financial services, closing their representative offices, preventing their agents from participating in joint ventures or business arrangements, and expelling those agents. UNSCR 1718, para. 8(d); UNSCR 2094, paras. 8 & 11; UNSCR 2270, paras. 15 & 32; & UNSCR, 2321, para. 3.

Who’s Breaking it: China, mainly. The Panel suspects that at least four U.N.-designated North Korean banks or their aliases continue to operate from Chinese territory:

  • Korea Kwangson Banking Corporation, which operated from Dandong until the Dandong Hongxiang indictments, and still has fronts in the British Virgin Islands, the Seychelles (where this blog has a readership, for some reason), and Hong Kong. (Para. 224.)
  • Daedong Credit Bank, which has offices in Dalian, Dandong, Shenyang, and may actually be majority Chinese-owned, in violation of the prohibition against joint ventures with North Korean banks (see below). Daedong Credit Bank recently hit the headlines again when it appeared in the Panama Papers. (Para. 225.)
  • Korea Daesong Bank also has offices in Dalian, Dandong, and Shenyang. (Para. 225.)
  • Ryugyong Commercial Bank, a suspected front for Daedong Credit Bank, operates in Beijing, where it processes transactions for designated entities and finances arms deals. (Para. 227.)

Rule 2: Banks must cut off correspondent relationships with North Korean banks.

Member states must “prohibit financial institutions within their territories or subject to their jurisdiction from . . . establishing or maintaining correspondent relationships with DPRK banks,” except with the Committee’s advance approval, and requires member states “to terminate such . . . correspondent banking relationships with DPRK banks within ninety days from the adoption of this resolution.” UNSCR 2270, para. 33.

Who’s Breaking it:

  • The unnamed Chinese banks that maintain correspondent accounts for Daedong Credit Bank, which is helping Glocom, its officers (Rang Su-nyo) and its front companies (Pan Systems Pyongyang, Pan Systems Singapore, International Golden Services, and International Global Systems) process U.S. dollar and euro transactions through U.S. and European correspondent banks. (Paras. 233-38.) That’s a violation of the money laundering statute — specifically 18 U.S.C. 1956(a)(2), because as the Panel notes, Glocom is a front for the Reconnaissance General Bureau, which itself is designated by both the U.S. Treasury Department and the U.N. The obvious predicate offense for a money laundering charge would be the International Emergency Economic Powers Act. If those banks aren’t violating the IEEPA, they may be in violation of their customer due diligence obligations under 31 U.S.C. 5318(i). I’d like some names, please.
  • China, by hosting Kim Chol-sam, an extraordinarily prolific money launderer who is a director of DCB Finance and is linked to Daedong Credit Bank, both of which were designated by the Treasury Department for WMD proliferation in 2013. According to the Panel, Daedong Credit Bank and DCB Finance ran millions of dollars in U.S. dollar wire transactions through our financial system through Korea Daesong Bank (also designated). He also facilitated bulk cash smuggling from China to North Korea. Kim sometimes poses as a South Korean, maintains a series of front companies in China, including Dalian Daxin Electronics, Hongdae International Ltd. (HK), Pan Ocean Investments, Ltd. (set up with help from a Hong Kong company’s Beijing office), Win Talent International Ltd. (ditto). Those links, by the way, are to the Panama Papers database. (Paras. 226-28.)

Rule 3: States must close foreign branches of, and joint ventures with, North Korean banks.

Member States shall “prohibit in their territories the opening and operation of new branches, subsidiaries, and representative offices of DPRK banks,” to “prohibit financial institutions within their territories or subject to their jurisdiction from establishing new joint ventures,” except with the Committee’s advance approval, and requires member states “to close such existing branches, subsidiaries and representative offices, and also to terminate such joint ventures [and] ownership interests . . . within ninety days from the adoption of this resolution.” UNSCR 2270, para. 33.

Who’s Breaking it: China, Russia, Malaysia, Zambia, Egypt, and others.

It’s important to note that the ban on joint ventures with North Korean banks is only as recent as last March, and much of the information below is from the Panel’s previous reports that predate those resolutions. Having said that, I saw nothing in the 2017 report indicating that any of the banks listed below were closed. All of these are North Korean banks with foreign branches, North Korean joint ventures with foreign banks or companies, or both:

  • A bank that calls itself — I am not making this up  — “the International Bank of Martial Arts in Pyongyang,” continues to do renminbi money transfer services from Dandong. According to the Panel, it “has served foreign clients with renminbi savings, loan, and transfer services; has undertaken transactions in China; and has issued guidelines in Chinese and English to foreign clients on how to transfer renminbi from China.” (Para. 216; Annex 15-2).
  • The Central Bank of the DPRK has branches in China, where (my conjecture, based on Dodd-Frank disclosures) it likely sells gold, in violation of UNSCR 2270, para. 30. (2014 Report, Table XXXIV.)
  • The Chinese Commercial Bank in Rason, established in 2013 by the China Gold Trade Exchange of Dalian. (Para. 219.)
  • The First Credit Bank, a/k/a Cheil Credit Bank, a/k/a Jeil Credit Bank, which the Panel’s 2014 report describes as a “possible joint venture.” (2014 Report, Table XXXIV.)
  • First Trust Corporation, a joint venture with the notorious Japan-based front group Chosen Soren to finance trade with North Korean firms based in Russia, which would now violate UNSCR 2321, paragraph 32. (2014 Report, Table XXXIV.)
  • Golden Triangle Bank in Rason, which provides support for trade with North Korea, also in violation of UNSCR 2321, paragraph 32. (2014 Report, Table XXXIV.)
  • Hana Banking Corporation, which the Panel’s 2014 report described as a “joint stock company arranged between Central Bank of DPR Korea and Central Bank of China.” It “operates branches in China and deals in RMB.” (2014 Report, Table XXXIV.)
  • Hi-Fund Bank, a subsidiary of the MKP Group, a joint venture with Malaysian parters with a branch in Zambia, which I mentioned in this post. (Para. 218.)
  • International Consortium Bank, another MKP subsidiary. (2014 Report, Table XXXIV.)
  • Korea Joint Bank, a/k/a Korea Joint Operation Bank, Chosun Joint Operation Bank, a joint venture bank “established by Korea International General Joint Venture Company and Association of Korea Traders and Industrialists in Japan.” Japan has usually been a strict enforcer of North Korea sanctions. I wonder if this bank is still operating. (2014 Report, Table XXXIV.)
  • Koryo Commercial Bank, a/k/a Korea Commercial Bank, a joint venture bank; established by North Korean and U.S. residents — and what I wouldn’t give to know who those U.S. residents are, although I can venture some guesses (which I’ll keep to myself). According to the Panel, it may be related to Kumgangsan International Group. (2014 Report, Table XXXIV.)
  • Orabank, which, as George Turner informed us, is a joint venture between Orascom and the Foreign Trade Bank of North Korea, which the Treasury Department designated in 2013 under Executive Order 13382 for financing the proliferation of weapons of mass destruction. This connection was a legal risk for Orascom and a far greater one for its former CEO, Naguib Sawaris, a U.S. citizen.
  • Kumgyo International Commercial Bank. Per the latest Panel report, this bank is run jointly with the China Inner Mongolia Horizon (Hong Yuan) International Trade Corporation, Ltd. and affiliated with Korea Chongsong Mining Company. (North Korea’s mining industry is now under U.S. sectoral sanctions for its frequent involvement in WMD proliferation and arms trafficking.) The bank is registered with the Chinese Ministry of Commerce as a venture, and is 49 percent owned by a Russian company, Menggely K LLC,  of the Tuva Republic. It facilitates exports of pearls and magnesium. (Para. 220.)
  • First Eastern Bank, Rason. This is a joint venture with the Chinese company Unaforte, which is linked to our friend Jim Rogers. It’s involved in mining, investment, and the (now prohibited) gold trade. We’ve already covered that North Korea is banned by U.N. resolutions from exporting gold. Remember also Leo Byrne’s reports exposing that Unaforte exported gold jewelry to Hawaii, which would violate Executive Order 13570 unless the exporter had an OFAC license (place your bets). It has a branch in Yanbian and is licensed by the North Korean government, but claims not to be subject to either North Korean or Chinese jurisdiction. It advertises that it does not require proof of identity, which sounds like an open invitation to money laundering. (Para. 221.)

To the extent these banks still operate, they’re all violating U.N. sanctions. If the new administration is looking to show seriousness of purpose about cutting off North Korea’s finances, it could start by designating all of them under section 104 of the North Korea Sanctions and Policy Enhancement Act or its implementing order, Executive Order 13722. That would reinforce the message that Chinese banks should not continue to do business with them.

Rule 4: Member states must expel persons working for North Korean banks.

Persons working on behalf of North Korean financial institutions or U.N.-designated entities must be expelled for purposes of repatriation to North Korea, and are ineligible for any immigrant, non-immigrant, or transit visa, unless their presence is required for a legal, medical, or humanitarian reason. UNSCR 2270, para. 15; UNSCR 2321, para. 33.

Who’s Breaking it: China and Malaysia, mostly. See, e.g., Kim Chol-sam and his entire network, the Glocom network, and all of the foreign branches of North Korean banks I mentioned above. The branches are supposed to be closed, and their North Korean employees expelled.

Rule 5: Member states must restrict bulk cash transfers to and from North Korea.

The Security Council “[e]xpresses concern that transfers to the DPRK of bulk cash may be used to evade” the sanctions resolutions, “and clarifies that all States shall apply” the “enhanced monitoring” measures set forth in paragraph 11 of UNSCR 2094 to bulk cash transfers to and from North Korea. Although the language “expresses concern” appears non-binding at first glance, it refers back to mandatory provisions. UNSCR 2094, para. 14.

Who’s Breaking it:

  • China, for hosting bulk cash smuggler and money launderer Kim Chol-sam and his network.
  • Glocom, and also Malaysia for letting Glocom get away with it.
  • Singapore and the UAE, which failed to stop a North Korean diplomat who was carrying $1.4 million in gold through their airports. (Para. 243.)

Who isn’t:

  • The government of Bangladesh deserves an honorable mention for seizing that $1.4 million in smuggled North Korean gold (para. 243) and this Rolls-Royce, which was shipped from Malaysia by a North Korean diplomat …

[to raise money to buy infant formula and TB medicine, naturally.]

Could that have something to do with North Korean hackers picking the Bangladesh Bank as a victim? Could be, but then how do you explain the killing of Kim Jong-nam in Malaysia? Either way, Bangladesh’s good-faith enforcement has earned it a supportive response to that crime.

Rule 6: Member states must limit extensions of credit to North Korea.

States should not enter into new commitments for grants, financial assistance, or concessional loans to the DPRK, except for humanitarian and developmental purposes directly addressing the needs of the civilian population, or the promotion of denuclearization, and should exercise enhanced vigilance with a view to reducing current commitments. Strictly speaking, this is non-binding language. UNSCR 1874, para. 19.

Who’s Breaking it:

  • China, if Sam Pa and the 88 Queensway group are still in partnership with KKG, Korea Daesong General Trading Company, and Bureau 39.
  • Moon Jae-in next year, unless we stop him.

Rule 7: Member states must close bank branches and accounts in North Korea.

Member States must take the necessary measures to close existing representative offices, subsidiaries or banking accounts in North Korea within 90 days, unless the Committee determines on a case-by-case basis that such offices, subsidiaries or accounts are required for the delivery of humanitarian assistance or the activities of diplomatic missions in the DPRK or the activities of the United Nations or its specialized agencies or related organizations or any other purpose consistent with the objectives of this resolution. UNSCR 2321, para. 31.

Who’s Breaking it: China mostly, as noted above.

Concern: Member states should “exercise vigilance” over North Korea’s slave labor exports.

This isn’t a binding rule, but the Security Council expressed “concern that DPRK nationals are sent to work in other States for the purpose of earning hard currency that the DPRK uses for its nuclear and ballistic missile programmes, and calls upon States to exercise vigilance over this practice.” UNSCR 2321, para. 34.

The is provision isn’t, strictly speaking, so much about the exploitation of the workers as it is about the fact that their “wages” are stolen, laundered, and used for prohibited purposes.

Who’s Ignoring it:

  • China, the largest single user of North Korean labor;
  • Russia, which just signed a new contract for North Korean labor;
  • Namibia, whose banks process dollar payments to U.N.-designated Mansudae Overseas Project Corporation, as “wages” for its workers. (Para. 245.)
  • Oman, Kuwait, Qatar, and other Gulf states, as illustrated by Sri Lanka’s seizure of $167,000 in cash, gold jewelry, and watches, which the courier said were wages of construction workers in Oman. Uh huh. (Para. 244.)
  • Malaysia, as discussed.
  • More research about that topic here, herehere.

Conclusion: What we learned about North Korean money laundering from the Panel’s report

First, North Korea increasingly relies on non-bank front companies that essentially operate as banks, and would thus qualify as financial institutions under the U.S. legal definition in 31 U.S.C. 5312.

Second, North Korea still prefers dollars (see, e.g., paras. 114, 224, 226 n.206, 227, 234, 238 & 244). Many of those dollar transactions continue to be run through U.S. correspondents (see, e.g., paras. 217 n.194, 226 & 235), who need to step up their game.

239. Stronger sanctions have led networks of the Democratic People’s Republic of Korea to employ greater ingenuity in using formal banking channels and bulk cash transfers to facilitate their illicit endeavours. At the same time, Member States that host nationals of the Democratic People’s Republic of Korea, that control the movement of persons across their borders, that regulate banks and that regulate correspondent banks have not made a commensurate investment in their own capacity to enforce the strengthened sanctions. Consequently, agents of the Democratic People’s Republic of Korea have been able to mask both their illicit activities and their links to the country.

A new Treasury Department regulation at 31 C.F.R. 1010.569, implementing the ban on correspondent accounts and imposing new due diligence requirements, may give them an incentive to do just that. The fact that Pyongyang still relies on the dollar system gives us more options to intercept those dollars.

While some of that cash is eventually smuggled into North Korea, most of it is probably commingled with illicit (or as the case may be, licit) funds and deposited into Chinese banks by small-time operatives (who do what’s known as “structuring”). From there, it’s transferred into other accounts (“layering”) and spent on stuff the elites in Pyongyang like. Then, the goods are shipped in by boat or Air Koryo (the final stage of money laundering: “integration”).

None of these methods are more sophisticated than those of Al Qaeda (with its use of hawalas), Colombian drug lords (with their clever use of trade-based money laundering), or Iran (with its talent for using gold as a sanctions dodge). The Panel’s report proves that these networks can be uncovered by skilled and determined investigators. So, for that matter, did C4ADS, and the Treasury and Justice Departments. It’s by no means impossible to find and destroy these networks with enough of the right people. The Panel has identified dozens of potential North Korean targets that should be expelled and have their assets frozen. Maybe now we have to political will to make that effort, but do we have enough cops, lawyers, and diplomats to get the job done?

For two other good analyses of the report and how to respond to its findings, read this one, by George Lopez and this one, by Richard Nephew. Lopez, in particular, dispels the myth that North Korea is already isolated and therefore financially impregnable. Instead, the Panel’s report proves that Pyongyang remains dependent on offshore finance.

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Royce introduces bill to toughen sanctions on N. Korea; subcommittee holds hearing

The big news yesterday was that Ed Royce, the Chairman of the House Foreign Affairs Committee, has introduced a sequel to the North Korea Sanctions and Policy Enhancement Act, or NKSPEA. You can read the full text here, but briefly, the bill —

  1. Expands the mandatory and discretionary sanctions in NKSPEA 104 to match the sanctions added by UNSCR 2270 and UNSCR 2321. It also adds a few more, like authorizing Treasury to sanction anyone who imports food from North Korea — a gravely immoral thing when so many North Koreans are going hungry, and when the state obviously isn’t using its food export revenue to buy gbrain to feed them.
  2. Provides new authorities to ban North Korea from financial messaging networks. Of course, SWIFT is reportedly disconnecting all North Korean banks, but this provision now becomes important to prevent SWIFT’s less reputable competitors from taking that business on.
  3. Codifies the Treasury Department’s new regulatory ban on providing indirect correspondent account services to North Korean banks.
  4. Toughens the NKSPEA 203 provisions denying aid to states (mostly in Africa and the Middle East) that buy weapons from North Korea.
  5. Toughens the NKSPEA 205 provision allowing U.S. Customs to increase inspections of cargo coming from ports that aren’t meeting their UNSCR 2270 obligations to inspect North Korean cargo. It also creates a blacklist of non-compliant ports, including Dandong and Dalian. That could put pressure on those ports to either meet their inspection obligations or shun North Korean cargo altogether. Think of it as the customs equivalent of Banco Delta Asia. But I haven’t even told you the best part yet.
  6. Creates the authority for secondary shipping sanctions against North Korea by giving the Coast Guard the authority to ban ships, shippers, and flags that violate U.N. shipping sanctions from U.S. ports and waterways. That will make for some lively discussions with the Ways and Means and Transportation committee staffers. It also takes a page from the South Koreans and Japanese who’ve enacted similar measures. That would effectively bring the U.S. into a coalition with those nations to isolate North Korea from the global trade system. Given that this coalition would now include China’s three largest trading partners, that’s potentially quite a powerful measure. And as I’ve noted more than once, let there be no doubt that it was China that started the trade war over North Korea. This is how we stand by our allies and deter economic bullying.
  7. Increases sanctions against companies that employ North Korean slave labor, and threatens to raise the tier status of those governments under the Trafficking Victims Protection Act.
  8. Adds a new condition for the suspension of sanctions — that North Korea permit Korean-Americans to have unrestricted and unmonitored meetings with their North Korean relatives before they die.
  9. Offers rewards to defectors, and maybe other informants, who provide information leading to the arrest or conviction (in any country) of persons involved in North Korean WMD, cyberattacks, or money laundering.
  10. Piles on more pressure to designate North Korea as a state sponsor of terrorism.

And we still haven’t even seen the member amendments, which promise to be lovely. (On a related note, the Senate is also moving separate legislation to sanction the companies that have participated in China’s island-building in the South China Sea.) This promises to be an action-packed year for all you sanctions geeks out there. The dark circles under my eyes should be proof enough.

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The other big event yesterday was the first hearing run by the new Chairman of the Asia-Pacific Subcommittee, Ted Yoho of Florida. As of yesterday morning, I hadn’t really viewed Yoho as a thought leader on Asia policy, but after his performance yesterday, I’ve reassessed that view. Yoho ran a tight ship, kept the proceedings on time, and despite this being his debut, projected a sense of calm command of the proceedings. More importantly, both Yoho and new Ranking Member Brad Sherman came in extremely well-briefed on the issue, and in full command of the facts. There was undoubtedly some first-rate staff work behind that. They’ve clearly digested the Panel of Experts’ latest, something that I’m still in the process of doing. You should really watch the whole thing:

The panel members were Bruce Klingner of the Heritage Foundation, Professor Sung-Yoon Lee of the Fletcher School, and former State/Treasury official Anthony Ruggiero, who has added much-needed expertise to the debate about sanctions policy and administration. I thought all three were extremely effective in breaking through to the members, but then, I consider all three men to be good friends, so I won’t even pretend to be objective. I’ll just post a money quote from each of them. First, Klingner sets the stage for where we find ourselves today, and why Americans should care:

Professor Lee’s statement, frankly, is some of his best work. It’s a must-read, not just for its historical insight about the often-strained relationship between China and North Korea and what that doesn’t mean, and not just for its insight into North Korea’s political objectives, but for the beauty of its prose (which Chairman Yoho also praised).

Ruggiero then brings his practical experience and careful research to the often-underinformed discussion of sanctions as a policy tool. And if I had to pick one panelist whose testimony really seems to have broken through to the Committee members, it’s probably Ruggiero, who reformatted their c-drives about a lot of junk analysis about sanctions:

Thanks for that!

Ruggiero also had some choice words for SWIFT, which I’ll let you read on your own.

With the Trump administration about to conclude its policy review and clearly headed in the direction of a harder line that will emphasize sanctions without sparing Chinese violators, this advice will undoubtedly find audiences in the White House, the National Security Council, and the State and Treasury Departments. My guess is it’s going to be a tense dinner at Mar-a-Lago when — or if — Xi Jinping comes around. But as I’ve said before, our relations will China may have to get worse before they can get better.

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

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

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

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

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

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

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

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

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

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

Here comes the culture shock.

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

And also, don’t usually take bribes.

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

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

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

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

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

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

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

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

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

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

Until a whistleblower came along, anyway.

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

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

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

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

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

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

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

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

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

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

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N. Korea, Lazarus & SWIFT: Are the white hats closing in? (Update: SWIFT cuts off remaining N. Korean banks)

In the last month, major news stories about North Korea have bombarded my batting cage faster than I’ve been able to swing at them. I’d wondered when I’d have a chance to cover Katy Burne’s detailed story in the Wall Street Journal about the empty half of the SWIFT glass — that despite its recent decision to disconnect three U.N.-designated North Korean banks, it’s still messaging for banks that are sanctioned by the Treasury Department, but not by the U.N.:

The U.S. Treasury-sanctioned banks that remain on Swift include the state-owned Foreign Trade Bank of the Democratic People’s Republic of Korea, the country’s primary foreign-exchange bank; Kumgang Bank; Koryo Credit Development Bank; and North East Asia Bank, according to people familiar with the network. A search on Swift’s website listed active bank identifier codes for the institutions as of Monday.

The U.S. designated for sanctions the Foreign Trade Bank in 2013, saying it facilitated weapons of mass destruction programs in North Korea. The other three were sanctioned in December as the U.S. targeted entities it said supported the North Korean government and its weapons programs following the Asian nation’s September 2016 nuclear test.

The apparent sanctions gap raises questions about how easily North Korea could move currency through alternative banking channels, something the U.N. said it has been known to do in the past through fronting companies. [….]

While based in Brussels and regulated by Belgian authorities, the company intersects daily with U.S. financial institutions, processing tens of millions of payment instructions, including through a large facility in Culpeper County, Va. [WSJ, Katy Burne]

I won’t sugar-coat this; the fact that these dirty and important (to His Porcine Majesty) banks can still use SWIFT is a major hole in our sanctions, and whether Congress and the administration are willing to close it will be a test of how serious they are about stranding Pyongyang’s money.

I can understand some of SWIFT’s likely arguments against that, mind you: first, SWIFT has earned much good will from Treasury for favors it has done them on terrorist financing; second, there may be other potential providers of the same service that may be less responsive to U.S. legal pressure. Fair enough, but whoever takes up that slack in SWIFT’s wake should be sanctioned to swift extinction (yes, intended). For a list of North Korean banks indicating which ones are designated by the U.N. and the U.S., see this post, and scroll down.

Meanwhile, Symantec now claims it has additional evidence that the hacker group Lazarus, which it had previously linked to the robbery of the Bangladesh bank using hacked SWIFT software, is responsible for that attack, and more:

A North Korean hacking group known as Lazarus was likely behind a recent cyber campaign targeting organizations in 31 countries, following high-profile attacks on Bangladesh Bank, Sony and South Korea, cyber security firm Symantec Corp said on Wednesday.

Symantec said in a blog that researchers have uncovered four pieces of digital evidence suggesting the Lazarus group was behind the campaign that sought to infect victims with “loader” software used to stage attacks by installing other malicious programs.

“We are reasonably certain” Lazarus was responsible, Symantec researcher Eric Chien said in an interview.

The North Korean government has denied allegations it was involved in the hacks, which were made by officials in Washington and Seoul, as well as security firms.

U.S. Federal Bureau of Investigation representatives could not immediately be reached for comment.

Symantec did not identify targeted organizations and said it did not know if any money had been stolen. Nonetheless, Symantec said the claim was significant because the group used a more sophisticated targeting approach than in previous campaigns.

“This represents a significant escalation of the threat,” said Dan Guido, chief executive of Trail of Bits, which does consulting to banks and the U.S. government. [Reuters]

Further down, the report suggests that one or more Polish banks may also have been hit, but “Reuters has been unable to ascertain what happened in that attack.” The headline having promised evidence of attribution to North Korea, however, the text of the story itself left me wanting more. It’s not news that Symantec has linked Lazarus to North Korea; Symantec did that almost a year ago. Nothing in Reuters’s report adds evidence to that attribution.

Nor does this story suggest that there’s enough evidence for the feds to act against Lazarus, although it does hint that the FBI is investigating. Jurisdiction shouldn’t be an issue in the Bangladesh case; money moved through the New York Federal Reserve Bank. Attribution is the real question. Depending on what they can prove, the feds would have many potential charging options, including bank fraud, wire fraud, the Computer Crime and Abuse Act, racketeering, and money laundering. Furthermore, there are anti-hacking provisions in both the NKSPEA (section 104(a)(7)) and Executive Order 13722, which means that if the feds could find any of Lazarus’s money, or any assets of Lazarus’s co-conspirators — regardless of whether those assets can be traced to any of these specific acts — the Treasury Department could freeze them, and the Justice Department could forfeit them.

And needless to say, the indictment of a state actor would be a big deal, for a lot of reasons.

So far, I don’t see enough in the open sources to support that, but it’s good news that the white hats are working diligently on this. If they can attribute this to senior officials in the North Korean government — most likely, within the Reconnaissance General Bureau — then it would be our legal basis to go after the RGB’s assets, which we’ve recently learned include some sophisticated and global commercial operations. This story bears close watching.

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Update:

Reuters is reporting that SWIFT will disconnect the remaining North Korean banks:

SWIFT, the inter-bank messaging network which is the backbone of international finance, said it planned to cut off the remaining North Korean banks still connected to its system, as concerns about the country’s nuclear program and missile tests grow. SWIFT said the four remaining banks on the network would be disconnected for failing to meet its operating criteria.

The bank-owned co-operative declined to specify what the banks’ shortcomings were or if it had received representations from any governments. Experts said the decision to cut off banks which were not subject to European Union sanctions was unusual and a possible sign of diplomatic pressure on SWIFT. [Reuters]

Now that SWIFT has gotten itself right with Jesus, I would like to implore everyone, everywhere to lay off SWIFT. It’s absolutely true that if we turn SWIFT into a political surrogate for our sundry political conflicts, the world’s dirtiest banks will just take their business elsewhere. That’s not a trend we want to encourage. SWIFT has usually been a responsible member of the financial community, sometimes at great cost to itself.

My argument all along has been that (1) North Korea deserves to be an exception to that rule because (2) North Korea is a unique threat to the financial system — not to mention, to all of humanity — as documented in (3) seven U.N. Security Council Resolutions, a Patriot Act 311 determination, and a call for “countermeasures” by the Financial Action Task Force. You can’t say that about any other country on earth right now — not even Iran. I can’t reconcile messaging for North Korean banks with any of those authorities. And if any competitor tries messaging for the FTB, it’s especially important that the Treasury Department should have the authority to obliterate them (which is why Congress should still proceed with something like the BANK Act).

Having said all that, I wouldn’t be too quick to assume that diplomatic pressure was the main reason for this most welcome decision. “Operating criteria” could mean a lot of things, but it’s a slightly better fit with “massive global bank fraud” than it is with “diplomatic pressure.” If there are more developments in the Lazarus investigation than the Reuters report makes apparent, and if those developments convinced SWIFT that it had unwittingly helped the North Koreans defraud its more reputable clients by sharing its software with them — and their hackers — that would be a perfectly good (and equally plausible) reason for SWIFT to have cut the North Koreans off.

Yet again, the North Koreans are tactically brilliant criminals. And yet again, they’re strategically moronic. It’s a rare and happy day when someone finally holds them to account for it.

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Another North Korean ship sinks, this time off the Chinese coast

In an effort to hide their sanctions violations from the prying eyes of the U.N. Panel of Experts — and from Leo Byrne and the sharp-eyed investigators at C4ADS — North Korean ships have taken to turning off the transponders and navigational devices that allow others to know where they are. Now that I’ve explained the advantages of that, let’s talk about one big possible disadvantage: other ships might crash into you and sink you.

That’s the best explanation I can piece together from what Leo Byrne could piece together from the what Chinese Maritime Ministry is saying about the sinking of the M/V Kum San off the Chinese port of Lianyungang, where it had been “hovering,” in standard North Korean fashion, until a Chinese oil tanker came along. Although the report says the Kum San struck the tanker, the report also says that the tanker was undamaged and went along its way, while the Kum San (apparently fully loaded) went to the bottom.

As with the January sinking of the M/V Chong Gen off Japan, all the crew were rescued. The Chong Gen was another North Korean general cargo vessel that sank in the Tsushima Strait with a cargo of rice, for reasons that were never fully explained, but might also have been due to a navigational failure given its proximity to the rocky Japanese coastline.

The Kum San had been flying the flag of Sierra Leone until recently, when it reflagged as North Korean. Its IMO does not appear in the Treasury Department’s SDN List, so it was not directly linked to smuggling. Typical of a North Korean ship, however, its owner is a company with just one ship, which is a tactic North Korea uses to obscure the true ownership of its vessels.

According to Byrne, North Korea recently began to consolidate the ownership of its shipping, and specifically its tanker fleet, as a result of the difficulty it is facing in registering its ships abroad under flags of convenience. A mass re-registration to Tanzania had become an embarrassment for the Tanzanian government. Byrne later discovered a similar North Korean effort to re-register ships under the Fijian flag, but the Fijian police soon began to investigate the practice.

The U.N. also recently banned other states from insuring North Korean vessels, so in theory, Pyongyang’s state insurance company (which was recently designated by the U.S. Treasury Department) will eat the entire cost of the loss. 

More posts on North Korean shipping here.

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Malaysia holds the upper hand in its hostage dispute with North Korea

Three weeks ago, Malaysia was one of North Korea’s most important trading partners — a haven, hub, and way station for its arms trafficking, money laundering, and slave labor. Money has long been the limiting reagent in Pyongyang’s experiment with phobocracy. It’s now clear that Kim Jong-un will soon pay a heavy financial and diplomatic price for the badly botched murder of his half-brother, Kim Jong-nam with a persistent nerve agent in a crowded airport terminal in Kuala Lumpur last month. (I’ve described this as the first case of international terrorism using a weapon of mass destruction.)

The Malaysian investigation quickly implicated eight North Koreans, including a diplomat. Three of those men are still hiding in the North Korean Embassy. North Korea, with ghoulish obsession, demanded the repatriation of Kim Jong-nam’s body. Malaysia refused to release it without a DNA sample from a relative confirming the identity of the deceased. North Korea condemned the Malaysian investigation as biased, Malaysia expelled the North Korean ambassador, and North Korea expelled the Malaysian ambassador. And then, this happened:

Pyongyang, March 7 (KCNA) — The Protocol Department of the DPRK Foreign Ministry, at the request of a relevant organ, on Tuesday informed the Malaysian Embassy here of its decision to temporarily ban the exit of Malaysian citizens in the DPRK until the safety of the diplomats and citizens of the DPRK in Malaysia is fully guaranteed through the fair settlement of the case that occurred in Malaysia.

It expressed hope that the Malaysian Embassy here and the Foreign Ministry of Malaysia would fairly settle the current case as early as possible from the goodwill stand of setting store by and developing the bilateral relations.

In this period the diplomats and citizens of Malaysia may work and live normally under the same conditions and circumstances as before. -0- [KCNA]

Call the ACLU and petition the Ninth Circuit — Kim Jong-un just issued a #muslimban! Malaysian Prime Minister Najib Razak responded in kind:

[link]

The Malaysian government’s ban doesn’t just affect diplomats. The PM said “all North Korean citizens” and he meant it.

Deputy Prime Minister Datuk Seri Ahmad Zahid Hamidi made the announcement today in an immediate reaction to Pyongyang’s ban against Malaysians from leaving North Korea.

“As a response to foreign minister of North Korea, the Home Ministry via Immigration has released an immediate ruling that not one officer in Malaysia is to leave the country. “This is effective immediately to all exits of immigration nationwide,” he told a news conference here.

Ahmad Zahid also said the Cabinet will meet this Friday and discuss if it is to sever all ties with North Korea. He reiterated that Malaysia will not tolerate being accused of a murder conspiracy without proof.

“We have no intent to take any reciprocating action. But after this has been done by a country with diplomatic ties with Malaysia outside of the normal conventions of bilateral relationships, Malaysia is forced to take a similar action as they have manipulated the murder case here.

“We want to send a clear message, ‘Don’t point fingers at us and don’t look down upon Malaysia as (a) sovereign nation,” he said. [Malay Mail Online]

Reports that Malaysian diplomats were burning documents at their embassy in Pyongyang give you a good idea where that decision is headed. The Malaysian government is also reviewing trade relations with North Korea and was expected to make a decision by the end of the week.

“We don’t intend to retaliate but this is what must be done when a country that has diplomatic relations with Malaysia acts outside diplomatic norms,” Deputy Prime Minister Ahmad Zahid Hamidi said Tuesday. “We want to send a clear message — do not point fingers at Malaysia and do not belittle Malaysia’s standing as a sovereign country that has carried out investigations professionally.” [Bloomberg]

Eleven Malaysians are now trapped inside North Korea, some of them at Sunan Airport. Three are embassy employees, six are their family members, and two are humanitarian aid workers for the World Food Program. (I wonder if the Ministry of State Security will send an officer to literally bite their hands, to perfect the metaphor.) There are about 300 North Koreans in Malaysia, including 170 coal miners laboring in brutal conditions in Sarawak. Authorities there are awaiting orders from K.L. about how to respond.

At this point, it’s useful to cite an authoritative definition of “hostage.” Legally, the U.S. Criminal Code only prohibits hostage-taking involving U.S. nationals, but otherwise defines “hostage taking” as “to detain another person in order to compel a third person or a governmental organization to do or abstain from doing any act as an explicit or implicit condition for the release of the person detained.” That sounds like what both governments are doing at this point, with two exceptions — the two North Korean non-diplomats who are hiding inside the North Korean embassy in Kuala Lumpur, and who are wanted by the police for questioning in the Kim Jong-nam murder investigation.

The common reaction to this, even in Malaysia, is to call it a “tit-for-tat.” My immediate reaction was also to view both sides as guilty of hostage-taking and violating the Vienna Convention, which guarantees diplomats freedom of movement and immunity from criminal prosecution. On closer examination, however, the Malaysians might have a case that their action is a lawful “countermeasure,” a doctrine with some basis in customary international law (start at Article 49).

But what the law allows isn’t necessarily the best policy, and I tend to think the Malaysians are going about this all wrong by lowering themselves to Pyongyang’s level. Their best leverage, after all, would consist of a series of perfectly legal acts. Begin with the fact that among some of those 300 North Koreans, not all of them likely want to go back to Pyongyang. That would go double for the ones who are involved in botching the hit on Kim Jong-nam. Regardless of whether the Malaysian government has a legal right to prevent the departure of the North Koreans — and their ban is probably disproportionate, if understandable — holding North Koreans as effective hostages isn’t their best form of leverage by a long shot.

Instead, the Malaysian government should initiate a series of criminal investigations of North Korean activities in Malaysia for violating U.N. sanctions, and start seizing property that belongs to the Reconnaissance General Bureau, Korea Mining Development Corporation, and other U.N.-designated entities. That approach has the advantages of being (a) perfectly legal, and (b) much more concerning to Pyongyang than actions that affect its citizens, who are all deemed more-or-less expendable anyway. To further increase the pressure on Pyongyang, Malaysia could guarantee each departing North Korean a lengthy unmonitored interview with the U.N. High Commission for Refugees, affording each departing North Korean the option to defect instead. Rewards and asylum could be offered to those who provide information leading to an arrest or conviction. Imagine the pressure that would put on Pyongyang. It might even be a useful experiment in how to negotiate with Pyongyang from strength.

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Yay, it happened! Jim Rogers got burned by hyping North Korea!

And just like that, crackpot investment advisor Jim Rogers joins the distinguished company of Hyundai Asan, Volvo, Yang Bin, David Chang and Robert Torricelli, Chung Mong-Hun, Roh Jeong-ho, and Orascom’s Naguib Sawaris, all of whom won Darwin Awards in North Korea. I’ve previously written about Rogers and his enthusiasm for North Korea and its worthless currency. That OFK post caught the eye of a New York Times reporter, who has just published a story on the relationship between Rogers and his self-described business partner, a Chinese entity called Unaforte:

“It’s very exciting. The kid has been opening up North Korea,” Mr. Rogers said in an interview, referring to Kim Jong-un, the country’s ruler.

But North Korea can be a murky place to tread — as Mr. Rogers’s experience shows.

A Hong Kong company called Unaforte that is involved in several North Korean businesses named Mr. Rogers as a shareholder a year ago, according to a corporate filing. Investing in a North Korean business like that would probably violate American sanctions if it happened now, though experts say it was legal at the time. [NYT, Patrick Boehler & Ryan McMorrow]

In this case, “experts” means me. Rogers’s investment came just a month before President Obama signed Executive Order 13722, which imposed sectoral sanctions on North Korea’s transportation, mining, energy, and financial services industries. That E.O. was enough to drive investor and fund manager James Passin out of North Korea. Before that, however, our threadbare North Korea sanctions probably didn’t prohibit what Rogers did. Still, staying one step ahead of the law doesn’t mean one isn’t stepping in something.

Mr. Rogers said he gave Unaforte $100 as a token of good will but never expected that it would name him as a shareholder. Asked about his stake in the company in October, he interrupted an interview with The New York Times to call Unaforte and told the English-speaking sister of its founder that the company had agreed he could not be a shareholder.

Speaking into his phone, Mr. Rogers said, “I know I have told you, ‘Never, never, never.’”

Unaforte no longer lists Mr. Rogers as a shareholder in its filings but will not release shareholder records that might show more details about the shares given to Mr. Rogers. Officials at Hong Kong’s corporate registry said they were investigating whether Unaforte is complying with the city’s disclosure laws. Unaforte did not respond to emailed questions for comment. [NYT]

The Times chronicles how Rogers quickly distanced himself from Unaforte once its reporters started asking questions (“I make speeches for hundreds of people.”). At one time, Unaforte featured Rogers prominently in its promotional materials. Its founder, Zhao Chunhui, calls himself “Jim Rogers’s business partner in China.” Then, a Unaforte website marketing its North Korea investments — a bank, an office park, and a stake in a gold mine — “went offline after The Times began to ask about its businesses.” On March 17, 2016, two days after President Obama signed EO 13722, Rogers wrote to Unaforte, asking “that it return his $100 and take back an unspecified number of shares.”

To make matters worse, Unaforte also drew a mention in the latest report of the U.N. Panel of Experts, for setting up a bank in the Rason Special Economic Zone. Sorry, my WordPress installation doesn’t read hanja:

221. A Hong Kong, China, company, Unaforte (?????????), with a Yanbian branch (?????) established the First Eastern Bank (????) in Rason in 2014 as a subordinate enterprise to provide financial support and loans to Chinese investors in mining and real estate projects in Rason (see annex 15-11). The bank is licensed by the Central Bank of the Democratic People’s Republic of Korea (see annex 15-12) and provides loans to Chinese individuals and companies in the Rason area. In its promotional materials, Unaforte claims: “The [First Eastern] Bank is fully independent and does not require proof of identity. It is not subject to the jurisdiction of China or [the] Democratic People’s Republic of Korea and is not required to report to the Chinese government or the Democratic People’s Republic of Korea government!” (see annex 15-13). The Panel notes that foreign nationals holding accounts in banks of the Democratic People’s Republic of Korea would be a violation under resolution 2321 (2016).

Under sanctions adopted by the U.N. Security Council last year, the Far Eastern Bank must now be closed. Specifically, Paragraph 31 of UNSCR 2321, adopted on 30 November 2016, requires Member States to close all existing representative offices, subsidiaries or banking accounts in the DPRK within 90 days. UNSCR 2270, paragraph 33, requires Member States to “prohibit in their territories the opening and operation of new branches, subsidiaries, and representative offices of DPRK banks,” to “prohibit financial institutions within their territories or subject to their jurisdiction from establishing new joint ventures,” except with a U.N. Committee’s advance approval, and requires member states “to close such existing branches, subsidiaries and representative offices, and also to terminate such joint ventures [and] ownership interests.”

Previously, Leo Byrne of NK News also reported on Unaforte’s exports of gold jewelry to Hawaii. The gold was allegedly mined in North Korea; thus, exports to the U.S. could have violated a 2011 executive order prohibiting imports from North Korea, except pursuant to a Treasury Department license. Rogers comes across looking like a fool, a charlatan, and a generally amoral person, but from a strictly legal perspective, not even he can be faulted for ex-post facto sanctions violations. There’s no evidence that Rogers knew of the gold jewelry exports to the U.S., but if he did, that might be his greatest legal risk.

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U.N. report: SWIFT banking network violated North Korea asset freeze

Since last year, this blog has covered SWIFT’s continued provision of financial messaging services to North Korean banks, despite suspicions that North Korea was involved in stealing almost $100 million from the Bangladesh Bank by hacking into SWIFT’s messaging software. Later, I wrote about an effort in the last Congress to ban North Korean banks from SWIFT, mirroring a sanction that was one of our most effective measures against Iran. SWIFT is effectively the postal service of the financial system, sending instructions between banks to credit and debit accounts to facilitate payments. Losing SWIFT access makes it slow, costly, and inefficient for a bank to operate.

The U.N. Panel of Experts’ latest report, released over the weekend, now confirms that SWIFT continued to provide services to three North Korean banks — Bank of East Land, Korea Daesong Bank, and Korea Kwangson Banking Corporation, the object of this recent Justice Department indictment — long after those banks were designated by the U.N. and the U.S. Treasury Department. Worse, the Belgian government authorized that. Generally speaking, both sets of designations require the freezing of any of the target’s assets, and prohibit any action that facilitates the target’s transfer of property or interests in property.

248. In response to inquiries by the Panel, SWIFT confirmed to the Belgian authorities that it provided financial messaging services to designated banks of the Democratic People’s Republic of Korea. As part of its procedure for doing so, SWIFT requests authorization from the Government to receive the moneys owed for the services. Upon receipt of such authorization, SWIFT receives payment for its services from the designated banks.  The payments are then entered in its books and recorded as revenue. The Belgian authorities have authorized SWIFT to receive the amounts set out in tables 13 and 14 from designated banks in exchange for the provision of financial messaging services, the provision of the SWIFT handbook, training in the use of the SWIFT network and maintenance costs.

SWIFT stopped providing services to four other North Korean banks — Amroggang Development Banking Corporation, Daedong Credit Bank, Tanchon Commercial Bank, and Korea United Development Bank — not because SWIFT was even minimally principled, but because “those banks themselves requested SWIFT to do so.”

Paragraph 8(d) of UNSCR 1718 requires all Member States, and all persons subject to their jurisdiction, to “ensure that any funds, financial assets or economic resources are prevented from being made available by their nationals or by any persons or entities within their territories, to or for the benefit of” designated entities. The whole point of financial messaging services is to make economic resources available. I can’t for the life of me see how financial messaging on behalf of designated North Korean banks is anything but a clear violation of 1718.

The unavoidable fact of SWIFT messaging is that it enables banks to effect financial transfers. Thus, messaging services that facilitate designated banks’ financial transactions violate a Member State’s duty (in this case, Belgium’s) to “prevent” the funds “from being made available” to designated entities, per paragraph 8(d) of UNSCR 1718 (2006), paragraph 11 of UNSCR 2094 (2013), and paragraph 10 of UNSCR 2270 (2016). To authorize the acceptance of payment from designated DPRK entities would permit those entities to purchase goods and services and access the global economy, which would contravene the plain meaning of an asset freeze. That’s exactly what Belgium and SWIFT did here. Bear in mind that last summer, the Justice Department indicted Dandong Hongxiang for using an off-the-books ledger system to move funds for one of the very same banks.

Then, there is the question of whether SWIFT provided “financial services” to North Korean banks. In relevant part, Paragraph 11 of UNSCR 2094 requires Member States to “prevent the provision of financial services . . . by their nationals or entities organized under their laws . . . of any financial or other assets or resources . . . that could contribute to” activities prohibited by the Security Council’s resolutions. By citing Paragraph 8 (d) of UNSCR 1718 (2006), this provision specifically applies to entities that have been designated by the Security Council.

Now, I take it that SWIFT’s highly-paid lawyers and lobbyists (at least, more highly paid than me) have gone to great lengths to persuade people that financial messaging services aren’t “financial services.” In paragraph 249 of the Panel’s report, Belgium cites domestic and EU law to that effect. At best, that’s a valiant effort to make chicken salad from chicken shit. To its credit, the Panel didn’t buy that, although it focused on a different angle — the receipt of fees by SWIFT from North Korean banks.

The Panel notes that, in the absence of a determination by the Committee that these payments fall under the exemptions in paragraphs 9 (a) and/or (b) of resolution 1718 (2006), the receipt of funds from a designated entity is a violation of the asset freeze pursuant to paragraph 8 (d) of resolution 1718 (2006) and paragraphs 8 and 11 of resolution 2094 (2013).

Myself, I’m much less concerned about the minuscule fees SWIFT received — a few thousand dollars — than the (undoubtedly, much larger) sums SWIFT’s messaging services helped those designated banks to move.

With U.N. resolutions, we’re lucky if many states’ officials read them at all. For the resolutions to have any chance to work as intended, thousands of officials in hundreds of member states have to interpret and apply them consistently. Not all of those officials are banking lawyers. Pedantic interpretations of resolutions that fly in the face of their plain meaning are a recipe for exceptionalism. That’s what happens when a Member State’s interpretation of its domestic law is allowed to contravene the plain meaning and purpose of the resolutions.

Belgium, of all places, now finds itself cast as a unilateralist rogue state defying U.N. resolutions and flirting with money laundering. Given SWIFT’s influence on both sides of the Atlantic, it probably saw itself as above the law. There is nothing on SWIFT’s website reacting to that revelation at the time of posting. But with the truth of SWIFT’s enabling of dirty North Korean banks now revealed, it’s hard for me to believe that it will be business as usual. At a bare minimum, I’d expect SWIFT to disconnect the three designated banks. The next move may well be up to Congress. For SWIFT, that’s a lot of risk to take to feed the hand that bites them.

~   ~   ~

Update:

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Malaysia’s lax enforcement of North Korea sanctions has finally come home

Over the weekend, Malaysian authorities painstakingly decontaminated a terminal of the Kuala Lumpur International Airport where North Korean agents — including a diplomatcarried out a lethal attack with the nerve agent VX, a substance so deadly that a tiny droplet can kill an adult. The authorities are clearly concerned that the use of a persistent chemical weapon of mass destruction in a crowded airport terminal will cause panic among Malaysian citizens and members of the traveling public, as well they should be. Pyongyang’s reckless act endangered thousands of innocent lives. It endangered every child who sat on the floor while her mother used the check-in machines. It endangered every baby who touched a contaminated surface and put her finger in her mouth, and every mother who used one of the sinks the attackers used to wash their hands. It endangered every worker who cleaned the restrooms or vacuumed the floors, every traveler who touched the handrails on the escalators going down to the taxi rank, every passenger who rode in one of those taxis after the attackers did, and every person who walked through that terminal and took her shoes off at her front doorstep.

The first object of Malaysians’ outrage is, and should be, the North Korean government. As of this hour, the North Korean embassy is still harboring two suspects, refusing to cooperate with Malaysian authorities, and spewing flagrant lies to deflect blame. Obviously, I can’t speak for the Malaysian government, but if I could, I’d be making plans to close the embassy, to expel everyone with diplomatic immunity, and arrest any suspect without it.

But if Pyongyang deserves the brunt of our outrage, a second object of outrage should be the Malaysian government itself, which had long been warned in U.N. reports that Pyongyang’s agents on its soil were violating U.N. sanctions and the laws of other nations, yet did little to curtail them. Report after report identified Malaysia as the home base of North Korean spies, smugglers, arms dealers, slave traders, money launderers, and procurers of tools to make missiles. In allowing this activity to go on for years, the Malaysian government not only allowed North Korea to endanger Malaysians, but to endanger the citizens of other countries — and indeed, the security of the entire world.

Just last week, for example, Reuters reported on the contents of a leaked excerpt of the 2017 report by the U.N. Panel of Experts overseeing compliance with U.N. sanctions against North Korea, including an embargo on the sale or purchase by North Korea or arms and related materiel. The report described the interdiction last year of a shipment of North Korean weapons in transit to Eritrea, including 45 boxes of battlefield radios manufactured by the Malaysia-based company Glocom. According to the report, Glocom is a front for the Reconnaissance General Bureau of the Korean Workers’ Party, an entity designated by the U.N. Security Council, and the agency suspected of carrying out the Kuala Lumpur airport attack. Glocom still operates through this website marketing its wares. It does not list Glocom’s corporate officers, so I’ll let the Malaysian authorities investigate whether there are any financial, logistical, material, or personnel links between Glocom and the attackers. Overall, that seems likely to be the case.

[Update]

Reuters has a must-read story on Glocom filled with details about how it masked its ownership and control behind layers of front companies and shell companies, and tied itself to Malaysian man with influence in the country’s ruling party. They even made this org chart:

It notes that on one occasion in 2014, a female RGB agent named Ryang Su-nyo was caught at the Kuala Lumpur airport terminal while attempting to smuggle $450,000 in cash through customs (note again the North Korean preference for U.S. dollars). Ryang said she was transporting the money for the North Korean embassy, so the authorities decided not to press charges and gave the cash back. Here’s a newer website for Glocom. This wasn’t like any of the ham-handed, rinky-dink North Korean front companies I’ve seen before. This was a slick, sophisticated, and well-capitalized operation that raised funds for an agency with a long history of terrorism. If any of the money ran through the U.S. financial system, which seems likely, it would be worth exploring a material support charge.

[End update]

Then, there is the case of a 2007 shipment of missile parts seized en route from North Korea to Syria. That shipment, which transited through Dalian, China and Port Kelang, Malaysia contained, among other items, “solid double-base propellant … usable for gas generators to power Scud missile turbopumps.” When the shipment was seized, the blocks of explosive propellant that had passed through those busy ports were removed “for safety reasons.” (2012 report, Para. 57.)

Malaysia has long been a hub and meeting venue for North Korean arms smuggling. A shipment of tank parts bound for the Republic of Congo, and which was seized in South Africa in 2010, was routed through Dalian, China and Port Kelang. (2010 report, Para. 63.) In June 2009, Japanese authorities arrested three individuals for attempting to illegally export a magnetometer to Myanmar through Malaysia, “allegedly under the direction of a company known to be associated with illicit procurement for Democratic People’s Republic of Korea nuclear and military programmes.” (2010 report, Para. 51.) In 2012, Japan notified the panel of 2008 and 2009 shipments through Malaysia of machinery useful for producing missile gyroscopes. (2012 report, Para. 91.)

Malaysians have seen the tragic results of anti-aircraft missiles falling into the wrong hands. In 2012, a British court convicted arms smuggler Michael Ranger of attempting to sell Azerbaijan “between 70 and 100 man-portable air defence systems”* from Hesong Trading Company, a subsidiary of the notorious Korea Mining Development Trading Corporation, or KOMID, Pyongyang’s principal arms-dealing front company. Ranger “was in regular e-mail correspondence with” O Hak-Chol, a North Korean diplomat and Hesong representative whom Mr. Ranger met in a number of third countries, including Malaysia. (2013 report, Paras. 90-95 & FN.61.) As recently as 2015, KOMID representatives continued to transit through Malaysia. (2016 report, Para. 177.)

As of 2015, long after the Security Council designated North Korean shipper Ocean Maritime Management (OMM) for arms smuggling and required member states to close its offices and expel its representatives, OMM still maintained an office in Kuala Lumpur. (2015 report, Para. 128.) Until early 2015, a Malaysia-based North Korean agent named Pak In-su acted as an agent for the Mirae Shipping Company, a front for OMM.

Pak In-su’s primary employer was Malaysian Coal and Minerals Corporation (2015 report, Para. 143), a company that is almost certainly linked to Malaysia’s use of North Korean labor in its coal mines. What little we know of working conditions for North Korean expatriate laborers in Malaysia, and what we know of the conditions elsewhere, suggests that those conditions are tantamount to slavery. At least one North Korean miner in Malaysia was killed in an explosion in 2014. In the end, the regime in Pyongyang probably keeps most of the workers’ wages.

The Committee for Human Rights in North Korea estimates that 300 North Korean laborers are working in Malaysia. Partially as a result of such labor practices, Malaysia was recently downgraded to Tier 3 under the Trafficking Victims Protection Act, which imposes penalties on legitimate Malaysian businesses that export to the United States. It also subjects Malaysia to sanctions risks, and the entire world to security risks. In a press release announcing its designation of the Mansudae Overseas Project group, for exportation of workers in violation of Executive Order 13722, the Treasury Department listed Malaysia as a market for Mansudae’s services, and said, “Some of the revenue generated by overseas laborers is used by the Munitions Industry Department, which was designated by the Department of State in August 2010 pursuant to E.O. 13382 for its support to North Korea’s WMD program.”

The procurement network that obtained parts and materials for North Korea’s missile programs has long had a strong presence in Malaysia. This presence has included entities that were designated by the U.N., including OMM, Mirae Shipping, and KOMID, and a U.N.-designated North Korean arms exporter known as Green Pine. In 2006 and 2010, the Korea Chonbok Trading Corporation, a front for Green Pine, purchased pressure transmitters from an unnamed European country for its long-range Unha-3 rockets. A payment invoice for the transactions lists one Ryong Jong-chol, a North Korean based in Malaysia, as the purchaser. (2015 report, Para. 195.) The payments, denominated in Euro, were routed through a Malaysian bank. According to the Panel, “Ryom was acting as the representative of Bank of East Land.” East Land was later designated by the U.S. Treasury Department (in 2011), the U.N. (in 2013), and the European Union (in 2013). (2016 report, Para. 186.) As of February 2016, the Malaysian government had still not responded to the Panel’s request for information about the transactions.

Malaysia’s tolerance of North Korea’s deceptive financial practices endangers Malaysian banks’ access to the global financial system. Malaysia is one of the few nations that still deals with North Korean banks, despite U.N. resolutions requiring “enhanced monitoring” of its financial activities (Para. 11), and warnings by the Financial Action Task Force to take “countermeasures” against North Korean money laundering and proliferation financing. In 2009, U.S. sanctions coordinator Philip Goldberg and Treasury official Daniel Glaser traveled to Malaysia and met with senior officials of the Malaysian government and central bank, regarding the implementation of U.N. financial sanctions under then-new UNSCR 1874. That visit followed reports that Malaysian banks were involved in transferring funds between North Korea and Burma for weapons-related transactions, in violation of a U.N. arms embargo. In 2013, Treasury Undersecretary David Cohen visited Malaysia to discuss its compliance with U.N. financial sanctions.

At least one major Malaysian Bank, Malayan Banking Berhad, was reported by the Panel in 2010 to maintain a correspondent relationship with, or to issue letters of credit for, North Korean banks. (2010 report, page 68.) It’s important to note, however, that the U.N. Security Council did not prohibit correspondent relationships with North Korean banks until 90 days after the adoption of U.N. Security Council Resolution 2270, on March 3, 2016. The Panel’s 2013 report listed the International Consortium Bank, a/k/a Hi-Fund International Bank as having been partially capitalized by and founded by the Malaysia Korea Partners Group of Companies (2013 report, page 132.)

ICB is a subsidiary of a North Korean front company called the MKP Group, which has the world’s most hilariously awful website, appears to have some ties to the Mansudae Overseas Project Group, also operates in Zambia, and really merits a post of its own one day. The existence of these banking relationships shows the importance of Malaysia as a secondary hub in Pyongyang’s financial network, which is often used for illicit purposes.

A recent investigation by Bangladeshi authorities into the smuggling of undeclared luxury goods, including LED televisions, tobacco, Rolls-Royces, and BMWs, has reportedly implicated the North Korean embassy in Malaysia. Under UNSCR 1718, North Korea is prohibited from importing luxury goods. In this case, the end destination for the goods isn’t clear, but whoever is behind the shipments conspired to evade Bangladesh import duties.

For the most part, the substantial network of North Korean arms smugglers, spies, and money launderers who operate in Malaysia merely endanger the citizens of other nations — most obviously in South Korea, but also in Syria and the Republic of Congo. In most cases, however, it’s impossible to predict who and where the next victims of North Korea’s activities will be. North Korea sells the world’s most dangerous weapons and technology to any buyer without regard to end users, victims, or consequences. As the VX attack at Kuala Lumpur illustrates, allowing North Korean agents to operate on one’s soil eventually endangers the host country’s citizens and interests, too. The question that the Malaysian people and government should be asking is whether the benefits of their financial and commercial ties to North Korea are really worth those risks.

~   ~   ~

* North Korea has been caught selling MANPADS before. One shipment of them was seized in Bangkok in 2010, on its way to Iran’s terrorist clients. In 2010, Yi Qing Chen was convicted of attempting to smuggle Chinese-made QM-2 man-portable surface-to-air missiles into the United States in 2005.  In 2011, he was sentenced to 25 years in prison. The QM-2 is a Chinese copy of the Russian Igla-1, or SAM-18.

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