The Obama Administration has never talked much, or done much, about North Korean money laundering. There is a tendency to assume that a problem that isn’t discussed isn’t a problem at all, but The Wall Street Journal‘s Alastair Gale has just interviewed some senior defectors with inside knowledge of North Korea’s money laundering, and the product of those interviews was some outstanding reporting. Gale’s interviews confirm the continued importance of Bureau 39 to North Korea’s regime, and that it continues to engage in and profit from illicit activity:
High-level defectors, security officials and analysts say the fund still enables current ruler Kim Jong Un to underwrite comfortable lifestyles for the upper tier of North Korean society to ensure their support. His father, who died in December 2011, was known for throwing lavish parties for officials and importing luxury items such as cognac for himself and the elite.
Analysts and security officials say the execution of Kim Jong Un’s uncle, Jang Song Thaek, late last year may have been because Mr. Jang had interrupted the flow of funds to Office 39. [Alastair Gale, Wall Street Journal]
Admittedly, this much won’t be terribly surprising to many readers, but what I’ve long wondered was how North Korea has hardened its finances to avoid a recurrence of the Banco Delta Asia fiasco, in which a single bank became a point of vulnerability that, when closed off, nearly suffocated the regime itself. That is why Gale’s companion Q&A is, by far, the more interesting read, and possibly the most interesting thing I’ve read about North Korea all year:
How are financial transactions done for North Korea’s trade?
But because of the Banco Delta Asia sanctions, North Korea now does transactions through personal bank accounts under individuals’ names. So, for example, if there’s money from exporting zinc, North Korea divides it among a few individuals’ accounts. Likewise, an order may come from North Korea for individuals to pay out from their accounts to a certain company for an import shipment. Such accounts are in China and Macau. North Korea also works through small regional banks in Italy, Russia and Africa.
To understand the significance of these reports, you first have to understand how money laundering works, and the critical fact that it requires some legal lines of business to conceal the proceeds of the illicit ones. Law enforcement uses the terms “placement” and “co-mingling” to describe the process of blending the legal and illicit proceeds to disguise their origin, and to allow the launderer to claim that it’s all legit.
The co-mingled funds are then invested, spent on goods that are re-sold, and transferred multiple times to hide their origin and ownership. This is known as “layering.” Only then is the money used to buy Swiss watches, Italian yachts, aluminum tubing, cell phone trackers, and maraging steel. None of which is news to the Treasury Department.
What do you know about trade of weapons and other illicit items?
People come from North Korea to do individual deals for nuclear and missile material imports. Trade representatives located overseas don’t really know what’s happening. I was not involved with counterfeiting but I saw people around me getting involved with sales of drugs and counterfeited cigarettes. Drugs are sold in China, Taiwan and Japan and cigarettes mostly to Indonesia.
It’s uncertain whether the state is still involved with narcotics sales. But Kim Jong Un doesn’t care how the money is made if someone can make a million dollars.
This suggests two paths to exerting effective financial pressure on North Korea, either of which would be possible under H.R. 1771.
The first, which would be far less likely to be effective without the cooperation of China and other member states, would be to pursue the individual North Korean agents and accounts used for co-mingling, structuring, layering, and laundering North Korea’s offshore assets money. The term Marcus Noland has coined for this is “whack-a-mole.” This would be extremely resource-intensive for financial investigators. Like the process of bankrupting Al Qaeda, it’s a process that would take years. To be as effective, it would involve the designation of hundreds of individuals, entities, and assets. This clearly isn’t the case today; a total of 62 North Korean entities and individuals have been designated in a decade, most of them during the Bush Administration.
Once Treasury designated an individual or account as North Korean property, the bank holding the deposit would have little choice but to cooperate with Treasury. They key, of course, is identifying the asset as North Korean and associating it with illicit activity in the first place. Treasury’s means to identify non-dollar assets are much more limited if the jurisdiction that regulates that currency doesn’t cooperate.
The obvious limitation of this strategy is the lack of financial intelligence to implement it. The U.S., Treasury typically gathers financial intelligence through the Currency and Transaction reports (for transactions over $10,000), and Suspicious Activity Reports filed by banks. Needless to say, not all jurisdictions require North Korea to report its transactions in such detail, although the Financial Action Task Force has made good progress toward setting base lines for transaction reporting.
That limitation could be remedied if the next U.N. Security Council resolution expands on the “enhanced monitoring” requirement of UNSCR 2094 and requires member states to impose specific reporting requirements on transactions by North Korean persons and entities, and to share those data with the U.N. Panel of Experts, and with member state regulators. This, in turn, would create an international database of North Korean financial data that would be invaluable to regulators in identifying North Korean money launderers, procurers, and proliferators.
Such a database wouldn’t necessarily require the U.N.’s consent, but could be done under the umbrella of the Financial Action Task Force or the Proliferation Security Initiative. On the other hand, it’s hard to expect other nations to enhance their monitoring of North Korean transactions when the U.S. Treasury Department’s own sanctions regulations are as weak as they are, and don’t even require the licensing of most investments, loans, or other financial transactions in North Korean property. It would be fair to say that the U.S. itself is out of compliance with this provision.
The near-certainty that China would cooperate as little as possible, however, also calls for a second approach — to apply a rebuttable negative presumption to all North Korean entities and assets. That presumption finds some support in the burden-shifting language of UNSCR 1718 (“ensure that any funds … are prevented from being made available … for the benefit of such persons or entities”) and 2094 (“resources, including bulk cash, that could contribute to the DPRK’s nuclear or ballistic missile programmes”). Treasury could then apply appropriate exemptions under section 207 of the NKSEA for in-kind purchases of food, medicine, humanitarian goods, consular activities, and other legitimate exempt activities. North Korea’s banking system would be a particular vulnerability — collectively, North Korean banks are the BDA of today.
A combination of these strategies, but one that relied more heavily on the second approach, proved highly effective against Iran and Burma.
A strategy that falls somewhere between these approaches would be the designation of North Korea as a primary money laundering concern. This, along with the discretionary sanctions authorities in NKSEA section 104(b)(2), would allow Treasury to require banks known to service large numbers of North Korean customers to provide enhanced transaction reporting of their dollar-based transactions. This limitation on access to the financial system would be so costly that it could, by itself, cause banks to refuse all North Korean business. It would also help regulators identify suspicious individuals, entities, accounts, and transactions for specific designation.
The secondary effect of this strategy would be to channel North Korea’s dealings into a few financial nodes. Some of those nodes, no doubt, would be the scavengers of the financial ecosystem, the next Banco Delta Asias of the world. Those entities would then be easier to identify and designate as primary money laundering concerns themselves. Others, however, would be foreign financial institutions licensed to handle legitimate, transparent transactions as specifically authorized under section 207(d).
That would be a mechanism to force North Korea to accept financial transparency as a condition of access to the financial system, and would give U.N. member states a wide degree of control over how North Korea earns and spends its money. It would effectively put the North Korean economy into financial receivership, as responsible national governments sometimes do with corrupt unions and banks.
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Correction: A previous version of this post incorrectly stated that the reporter, Alastair Gale, interviewed the subjects of his report in Leiden. Mr. Gale writes in to say that the interviews were actually done in Seoul. Thanks to Mr. Gale for spotting and correcting the error, and for his outstanding reporting for this story.