NYT: How China helped N. Korea buy ski lift cable cars, and break U.N. sanctions

Yesterday, I posted about hunger in North Korea, the fact that Kim Jong-un is spending the nation’s lunch money on missiles and ski resorts, and the importance of helping the North Korean people make that connection though a comprehensive information operations strategy. The New York Times has bolstered the evidence of North Korean and Chinese culpability for this tragedy with a detailed report on North Korea’s purchase of the equipment for its ski resort through China.

Previously, NK News revealed that the Masikryeong Ski Resort was filled with foreign-sourced equipment, and identified most of the manufacturers (if you aren’t a subscriber, there’s a version here, at The Telegraph). The question left unanswered, however, was whether the North Koreans obtained the equipment directly from the manufacturers, or through China. The Times found evidence in China’s own customs data proving that it was the source of at least some of the equipment.

The cable cars for the Masikryong ski resort, which are at least 30 years old and out of fashion on European ski slopes, were made by Doppelmayr, an Austrian company, and used for years in Ischgl, a skiing town in Austria. After the resort decided to install new cable cars, the old ones were sold to an Austrian secondhand dealer, Pro-Alpin, according to Ekkehard Assmann, head of marketing at Doppelmayr.

Pro-Alpin, in turn, sold the cable cars to an unidentified Chinese company, according to Pro-Alpin’s website. The Chinese company then arranged for the equipment to be shipped to North Korea. [NYT, Jane Perlez & Yufan Huang]

The Times also examines China’s lame and risible excuses for ignoring the U.N. luxury goods sanctions it repeatedly voted for at the Security Council.

By almost any estimate, the sale of such items appears to violate the intent of United Nations sanctions meant to punish the North for its nuclear weapons program — specifically, sanctions targeting luxury goods, intended to cover products like Champagne and caviar, yachts and expensive cars.

But China, whose companies were involved in providing the equipment for the Masikryong ski resort, which opened in 2013, told a United Nations panel that those sanctions did not apply because skiing is a “normal activity” in North Korea, a country where most of the population is impoverished and food shortages are common. “Skiing is a popular sport for people, and ski equipment or relevant services are not included in the list of prohibited luxury goods,” the Chinese said, according to last year’s annual report from the United Nations panel, which monitors sanctions violations. [….]

The luxury goods sanctions have a glaring loophole: Each country is permitted to define what it considers luxury goods. The United States has published a detailed list, down to such items as vanity cases, binoculars and television sets larger than 29 inches. The European Union says “articles and equipment for skiing, golf, diving and water sports” are luxury goods and bans them from export to North Korea. [NYT]

Here is the U.S. list (see Supplement 1), and here is the EU list (see Annex III). Yet, nearly a decade after the U.N. Security Council approved resolution 1718 ….

But China has failed to publish such a list and has not honored those of other countries, the documents of the United Nations panel show. Because it has never said what it considers to be luxury goods, China can argue that cable cars for Mr. Kim’s prestige resort were permissible, even justifying them as equipment for the masses.

“China appears impervious to shame,” said Marcus Nolan, of the Peterson Institute for International Economics in Washington, who said there were no penalties for flouting the luxury goods sanctions. [NYT]

The Times also traces the genesis of Xi Jinping’s obstructionist policy toward sanctions enforcement generally.

The Chinese hope to prevent tougher sanctions for fear that the North will become a hostile neighbor, a policy that diplomats said appears to have been shaped by President Xi Jinping last summer. In talks last week with his Chinese counterpart, Foreign Minister Wang Yi, Secretary of State John Kerry made little headway in persuading China to toughen sanctions against North Korea, and he warned that the United States would most likely move ahead on its own. [NYT]

The policy isn’t entirely a new one. Diplomatically speaking, Xi is more openly obstructionist than his predecessors, but China has a longstanding pattern and practice of violating sanctions against North Korea related to proliferation, arms sales, deceptive financial practices, and luxury goods.

What neither Xi nor President Obama counted on, however, was that Congress would seize the initiative.

Tougher sanctions legislation is moving through Congress that, among other things, would target Chinese banks that do business with North Korea. The administration has been reluctant to call for such sanctions, known as secondary sanctions, and it is not clear what the White House would do about the legislation, American experts said.

“Given the broad and variegated bilateral relationship between the United States and China, U.S. officials have been reluctant to confront and economically punish China with secondary sanctions in case it should undermine other key priorities in the bilateral relationship,” said Elizabeth Rosenberg, senior fellow at the Center for a New American Security. [NYT]

The Times also gives us some absolutely breathtaking data on what Kim Jong-un is wasting on luxury goods, while most of his subjects are food-insecure, malnourished, stunted, or starving.

Chinese customs data showed that North Korea imported $2.09 billion in luxury goods between 2012 and 2014, according to recent congressional testimony by Bonnie S. Glaser, senior adviser for Asia at the Center for Strategic and International Studies. Among the items that have slipped through the sanctions are Mercedes-Benz S-Class cars, photographs of which appeared in last year’s United Nations report. An unidentified American company armored the cars, the report said. It also said that a luxury yacht worth as much as $6 million, made by a British company, Princess Yachts International, made it into North Korea and has been used by Mr. Kim.

In 2014, China exported $37 million worth of computers; $30 million of tobacco; $24 million of cars; and $9 million of air-conditioning equipment to the North, according to trade statistics from the United Nations Department of Economic and Social Affairs. In all these categories, China was the top exporter, the United Nations said. [NYT]

As the Times notes, “luxury goods may seem a relatively minor issue,” but “they help to ensure the loyalty of the tiny elite around” His Corpulency, thus helping to preserve its cohesion. Their availability also sends a signal inside Pyongyang that the regime is financially secure, bolstering the confidence of the elites in the regime’s survival.

There is also another, more important, reason why luxury goods sanctions matter. It bears repeating that the World Food Program’s operations in North Korea cost just $100 million a year, to feed just 2.4 million women and children, a figure that undoubtedly includes substantial salary and overhead costs. If the period from 2012 to 2014 is inclusive, that’s a three-year period, and an expenditure of almost $700 million a year — an even higher estimate than the one I cited here.

Yesterday, I posted evidence that for many North Koreans, the food situation remains desperate. No government has a sovereign right to steal and waste the wealth of its people when the people are hungry. Viewed this way, North Korea’s luxury goods imports and missile tests aren’t just a sanctions violation, they’re a crime against humanity. What’s especially frustrating is that it’s a crime the world has the power to prevent, by putting North Korea’s assets into financial receivership. The world’s financial regulators should put Kim Jong-un and his minions on notice that their offshore bank accounts are available to buy food, medicine, and humanitarian supplies, but not for ski resorts and luxury cars.

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Ed Royce’s North Korea sanctions bill is already giving President Obama leverage over China

Kim Jong-un’s Groundhog Day message to the world was the announcement of a long-range missile test, and as you’ve no doubt heard, he has since made good on that threat. Like the movie “Groundhog Day,” this provocation cycle has been a variation on an endless loop. In 2006, 2009, and 2013, the missile test came before the nuke test, but if reports that His Corpulency is preparing yet another nuclear test are true, that will still technically be the case.

Otherwise, events have played out much as they did then: emergency meetings at the U.N., shuttle diplomacy, calls by the U.S. for tougher sanctions, and calls by China for everyone to just chillax and talk it out.

The Obama Administration is pushing China to push North Korea, but China has pushed back, stalled, and obstructed. For all the talk about a downturn in relations between Beijing and Pyongyang, Xi Jinping is being exceptionally stubborn in shielding Kim Jong-un from the consequences of his provocations. As the Brookings Institution’s Jonathan Pollack observes, “The sense of silence from China on this issue is really quite extraordinary.” It’s no great wonder why. Our President has done little of consequence to pressure Pyongyang or Beijing, so naturally, Xi and Kim have learned not to take him seriously. Whenever President Obama sees Kim Jong-un’s shadow, our State Department makes six more weeks of empty threats.

Will this time finally be different? Maybe so. 

Thanks to quick action by a united and bipartisan Congress — and how often do you read those words anymore? — the U.S. now has leverage with China that it didn’t have before. President Obama and the State Department may have been caught off-guard by Kim Jong-un’s nuclear test on January 6th, but Congress wasn’t. Since 2013, Ed Royce, the Chairman of the Foreign Affairs Committee, had been preparing a North Korea sanctions bill (full disclosure) and quietly building a bipartisan coalition to support it in the House and the Senate. Six days after the test, Royce pounced. Now, the administration isn’t even waiting for the bill to pass the full Senate (projected next Wednesday, if there are no “poison pill” amendments) to use its secondary sanctions provisions as leverage over the Chinese.

Mr. Kerry warned the Chinese that if they didn’t toughen their response to the North the U.S. might have to use secondary sanctions or deploy an advanced U.S. missile defense system to the region, according to U.S. officials. [WSJ, Jay Solomon & Josh Chin]

Separately, the New York Times quotes Deputy Secretary of State Antony J. Blinken as saying that “[t]he United States and its allies will bolster sanctions and go on the defensive against North Korea in ways that China may not like” if it doesn’t put the screws to His Corpulency.

Some of those steps “won’t be directed at China, but China probably won’t like them,” he said. Mr. Blinken refused to go into detail. But he said that “everything is on the table,” including so-called secondary sanctions, of the type the United States most recently used against Iran, which would target third-party countries doing business with North Korea. [N.Y. Times, Choe Sang-hun]

As you’d expect, that discussion and the exchanges between State and the Foreign Ministry since then have been contentious. They needed to be. North Korea’s financial links are concentrated in China. Despite China’s new propaganda meme that it really can’t control North Korea, most of North Korea’s money is in Chinese banks, and the vast majority of North Korea’s trade is with China.

That means the new sanctions could fall heavily on Chinese firms, which current and former U.S. officials have long accused of complicity in Pyongyang’s military development. [WSJ, Jay Solomon & Josh Chin]

The Chinese government says it’s opposed to “any efforts to unilaterally impose sanctions on North Korea.” So they’re unhappy. Which is sort of the idea here.

Sen. Cory Gardner (R., Colo.), who sponsored the North Korea legislation that was approved Jan. 28 by the Senate Foreign Relations Committee, said it aims to “send a strong message to China and others that the United States will use every punitive economic tool at its disposal to punish the regime and its enablers, wherever they may be.” [….]

“China is the place we really want to send a signal to,” said a congressional official working on the North Korea sanctions. [WSJ, Jay Solomon & Josh Chin]

President Obama has since called Xi Jinping personally “about how to coordinate efforts in response to North Korea’s provocations.” If the new sanctions legislation didn’t come up in that conversation, it surely hovered in the background. According to the WSJ, not only is the bill “unlikely to meet with a White House veto,” but the administration is threatening to do something unprecedented — enforce the law. 

Senior administration officials said they were receptive to vigorously enforcing the unilateral sanctions being developed by the Congress, despite some technical concerns.

Congressional officials working on the legislation said they’ve sought to replicate elements of the financial campaign the Obama administration used against Iran. Those sanctions cut by more than half Tehran’s crude oil exports and largely froze Tehran out of the global financial system.

The North Korea legislation aims to sanction any foreign firms aiding Pyongyang’s nuclear and cyberwarfare programs. It also is designed to block North Korea’s ability to export minerals, a key foreign exchange earner, and blacklist its entire financial system for its alleged role in illicit businesses. [WSJ, Jay Solomon & Josh Chin]

The administration is sending a clear message to China through various channels.

The United States would clearly prefer that China actively cooperate on a much fuller spectrum of measures. But Washington’s message to Beijing is clear: America will act with or without China’s concurrence.

The United States has long believed that China has the means to more decisively oppose North Korea’s nuclear and missile development, including restrictions on China’s financial, economic, and energy assistance to the North. By sharpening the choices confronting Beijing, Washington shows it believes that equivocation or indecision by China is no longer acceptable. [Jonathan Pollack, Brookings Institution]

Don’t be surprised if, when the next provocation cycle comes, Congress is ready to pounce again. 

In the end, I don’t expect Xi Jinping to agree to significantly tougher U.N. sanctions. He’ll try to wear us down, weaken any draft resolution, and eventually, if only to let us save face, agree to a watered-down resolution that nominally increases sanctions. Then, within a few months, China will go right back to violating them(We’ll almost certainly see further evidence of China’s pattern and practice of non-enforcement when the U.N. Panel of Experts monitoring North Korea sanctions releases its next report in March — sooner if one of you leaks me a copy). He’ll also fight the new sanctions law tooth-and-nail, such as through barter and yuan-based transactions, although I have to wonder how many Chinese companies are interested in that kind of business.

What happens next depends on whether the Obama Administration (a) puts the new bill on a shelf for the next President to find, like both George W. Bush and Barack Obama did with the North Korean Human Rights Act of 2004, or (b) actually enforces it, like it wants us (and the Chinese) to believe it will. If the answer is (b), there may not be much Xi Jinping can do about it. In practical terms, even small Chinese banks and companies can live without access to North Korean markets, but not without access to ours. Even companies that don’t deal directly with the U.S. market need banking services, and banks won’t touch them if they’re designated. When China’s banking system is as shaky as it looks right now, no sane bank manager is going to risk secondary sanctions over transactions with North Korea. Once they see that the Treasury Department is serious, Chinese bankers will drop North Korean customers like so many hot potatoes.

~   ~   ~

How will we know that the administration is serious? I can think of several signs to watch for. First, the Treasury Department could finally declare North Korea, a notorious counterfeiter and money launderer, to be a jurisdiction of primary money laundering concern, and impose harsh special measures on its banks. This is the single most powerful tool in the President’s arsenal.

Second, it could declare North Korea to be a state sponsor of terrorism, which would immediately invoke the tougher transaction licensing regulations at 31 C.F.R. Part 596, thereby closing a major sanctions loophole. If nothing else, that would help to appease Congress.

Third, it could launch criminal indictments against North Korean entities that have committed crimes. The government has expressed “very high confidence,” for example, in North Korea’s culpability for the Sony cyber attacks, which are violations of 18 U.S.C. 1030. An indictment would allow the government to issue an Interpol Red Notice for Kim Yong-chol, the assassin and terrorist who formerly headed Unit 121, until his recent promotion. Another potential basis for action could be that big meth smuggling conspiracy in New York, if any of the defendants have cut deals with DOJ and implicated North Koreans. More importantly, a conviction would allow the Justice Department to use 18 U.S.C. 981(k) and 982 to forfeit any North Korean assets involved in any crimes for which defendants were convicted, right out of the correspondent accounts through which those assets flow.

Fourth, it could take civil enforcement actions against entities that are propping up Pyongyang financially. The extraordinary reporting of George Turner at Finance Uncovered, for example, shows us that Orascom’s Naguib Sawaris, while building a cell phone network for the North Korean government, also set up a bank, Orabank, in partnership with North Korea’s Foreign Trade Bank. The U.S. Treasury Department blocked the FTB in 2013 for WMD financing. Turner’s article implies that Treasury knew less about Sawaris than he did, including Sawaris’s U.S. citizenship and links to a major defense contractor. If Sawaris or his companies are designated under Section 104 of the new sanctions law, they and their subsidiaries could face the blocking of their assets, civil and criminal penalties, and debarment from receiving government contracts. Sawaris’s U.S. citizenship is not a prerequisite to Treasury blocking his dollar assets,  but if the Justice Department finds evidence that he broke the law, his U.S. citizenship will make it much easier for DOJ to assert personal jurisdiction over him. Another potential target is China’s 88 Queensway, which worked in direct partnership with North Korea’s money laundering agency, Bureau 39. Even the Bank of China has reason to be nervous.

Fifth, the President could direct the Securities and Exchange Commission to require issuers with investments in North Korea to disclose those investments in their public filings. The reputational risks associated with investments in North Korea could have the effect of driving investors out of North Korea, if those investments become a matter of public record. And given what happened with Orascom’s catastrophic gamble on Koryolink, who can seriously argue that the risks of investing in North Korea aren’t “material?”

~   ~   ~

One last question: did the North Koreans consider the potential impact of this before going through with these provocations? After all, they have the experience of Banco Delta Asia behind them. Of course, with the amount of turnover inside the regime since His Corpulency’s succession, there may be plenty of people in his inner circle who don’t remember Banco Delta Asia. Maybe the North Koreans don’t think President Obama dares touch them. Maybe the explanation is mostly psychological. Mabye Kim Jong-un’s domestic pressures are forcing him to take risks despite the consequences. Most likely, given Kim Jong-un’s record of brutality toward his inner circle, his advisors don’t dare try to restrain him. If Treasury enforces this law, the reality won’t set in until the checks start to bounce. That’s when the hard part comes — knowing how to use that pressure, and if and when to relax it for the deal Beijing and Pyongyang will inevitably offer us to get the sanctions relaxed.

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Senate Foreign Relations Committee agrees on, passes North Korea sanctions bill

Last week’s big news was that the Senate Foreign Relations Committee, the last real legislative obstacle to a North Korea sanctions law, reached a compromise and unanimously approved a tough new version. Both Republicans and Democrats gave supportive statements before and after the vote:

“We have a bill that, in many respects, is stronger than the House bill,” said the Senate committee’s top Democrat, Ben Cardin of Maryland. “What we do is put pressure on not just the government, but on those who want to do business with North Korea — if they do in these areas, there will be sanctions imposed.”

The House bill requires the president to investigate and sanction persons and entities contributing to North Korean weapons of mass destruction, money laundering, censorship or human rights abuses.

The Senate bill adds provisions targeting North Korea’s sale of minerals and precious metals, a major source of hard currency. Corker said the legislation also places a greater emphasis on Pyongyang’s human rights record.

“I think we’ve enhanced it [the House bill] significantly,” Corker said. “It takes into account other issues that we have with North Korea, not just the nuclear testing, but also some human rights issues.”

Cardin stressed that the sanctions legislation would not affect international aid to Pyongyang.

The bill “is not aimed at all at humanitarian needs,” he said. “The North Korean people are in desperate need. We regret that the country doesn’t spend its resources on its people.” [VOA]

You can read Corker and Cardin’s official joint statement on the legislation here.

I’ll agree that the Senate bill is not only stronger than the House version but also stronger than what I’d expected. Under the compromise bill, the sanctions in sections 104(a) (for conduct such as proliferation and human rights abuses) and 104(c) (blocking all North Korean government assets) are now mandatory. Under the Menendez bill, 104(a) was discretionary and 104(c) didn’t exist as such. Under the Gardner bill, 104(a) was mandatory and 104(c) was discretionary. 

Marcus Noland should be pleased that section 302 of the new bill requires the administration to implement a diplomatic strategy to combat North Korea’s use of overseas slave labor, and that section 304 may well trigger mandatory sanctions against its use.

The Foreign Relations Committee has posted its amendment-in-the-nature-of-a-substitute on its website, although you have to put it together with some helpful amendments, proposed by Democratic Senator Ed Markey of Massachusetts, to get the full text. According to Senator Cory Gardner, the Colorado Republican who led the charge for this legislation, the full Senate will probably vote on it in the next two weeks.

Because the House and Senate bills are not identical, the House will have to act next to put the legislation on the President’s desk. It will probably vote on the Senate bill, rather than taking it before a Conference Committee. I’ve been told by a source I trust that President Obama has signaled that he won’t veto the bill. 

Here ends the good news. I promise you that all the other news is dreary, but I’ll save that for tomorrow’s post.

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Senate sanctions bills pick up new co-sponsors

It may be of no more than symbolic value at this point, with intense behind-the-scenes discussions ongoing over a bipartisan compromise bill, but symbols do matter, and a few more senators have lined up behind different versions of the North Korea Sanctions Enforcement Act in the Senate.

One of the Senate bills, S. 2144, has picked up Republicans David Perdue and Johnny Isakson of Georgia, Tom Cotton of Arkansas, Steve Daines of Montana, Mark Kirk of Illinois, Kelly Ayotte of New Hampshire, John Cornyn of Texas, Orrin Hatch of Utah, Roy Blunt of Missouri, Shelly Moore Capito of West Virginia, Pat Roberts of Kansas, and Mike Rounds of my home state, South Dakota. Kirk’s co-sponsorship is interesting, in that he has a background in naval intelligence and is a recovering North Korea engager.

Senators Cory Gardner of Colorado, Marco Rubio of Florida, and James Risch of Idaho were original co-sponsors of S. 2144, which makes a total of 15.

Meanwhile, the Menendez-Graham bill, S. 1747, has picked up two more Democratic co-sponsors, Dick Durbin of Illinois and Michael Bennet of Colorado.

Absent some unanticipated delay, the Foreign Relations Committee is expected to mark up a bill on Thursday. Interestingly, the schedule shows that they’ll be considering a 2015 version of the House bill, “with an amendment.”

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In The Weekly Standard: Ed Royce’s Bipartisan Coup Against a Bipartisan Failure

If President Obama ends up signing a North Korea sanctions bill in the next 30 days — and at this point, I don’t know what interest he has in vetoing one — it will effect the biggest change in our North Korea policy since the 1994 Agreed Framework. That, in turn, will have been due to years of principled dissent and patient, bi-partisan coalition building by Ed Royce, the California Republican who chairs the House Foreign Affairs Committee.

A certain, too-prevalent type of Republican who sees all Democrats as enemies could learn a few things about winning policy arguments from a man who defied his own party for conservative principle, and yet had the strategic sense to see Democrats, including some very liberal ones, as allies to be won over.

Read the rest of the story here.

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WaPo: Senate Foreign Relations hopes to mark up N. Korea sanctions bill next Thursday.

Via the Washington Post this morning, we’re still pretty much where I said we were last week, but at least we have an expected date for a committee markup. The Senate is still trying to work out a bipartisan compromise between Senator Bob Menendez’s (D, NJ) weaker S. 1747 and Cory Gardner’s (R, CO) tougher S. 2144, rather than voting on the House bill that passed last week “with huge bipartisan support.”

While the House and Senate bills contain generally the same sanctions options, there are differences between them — key among them that a compromise Senate measure is likely to leave more decision-making authority in the president’s hands and carve out more humanitarian assistance protections than the House bill.

Senate Foreign Relations Committee Ranking Member Ben Cardin (D-Md.) said in an interview while there was “nothing fundamentally wrong with the House bill,” he would like to tackle human rights in North Korea more comprehensively.

The House bill would only serve as a backup if the Senate can’t work out one outstanding issue between the its two measures, Chairman Bob Corker (R-Tenn.) said Wednesday.

“I’m 99 percent sure it will be a Senate bill,” Corker said, adding his committee will likely consider the measures during a Jan. 28 markup. [WaPo, Karoun Demirjian]

There is more pressure for the Senate to get its act together this time. Demirjian notes that in contrast with the House, which also passed a similar antecedent to its recent sanctions bill in the 113th Congress by a voice vote, the Senate “dropped the ball” on moving its own bill in the last Congress. It notes that “working through a separate bill may slow down the pace with which Congress responds to the latest nuclear provocation from Pyongyang.”

But Senate leaders stressed they have every intention of moving North Korea legislation quickly this month.

If the negotiations process falls apart, Corker said, “we still have the House-based text we could take up and certainly pass with a strong bipartisan majority.” [WaPo]

From what little we know here, it sounds like the negotiations are headed in the right direction.

Menendez said last week the compromise bill should feature “a mix of mandatory and discretionary sanctions” and added on Wednesday that he expected the final list would be a combination of the two.

If I’m guessing this right, the Senate is thinking of retaining the mandatory sanctions in Section 104(a) and making the sanctions in Section 104(c) discretionary, and perhaps even conforming that subsection to the text of Executive Order 13687. That would be a reasonable compromise that would keep the bill tough while preserving a structure that would be easy to amend and toughen in response to future provocations.

The bills also differ in what kinds of cybersecurity threats would be sanctioned, and emphasis put on North Korea’s minerals industry — a unique feature of Gardner’s bill.

The measures also approach human rights and humanitarian activities differently, with Menendez’s bill going the furthest to ensure that humanitarian aid and assistance receives special protection from enhanced sanctions, which is a key concern for some Senate Democrats. [WaPo]

Judging by some of the off-line discussions I’m having, the Senate really is working actively on this, with some of the most conservative and some of the most liberal senators taking leading roles. One issue I can confirm Senate staff are giving careful consideration is the shape of the humanitarian waivers and exemptions, such as those you can see in Section 207 of the House bill. That’s an important issue, deserving all the careful draftsmanship the world’s greatest deliberative body can muster.

From my vantage, this continues to be a case of a hawkish and mostly united Congress — yes, I really said “united Congress” — pitted against an administration that can’t decide what to do, and has decided to do nothing. For example, while Senator Gardner is criticizing the President for not mentioning North Korea in his SOTU speech, Gardner’s own toughness finds a serious competitor in this letter from Senator Ed Markey, a liberal Massachusetts Democrat, to the Secretary of State.

Here’s hoping that the final shape of the Senate’s bill is worth the wait.

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In The Weekly Standard: N. Korea sanctions worked before, and they can work again.

In lieu of an OFK post today, I’ll direct your attention to this legal analysis, in The Weekly Standard, of the wide range of sanctions President Obama has not imposed on North Korea, and why history tells us that financial sanctions can be an effective tool for modifying North Korea’s behavior, with or without the cooperation of the Chinese government.

Also, in case you missed it, here’s the latest op-ed by Professor Lee and me, at CNN.com.

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North Korea, sanctions, and the argument to impotence

With support for the Obama Administration’s North Korea policy collapsing in Washington, the White House desperately needs a win at the U.N., by showing that it can get the Security Council to pass tougher sanctions and make sanctions work. Let’s review what we know about the substance of a potential resolution:

Two administration officials said the United States was now drafting a proposed resolution for United Nations Security Council approval that would impose sanctions on North Korean trade and finance, including a partial ban on permitting North Korean ships to enter ports around the world, an effort to cut off more of the country’s trade.

A second set of sanctions under consideration is a cutoff of North Korean banking relationships, similar to the restrictions placed on Iran in the successful effort to drive it to the negotiation table on its nuclear program. [NYT, David Sanger and Choe Sang-hun]

Although Sanger wrote just over a year ago that “North Korea is under so many sanctions already that adding more seems futile,” he and Choe now recall the Banco Delta Asia stategy of 2005, which “caused considerable pain” to Kim Jong-il’s regime because “the bank was used to finance the lifestyles of many in the North Korean elite.” For some contemporary accounts of how effective that strategy really was, see this and this

The BDA strategy wasn’t effective just because it blocked the money that was in BDA. It wasn’t even that the money was backed up elsewhere, waiting in line to go through BDA. What really made the strategy work was financial diplomacy. Treasury officials traveled around the world to warn other bankers and finance ministers about the risks of doing business with North Korea, and to raise the reputational risks of having North Korean customers.

“Any bank will be in fear of being branded as a colluder of the Kim regime and I believe Washington’s so-called ‘secondary boycott’ will surely put Pyongyang into a corner if it is implemented,” said Yang Moo-jin, a professor at the University of North Korean Studies. [Korea Times, Yi Whan-woo]

While the Obama Administration waited for Godot, hoping that His Porcine Majesty would eventually decide to cut a deal, a growing number of us were urging the President to go back to what worked before. The administration answered from both sides of its mouth. From one side, it said it was pressuring North Korea through sanctions. From the other side, it argued that there was nothing more that sanctions could achieve.

After the Sony cyberattack, President Obama called North Korea “the most sanctioned, the most cut off” country in the world. By now, you’ve seen where I debunked that. The administration has also argued that North Korea’s secrecy and self-isolation effectively shielded it from sanctions. A year ago, in this congressional briefing, Treasury Undersecretary Daniel Glaser* said that Treasury hadn’t identified the “nodes” of North Korean finance post-Banco Delta Asia. In this event, Ambassador Robert King said the North Koreans weren’t even using the dollar system. I never believed a word of it, probably because I read the U.N. Panel of Experts reports, which have published many details about North Korea’s dollar-denominated wire transfers.

Now, the Treasury Department is acknowledging that it isn’t quite true.

The Treasury Department has identified similar institutions used by Mr. Kim’s son, the current leader, Kim Jong-un. [NYT]

And this, from Bonnie Glaser’s testimony yesterday, before the House Foreign Affairs Committee’s Asia Subcommittee:

In 2013, US and South Korean authorities uncovered dozens of overseas bank accounts worth hundreds of millions of dollars that were linked to top North Korean leaders, which they proposed including in UN sanctions lists, but Beijing refused. China has also strongly opposed levying sanctions on high-level North Korean officials such as the head of the North Korea’s agency responsible for conducting its nuclear tests. [link]

I know the Chosun Ilbo sometimes gets a bad rap, which it sometimes deserves, but here’s one thing it seems to have gotten right.

You can watch yesterday’s hearing and read all of the witness statements at this link. Bruce Klingner’s is particularly useful for the clarity of its recommendations.

In other words, we do, too, know where at least some of the money is. This is despite the fact that the administration doesn’t seem to be trying very hard to follow it. The Office of Foreign Assets Control doesn’t require licenses for most transactions with North Korea under 31 C.F.R. Part 510, and hasn’t imposed any enhanced due diligence or reporting requirements on North Korea under Section 311 of the USA PATRIOT Act. Our best sources of financial intelligence are the compliance reports that banks file with the Treasury Department. If you want to know where the money is, it’s helpful to at least ask.

When Treasury went after Kim Jong-il’s money in 2005, according to the New York Times, “the Bush administration relented and lifted the sanction, in part because of pressure from the government then in place in South Korea.” That seems to have changed, too. The Korea Times is also reporting that the U.S. and South Korea are considering a strategy “to cut off a flow of cash to North Korean leader Kim Jong-un which is used to prop up his regime,” “freeze Kim’s overseas financial assets,” and “scale up economic sanctions against Pyongyang.” The Korea Times also says the two governments “will urge the international community not to hire North Korean laborers or travel to the repressive state.” The report cites “sources” inside the Blue House. 

President Park Geun-hye vowed Wednesday to make all diplomatic efforts to ensure that the U.N. Security Council can adopt a resolution to slap the most powerful sanctions on North Korea.

The sanctions “will be useless unless we ensure North Korea feels pain,” Park said in a televised address to the nation.

She said the sanctions should be powerful enough to make North Korea change its course. North Korea has repeatedly vowed to develop its economy and nuclear arsenal in tandem, viewing its nuclear program as a powerful deterrent against what it claims is Washington’s hostile policy toward it. [Yonhap]

See also President Park’s latest call, for “bone-numbing” sanctions. Except, of course, for South Korea’s pet subsidy for Kim Jong-un: Kaesong.

Our own foreign policy establishment — including made members with close associations with past agreed frameworks — also seems to have shifted its views:

A new approach to persuading the North to abandon its nuclear program must focus on asymmetric pressure points. A look at recent history helps to outline such a strategy. In our experience working on North Korea policy, the government in Pyongyang has seemed truly caught off guard only twice: in September 2005 when the Treasury Department’s sanctions led to a freezing of its bank accounts in Macau; and in February 2014 when a United Nations commission called for the Security Council to refer the North’s leadership to the International Criminal Court for a long list of crimes against humanity.

The United States and the United Nations should immediately increase sanctions. A new Security Council resolution will most likely emerge soon, providing one opportunity for this. Another comes in the form of the presidential executive order created after the cyber attack on Sony Pictures last year. These should include targeted financial sanctions; travel bans and indictments against officials working on the nuclear program, human rights abusers and cyber criminals; as well as secondary sanctions on anyone doing business with North Korean companies.

But sanctions are only one part of the strategy. Many observers believe, credibly, that slave labor bankrolls the nuclear weapons program. The United Nations must also continue to hold individuals in the government directly accountable for crimes against humanity, and all countries, including China and Russia, should be pressured to stop accepting North Korean laborers.

Even if China’s government has made clear that it is unhappy with North Korea’s behavior, Beijing won’t abandon its ally anytime soon. But the United States can — and should — push for Beijing to dial back its support. China could instruct Chinese companies to curtail business with North Korea, and the government could reject any calls from North Korea for new economic projects until the government returned to negotiations. China could also agree to not obstruct any Security Council discussions on human rights abuses in the North. Washington must frame cooperation on North Korea as a cornerstone of United States-China relations.

North Korea thinks that nuclear weapons make it more secure. That’s wrong. North Korea’s only path away from isolation and insecurity will require negotiation on all issues, including security, human rights and economics. In order to help it understand this, the United States must use the nuclear test Wednesday to force the North back to the table. [NYT, Victor Cha & Robert Gallucci]

In Foreign Policy, Bush-era NSC official Michael Green gives my article in The Fletcher Security Review a nice shout-out:

Despite claims from frustrated engagers that North Korea is already the most sanctioned and isolated country in the world, the fact is that economic sanctions on Pyongyang fall short of those put on Iran before the administration’s nuclear deal with Tehran. An excellent study in the Fletcher Security Review demonstrates how incomplete sanctions on the North really are. If the United States worked with Japan, South Korea, and other allies to require inspections of all vessels and aircraft arriving from North Korea, for example, there would be a considerable impact on the country’s illicit shipments of drugs and counterfeit money, as well as the North’s ability to procure materials for its missile and nuclear weapons programs. Other measures would also impact the North, such as blacklisting known North Korean individuals and entities involved in commerce (none of which are purely commercial entities). [Michael Green, Foreign Policy]

See also last week’s Washington Post editorial, calling for “stepping up U.S. sanctions on those that trade with North Korea, including Chinese companies.”

It’s gratifying to see the arguments moving away from arguments to impotence to concrete proposals. Overall, the aftermath of North Korea’s fourth nuclear test has been comparatively free of nonsense about sanctions being maxed out, with a growing realization that there is much more we can do financially.

The better question is how we use all that pressure once we’ve built it, and what end state sanctions can help us achieve. The financial strategy of 2005 was a tactical success that ultimately failed to achieve our objectives, because the State Department and the Treasury Department weren’t playing from the same sheet. State didn’t understand the strategy or the authorities on which it was based, and an ambitious Chris Hill and a weakened President Bush were desperate for a deal — any deal.

North Korea knows very well that it gets its best deals from U.S. and South Korean presidents near the end of their terms, or during moments of domestic political weakness. For the strategy to work this time, we have to embark on it with clear objectives and firm conditions for relaxing sanctions. That’s why Congress wrote those conditions right into the law (see sections 401 and 402).

I envision two alternative objectives for a financial strategy. One would be to use that pressure to secure North Korea’s disarmament, and some progress on humanitarian reforms, relaxing and lifting sanctions on an action-for-action basis, but not before North Korea performs meaningfully. The alternative strategy — if you will, the Plan B — would be to disrupt Kim Jong-un’s consolidation of power, by denying him the means to pay his military, security forces, and elites. This would go in concert with disruptive and subversive information operations, and a diplomatic campaign of isolation over human rights issues, similar to the one that put global pressure on South Africa in the 1980s.

Call it an “insecurity guarantee” as long as he continues to nuke up and run gulags.

~   ~   ~

* I don’t know whether they’re related or not.

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N. Korea sanctions bill passes the House 418-2, Senate seeks compromise bill

By now, you’ve probably read the news about last night’s lopsided vote. Interestingly, it was the Democrats, not the Republicans, who were unanimous in their support. The two dissenting votes were Justin Amash and Thomas Massie, both isolationist Republicans from the Ron Paul mold. 

Dissent may be patriotic, but it’s never beyond some well-deserved ridicule.

[Reminder: The views expressed on OFK are the author’s alone.]

You have to hand it to Nancy Pelosi for running a tight ship. In the end, even Charles Rangel and Barbara Lee voted “yes.” John Conyers didn’t vote. 

Here’s a link to the final bill the House passed.

Today, all eyes turn to the Senate, which has very little time to reach unanimous consent on its own bill in this election year. The good news is that all of the right senators — with the exception of Harry Reid, so far — are saying that it’s a priority:

Senate Majority Leader Mitch McConnell (R-Ky.) said Tuesday that the upper chamber will soon take up sanctions legislation against North Korea after the country claimed it detonated a hydrogen bomb.

“Sen. [Cory] Gardner has been working on a North Korea sanctions bill. We anticipate it will come out of the Foreign Relations Committee very soon, and I intend to schedule floor time on it shortly,” he told reporters.

The Republican leader met with Gardner, a Colorado Republican, and Sen. Bob Corker (R-Tenn.), the Foreign Relations Committee chairman, on the issue earlier Tuesday. [The Hill]

Said Corker:

“We have members on our side, and the other side, that have bills here, so we’re going to go through it methodically,” Sen. Bob Corker (R-Tenn.) told reporters.

Sen. Ben Cardin (D-Md.) added, separately, that two proposals have been introduced in the Senate — one from Sens. Lindsey Graham (R-S.C) and Robert Menendez (D-N.J.) and another from Sen. Cory Gardner (R-Colo.) — and that he’s already had “some conversations with [with Corker] to make sure we have one bill.” [….]

Corker said that while the briefing with the administration didn’t specifically focus on what sort of sanctions Congress should impose, he added, “I think they believe that action by Congress would be helpful.” [….]

“I think we’re working with Senator Gardner, who has a bit of a different version, to reconcile it, and see if we can bring it to the chairman in a bipartisan effort,” the New Jersey senator said. [The Hill]

Both Corker and his Democratic Ranking Member, Ben Cardin, insist that action in the Congress should not be a substitute for action in the U.N. Security Council. They’re right, of course. U.N. sanctions and member state national sanctions work best in concert with each other. U.N. sanctions unite member states and help smooth out international enforcement gaps, but they have no force of law unless the member states enact and enforce sanctions of their own. All of the sanctions bills on the table now stress that by calling for the State Department to step up its diplomatic game.

Sen. Bob Corker, R-Tenn., chairman of the Senate Foreign Relations Committee, said he expected the Senate to vote on a measure to sanction North Korea soon, though he emphasized that the United Nations should also act.

“We’ve got to step up our game, be proactive and I think you’re going to see Congress over the next short period of time taking its steps, but it’s my hope the international community and our administration will be much more bold,” Corker told reporters following a closed briefing with officials from the State and Defense departments and Office of the Director of National Intelligence. [The Examiner]

Now that a sanctions bill has passed the House, the administration seems to have softened its line on whether Congress should meddle.

Corker also said the witnesses were open and said the administration “is probably more open in this case to Congress taking action and putting in place a toolkit to deal with this issue.”

Sen. Ben Cardin, D-Md., also said he expected Congress to take action against North Korea.

“It’s important that the [United Nations] Security Council takes action, we hope that they will. It’s also important for the United States to show international leadership to strengthen our sanctions regime against North Korea. So I think you’ll see action,” he said. [The Examiner]

The comments followed a classified Senate hearing on North Korea’s nuclear capabilities.

“I think they believe action by Congress could be helpful,” said Senate Foreign Relations Committee Chairman Bob Corker (R-Tenn.), emerging from a meeting on North Korea with administration officials. “It’s my sense anyway that Congress taking action on this issue could be beneficial and I think you’re going to see that happen.” [WaPo]

All of which gives hope that the Senate will get its act together, reach a compromise, and pass a bill out of Committee. Once that happens, I doubt the bill will attract opposition in the full Senate. What’s less certain is what the Senate’s compromise bill will look likeHaving reviewed both Senate bills, compared them to the House version, and had some discussions with Senate staff, my guess is that the Senate won’t just pass the House bill. Its own negotiations are probably too delicate for that. Senators will want to add their own language on diplomacy, human rights, human trafficking, and funding of humanitarian programs. That’s what’s supposed to happen when bright minds add good ideas. But the final content of the Senate bill will be 80 to 90 percent of the same DNA as H.R. 757.

My greater concerns are, first, that some of the Senate language in Section 104, the key enforcement trigger, lacks the coherence of what the House ultimately passed, and even (accidentally) leaves out the mandatory sanctions for arms trafficking. I don’t expect that to be controversial or difficult to fix.

Second, the National Committee for North Korea asked for some amendments to the language because of its fear that the House version could adversely affect humanitarian programs. Unfortunately, those requests came three months too late for consideration in the House markup. Myself, I think the concerns are overblown. The humanitarian waivers and exemptions in Section 207 of the House version are broad enough to deal with all of them, particularly if Treasury gets off the dime and starts working on implementing guidance now, assuring bankers that transactions in food and medicine are safe to handle, as it belatedly did with Iran. But NCNK’s recommended amendments were also conscientious, well written, and harmless to the bill’s effectiveness. In that case, if we all share the same concerns and goals, why not compromise? For whatever my view matters, I hope the Senate takes most of them aboard, and have said so to the right people.

Third and finally, one of the two competing Senate bills has mandatory sanctions for the worst conduct — proliferation, human rights abuses, money laundering, etc. — and one does not. In a perfect world, Congress could defer such matters to the President’s discretion, but this isn’t a perfect world. President Obama won’t use the discretion he has, and his predecessor, George W. Bush, threw his away because he didn’t know how to use sanctions as part of a comprehensive policy or a competent negotiation process. That gives Congress the responsibility to help the President lead. The fact that such targets as Chinpo Shipping, KNIC, NADA, Unit 121, Ri Chol, 88 Queensway, Hwang Pyong-so, and Kim Jong-un himself haven’t been designated by now — yet Robert Mugabe, Alexander Lukashenka, and Bashar Assad all have been — shows you just what’s wrong with this picture.

It’s as if someone in the State Department secretly granted Kim Jong-un transactional immunity, or (more likely) just decided to outsource the problem to our Chinese frenemies. I can’t quite explain it.

The only real opponent now is the calendar. It’s entirely possible that the House and Senate could both act, their attention spans could expire, and they could both disperse to their respective campaigns before they get agreed language through a conference committee. Certainly the Senate bill could make the House’s good bill even better. Each of the pending Senate bills contains endemic language that I hope to see in the final version. I’m sure you could find hundreds of people in this town who would express their own subjective opinions in that regard. The greatest danger now is that the perfect will become the mortal enemy of the good.

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Dems & Republicans join forces to support North Korea sanctions legislation

When it comes to North Korea policy, Washington’s most influential lobbyist has never been to Washington. He’s in his early 30s, never finished high school, chain smokes, likes to ski, loves the NBA and bondage porn, favors dark suits and mushroom haircuts, has an explosive temper and a small nuclear arsenal, and weighs as much as a village full of his malnourished subjects.

Tuesday’s nuke test may have come just in time for Congress to act before dispersing for a long election year. Now, a sanctions bill that had stalled for months is moving swiftly to the House floor, and Roll Call and Foreign Policy are quoting House Minority Leader Nancy Pelosi (D, CA) as saying that her party will support the legislation, “virtually guaranteeing” its passage “as early as next week.”

royce engek

[The leaders of the House Foreign Affairs Committee: Chairman Ed Royce (R, CA) and Ranking Member Elliot Engel (D, NY)]

Foreign Policy says the bill will be “based on” the North Korea Sanctions Enforcement Act (which, in full disclosure, I helped write):

An aide for House Majority Leader Kevin McCarthy told Foreign Policy the legislation would be based on the North Korea Sanctions Enforcement Act, a bill that passed out of the House Foreign Affairs Committee last year. The measure authorizes sanctions against banks facilitating the country’s nuclear program and the freezing of U.S. assets linked to North Korean “proliferation, smuggling, money laundering, and human rights abuses.” [Foreign Policy]

I won’t deny that the words “based on” concern me just a little, but I expect relatively few changes to the House bill — there just isn’t time for extensive ones. Whatever the changes, I just hope they aren’t harmful to the key provisions.*

The House bill is “ready to go” and could receive a vote the week of Jan. 11, Pelosi said. Because the bill has strong bipartisan support, she said it may be voted under an expedited procedure known as suspension of the rules, which requires a two-thirds majority for passage. Speaker Paul D. Ryan confirmed the House will vote on North Korea sanctions, but deferred details on the schedule to House Majority Leader Kevin McCarthy. [Roll Call]

In the Senate, where arcane rules make it difficult to move a bill without unanimous consent, things are less settled. There are two bills pending — Senator Cory Gardner’s (R, CO) strong S. 2144, and Senator Menendez’s substantively weaker S. 1747, which is largely redundant with an Executive Order President Obama signed a year ago, after the Sony cyberterrorist attack, but has hardly used. Unlike S. 2144, S. 1747 lacks mandatory sanctions, and leaves all the discretion to the President. 

sfrc

[Senators Ron Johnson, Marco Rubio, James Risch, and Chairman Bob Corker. Via]

Unfortunately, the President’s failure to respond to the Sony cyberattack last year means that he doesn’t need more discretion, he needs less of it. Kim Jong-un may not know much about Congress, but he obviously has this President figured out.

While the final form of a Senate bill remains uncertain, the Senate’s mood is on open display. Marco Rubio (R, FL), a co-sponsor of S. 2144, is calling for North Korea to be put back on the list of state sponsors of terrorism.** But of course, only a few lonely cranks — and three federal District Court judges, the U.S. Court of Appeals for the District of Columbia, and pretty much everyone of consequence in Congress — believe the evidence would support that.

“We have to do everything we can to ensure that they have less money to spend on these sorts of programs. So that’s why a state sponsor of terror, they should be returned to that list,” Rubio said in an interview with Fox Business Network. “They were once on that list. They were removed from that list as a concession. They need to be put back on,” he said. Rubio also called for measures to “go after the assets” overseas of the North’s leadership. [Yonhap]

Senator James Risch (R-ID), also a co-sponsor of S. 2144, told CNN, “I think that what is going to happen is, there are going to be some banking sanctions that they can turn the screw a little tighter on with some of the banks that they are doing business with in Asia. I have no doubt that that’s going to be looked at.” 

As Yonhap accurately divines, what Risch is calling for is a return to the strategy used against Banco Delta Asia in 2005, which “almost cut off the North from the international financial system.”

The blacklisting of Banco Delta Asia not only froze North Korean money in the bank but also scared away other financial institutions from dealing with Pyongyang for fear they would also be blacklisted. The measure is considered the most effective U.S. sanction yet on the North. [Yonhap]

Senator Kelly Ayotte, a moderate Republican from New Hampshire, called on the administration to “impose the toughest and broadest possible sanctions against North Korea and those who aid the regime’s illicit activities,” and also called the President’s North Korea policy a failure.

Senate Democrats are piling on, too.

Sen. Ben Cardin (D-Md.), ranking member of the Foreign Relations Committee, and Sen. Robert Menendez (D-N.J.) called on Congress to pass new sanctions legislation in the wake of the test. Menendez introduced legislation last year with Sen. Lindsey Graham (R-S.C.) pushing the administration for tougher sanctions against North Korea and its supporters.

Cardin and Menendez both said, separately, that the Security Council should impose its own penalties on North Korea. “Moreover, given North Korea’s actions, the United States and our allies must also take additional steps to combine effective sanctions with appropriate countermeasures,” Cardin added. [The Hill]

On Wednesday, Democratic and Republican lawmakers, including the top Democrats on the Senate Foreign Relations Committee and House Intelligence Committee, Ben Cardin of Maryland and Adam Schiff of California, pushed for punitive sanctions.

“I intend to work with my colleagues in the Senate on legislation to impose additional sanctions on North Korea and would also urge additional sanctions by the United Nations Security Council,” said Cardin in a statement. [Foreign Policy]

Senate staffers are probably debating which version of the bill they’ll ultimately pass out of the Foreign Relations Committee. Crucially, we still don’t know which version Chairman Bob Corker (R, TN) will support. The Hill quotes Corker as promising to work with Cardin, Menendez, and Gardner to “bring further pressure to bear” on the North Korean government. He might introduce his own version, or even “simply take up the House version of the bill this time around.”

This being an election year, the presidential candidates are also criticizing the President’s policy and calling for more sanctions. That means almost all of the Republicans — even Rand Paul — but not only the Republicans.

“The United States and our partners, including the U.N. Security Council, need to immediately impose additional sanctions against North Korea,” Clinton said. [Foreign Policy]

As I so often do, I agree with what Mrs. Clinton says on foreign policy. If only I could forget that she was Secretary of State for four years. If only she hadn’t coined that awful term, “strategic patience,” which still makes the State Department people wince. The Republicans will want to hang this albatross around her neck. They’d be crazy not to. Ted Cruz is already hanging it around her husband’s neck. That’s why foreign policy would have been an important issue in this election, even if the entire world didn’t seem to be collapsing into anarchy.

It’s hard to find anyone who approves of how the President has handled North Korea today. Conservatives call him weak, and his “traditional supporters” have criticized him “for not pushing harder for direct multilateral talks with North Korea and other regional partners.” Foreign Policy reports a “rare convergence of criticism” that “the size and sophistication of North Korea’s nuclear program has increased” during his presidency. The Washington Post‘s David Nakamura accuses the administration of dropping the ball and outsourcing the problem to the Chinese.

So far, so good, but then, Nakamura’s sources criticize the President for not trying hard enough to get a deal, which isn’t quite fair. As The Wall Street Journal told us yesterday, “U.S. officials say they have repeatedly tried to engage North Korea in dialogue about its nuclear program in recent months, but Pyongyang hasn’t responded to their advances.” It sounds self-serving, but the record supports that contention. Besides which, the harder American presidents try to “engage” North Korea, the worse their results tend to be.

In this climate, all the administration can really do is shift the focus to its push for tougher sanctions at the U.N. It needs a win in New York to make up for what looks like a general rout of its North Korea (non-) policy in Washington. The administration will probably announce new bilateral sanctions under existing executive orders to preempt some of the momentum in Congress, but I doubt that will appease Congress now. The administration can forget about any new diplomatic initiatives. Its goal now is to avoid a greater crisis, and to keep North Korea from sapping its credibility on other foreign policy issues.

~   ~   ~

* For more information on how a North Korea sanctions bill would work, why it would work, why more sanctions are needed, how it could work despite Chinese obstructionism, and how similar strategies have worked against North Korea before, here are those answers. For why I care and so should you, start here, and then move to this.

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

*** Yes, I changed the post title.

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Singapore shipper guilty of funding illegal N. Korean arms deal through Bank of China

In 2013, Panamanian authorities seized a huge haul of surplus Cuban weapons, including MiG fighters and surface-to-air missiles, aboard a North Korean ship at the entrance to the Panama Canal. Multiple U.N. Security Council resolutions prohibit North Korea from buying or selling most weapons, so the Cuban stevedores covered the weapons with sacks of sugar. An investigation by the U.N. Panel of Experts found that a North Korean shipper, Ocean Maritime Management (OMM), owned the ship, and that the regrettably named, Singapore-based Chinpo Shipping handled the financial transactions behind the shipment. According to multiple open-source reports, Chinpo used its account in the local branch of the Bank of China for those transactions.

chong chon gang sugar

After lengthy delays by the U.N. bureaucracy, a Security Council-appointed committee and the U.S. Treasury Department designated OMM. Since then, Treasury has designated multiple OMM offices, agents, and enablers. Chinpo was neither designated nor blocked, but the authorities in Singapore charged it with violating a local law codifying U.N. Security Council sanctions against North Korea, and for running an illegal money transmitting business without meeting the financial due diligence requirements that apply to such businesses. Now, Reuters and the AP are reporting that the court has convicted Chinpo:

In announcing the verdict, Singapore District Judge Jasvender Kaur said the firm, Chinpo Shipping Company, could have contributed to the nuclear-related programs or activities of North Korea.

The company was also found guilty of running a remittance business without a valid license for more than four years.

Chinpo had wired $72,017 from its Bank of China account to a Panama-based shipping agent in July 2013 for the return passage of the MV Chong Chon Gang through the Panama Canal. [….]

Chinpo violated a United Nations law adopted by Singapore that prohibits the provision of financial services, assets or resources to North Korea that “may be reasonably be used to contribute to the nuclear-related, ballistic missile-related, or other weapons of mass destruction-related programs or activities.” The maximum sentence is a fine of 100,000 Singapore dollars ($71,000) and five years in jail. [AP]

If you’ve read all of the links I so laboriously embedded in those first two paragraphs, there isn’t much question that Chinpo willfully facilitated the North Korean shipment using deceptive financial practices.

That shouldn’t be the end of the story, however, because financial institutions like the Bank of China are supposed to have compliance and know-your-customer programs in place to ensure that they don’t service illicit transactions. In the specific case of North Korea, the Global Financial Action Task Force has called for “countermeasures” against its money laundering and arms dealing for years.

You would think, then, that one of the world’s largest banks would employ compliance officers competent enough to detect such suspicious activity, which (if denominated in dollars, and in this case, it was) must be reported to the Treasury Department. In fact, the Treasury Department’s Financial Crimes Enforcement Network has published specific guidance on the reporting of suspicious North Korea-related transactions.

The U.N. Security Council’s adoption of specific financial measures to address this conduct reinforces long-standing Treasury Department concerns regarding North Korea’s involvement, through government agencies and associated front companies, in financial activities in furtherance of a wide range of illicit activities. These activities include currency counterfeiting, drug trafficking, and the laundering of related proceeds. FinCEN has previously noted such conduct, most recently in 2007.4 The Treasury Department remains especially concerned about the use of deceptive financial practices by North Korea and North Korean entities, as well as individuals acting on their behalf. Such deceptive practices may include North Korean clients’ suppression of the identity and location of originators of transactions; their practice of arranging for funds transfers via third parties; repeated bank transfers that appear to have no legitimate purpose; and routine use of cash couriers to move large amounts of currency in the absence of any credible explanation of the origin or purpose for the cash transactions. [….]

FinCEN notes that with respect to correspondent accounts held for North Korean financial institutions, as well as their foreign branches and subsidiaries, there is now an increased likelihood that such vehicles may be used to hide illicit conduct and related financial proceeds in an attempt to circumvent existing sanctions. Financial institutions should apply enhanced scrutiny to any such correspondent accounts they maintain, including with respect to transaction monitoring. [….]

Consistent with the standard for reporting suspicious activity as provided for in 31 C.F.R. part 103, if a U.S. financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution shall then file a Suspicious Activity Report. [FINCEN Advisory, June 18, 2009]

FINCEN and FATF have both renewed their North Korea advisories repeatedly in recent years. And yet, from the fact that the transactions went through unimpeded, we can infer that nothing here seemed suspicious to the Bank of China’s compliance officers:

Chinpo had applied for a total of 605 outward remittances totaling $40 million from 2009 to 2013 on behalf of North Korean entities. Chinpo’s director, Tan Cheng Hoe, also heads associated companies Tonghee Shipping Agency and Great Best Trading.

When The Associated Press visited Chinpo’s listed address, another company said it has occupied the premises for more than a year. The case was adjourned until Jan. 29 to give prosecution and defense lawyers time to make submissions. [AP]

As one immediate consequence of this conviction, Treasury will almost certainly designate Chinpo Shipping, and possibly some of its officers. I’d expect to see those designations this week, if not today.

But Chinpo Shipping is a small fish, and no one should view that result as the end of this story. This isn’t the first time the Bank of China has come under suspicion for shady North Korea-related transactions, after all. Just as Treasury has recently taken enforcement actions against other big banks, such as BNP Paribas, Credite Agricole, and Commerzbank, for evading sanctions against other countries, Treasury should investigate whether the Bank of China violated the Bank Secrecy Act by failing to file Suspicious Activity Reports on Chinpo, and perhaps other North Korea-linked customers.

We’ll soon know just how serious the Obama Administration is about enforcing the Security Council’s sanctions by the message it sends — or doesn’t — to the Bank of China.

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Treasury plays catch-up on North Korea sanctions, designates 10 proliferators & shippers

Yesterday afternoon, the Treasury and State Departments designated ten more North Korean targets:

  • six individual North Koreans for involvement in WMD-related financial transactions,
  • three shipping companies, for being fronts of Ocean Maritime Management, and
  • one entity, North Korea’s Strategic Rocket Forces.

From Treasury’s press release:

OFAC designated six individuals pursuant to E.O. 13382, which targets proliferators of WMD and their supporters.  Kim Kyong Nam was designated for acting, or purporting to act, for or on behalf of, directly or indirectly, the Foreign Trade Bank (FTB), North Korea’s primary foreign exchange bank.  FTB is an entity whose property and interests in property are blocked pursuant to E.O. 13382 for facilitating transactions on behalf of Specially Designated Nationals linked to North Korea’s proliferation network.  Kim Kyong Nam is FTB’s representative in Khabarovsk, Russia.
OFAC also designated the following five Tanchon Commercial Bank (TCB) representatives pursuant to E.O. 13382 for acting for or on behalf of, directly or indirectly, TCB, which was previously designated by the U.S. and UN as a financial arm of Korea Mining Development Trading Corporation (KOMID): Jang Bom Su, Jon Myong Guk, Ko Tae Hun, Choe Song Il, and Kim Jung Jong.  Jang Bom Su and Jon Myong Guk are TCB representatives in Syria.  Ko Tae Hun and Jon Myong Guk facilitate the cross-border movement of KOMID funds.  Choe Song Il and Kim Jung Jong are TCB representatives in Vietnam.
In addition to OFAC’s designations, the U.S. Department of State designated the Strategic Rocket Force of the Korean People’s Army pursuant to E.O. 13382 for engaging in activities that have materially contributed to the proliferation of weapons of mass destruction or their means of delivery. [….]
OFAC designated the following three shipping companies pursuant to E.O. 13551 for being owned or controlled by or acting for or on behalf of U.S.- and UN-designated Ocean Maritime Management Company (OMM):  Haejin Ship Management Company Limited, Pyongjin Ship Management Company Limited, and Yongjin Ship Management Company Limited.  OMM is a North Korean shipping company that uses a variety of aliases and front companies to operate internationally.  OMM attempted to import a concealed shipment of arms and related materiel to North Korea aboard the DPRK-flagged cargo vessel Chong Chon Gang in July 2013.  It used deliberate and evasive methods to conceal the illicit cargo of arms and related materiel. [link]

State’s press release is here.

First, the good. The administration has finally been shamed into a certain token degree of action. The number of entities designated under North Korea sanctions, or for supporting North Korean proliferation, has now hit 100. Around 37 of these targets were designated this year (meaning that the Obama Administration has now designated about as many North Korea-related targets as the Bush Administration did). The designations show a continued focus on targeting North Korean shipping (see here, here, and here).

Now, the bad news. First, the designations still include no senior North Korean officials, with the arguable exception of O Kuk-Ryol. Despite hints by the Obama Administration earlier this year, no North Korean officials have been designated for censorship or human rights abuses. No North Korean entities, including Unit 121, its leaders, or its Chinese enablers, have been designated under President Obama’s new cyber sanctions order.

The designation now of the Strategic Rocket Forces comes nine years after the U.N. Security Council first approved Resolution 1718, which prohibited any financial transactions in support of North Korea’s WMD and missile-related activities. The most glaring omission is Treasury’s failure, thus far, to designate the National Aerospace Development Administration, which has been implicated by the U.N. Panel of Experts for its missile development work.

Also telling is that while several North Koreans have been designated for their associations with two dirty North Korean banks, Tancheon Commercial Bank and the Foreign Trade Bank, those two banks could not have moved dollars through the financial system on their own. To date, I’m not aware of any third-country financial institution or money launderer being designated, fined, or penalized for facilitating those transactions since the action against Banco Delta Asia in 2005. The Obama Administration has designated no Russian targets for assisting North Korea with its arms smuggling or nuclear research, and no Chinese entities for helping North Korea nuke up, do arms deals or launder money. As long as that continues to be the case, there will be actors in the low reaches of the financial ecosystem who will continue to move Kim Jong-Un’s money through our banking system.

Finally, Treasury still hasn’t closed a key gap with the European Union by designating the Korea National Insurance Corporation, or the Korea Shipowners’ Protection & Indemnity Association. U.S. and EU cooperation in blocking the insurers of North Korean ships would be consistent with Security Council resolutions, and would make it extremely difficult for North Korean ships to land in foreign ports.

It isn’t clear why Treasury went to the extra trouble of designating the ten new targets under older conduct-based sanctions orders, rather than the new status-based 13687. One possibility is that Treasury was working on these actions before January 2, 2015, when the President signed 13687, and has just gotten around to issuing the new designations.

The total number of persons, vessels, and entities designated for North Korea-related conduct under the three sanctions orders (EO 13382, EO 13551, and 13687) now comes to precisely 100. That compares to 172 targets under the Zimbabwe sanctions program, 104 under Cuba sanctions (down from over 300 earlier this year), 209 under Syria sanctions, and 843 under Iran sanctions programs (a figure that does not include Iranian entities designated exclusively under terrorism or proliferation-related sanctions programs). A total of 711 targets are designated under Executive Order 13382 for WMD proliferation related activities; of these, 52 are either North Korean or designated for material support for North Korean proliferation. Thousands of targets are designated under anti-drug and anti-terrorism sanctions programs.

Below the fold, I’ve published a list of North Korean entities designated, and third-country entities designated under North Korea sanctions programs. Unfortunately, the list isn’t complete, because Treasury’s SDN search list still has some bugs to be worked out.

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Sen. Gardner calls on Congress to pass North Korea sanctions bill

Amid all of the slaughter and chaos sweeping over us, Senator Cory Gardner doesn’t want us to forget which government built a nuclear reactor in Syria in 2007, and that may soon be able to put a nuclear warhead on an intercontinental ballistic missile.

It is time to ratchet up the pressure. That is why I’ve introduced the North Korea Sanctions and Policy Enhancement Act. This bill would require the president to impose sanctions on people who have contributed to North Korea’s nuclear program, enabled its human rights abuses, and engaged in money laundering, counterfeiting or drug trafficking that benefits the regime.

North Korea skirts financial sanctions by setting up shell companies in countries like China. This bill would add pressure by asking the Treasury Department to designate North Korea “a country of primary money laundering concern” under the Patriot Act.

Similarly, North Korea evades U.N. embargoes on arms trafficking. This bill would authorize the Department of Homeland Security to seize any ships the regime uses for smuggling if they enter U.S. waters. It also asks the president to identify foreign ports that are not doing enough to prevent smuggling.[Sen. Cory Gardner, Wall Street Journal]

Senator Gardner’s bill, S. 2144, shares most of its content with H.R. 757, a bill introduced by Rep. Ed Royce (R., Cal.) and Rep. Elliot Engel (D., N.Y.). In several ways, S. 2144 improves on its elder sibling. Hopefully, as the bills work their way through their respective committees and chambers, they will converge in a form that combines their best elements. That needs to happen soon, because we’re already near the end of the first session of this Congress. Time is finite, and unfortunately, it seems the only person who can get the whole Congress’s attention is Kim Jong-Un.

Events may soon favor Sen. Gardner’s call, because Kim Jong-Un also doesn’t want us to forget about Kim Jong-Un. The day after the Wall Street Journal published Sen. Gardner’s op-ed, 38 North published images showing that North Korea is digging a new tunnel at its nuclear test site at Punggye-ri. Perhaps, then, tomorrow’s crisis might crowd into a few of the news cycles that have been preoccupied, lately, with the slaughter of the week. If that’s what it takes to get us toward a policy that recognizes the North Korea that is, rather than the North Korea we would prefer to believe in, so much the better.

Historically, North Korea’s nuclear tests have come every three or four years, so we’re about due. If what His Porcine Majesty most needs now is to whip up xenophobic hostility to distract his ruling class from their fears of him, and if he thinks he’s reached the limits of what Park Geun-Hye will tolerate, maybe a nuclear test is just what he needs in the short term. But if his survival depends on ready access to hard currency in his Chinese and Swiss bank accounts, in the long term, this might mean the end of him.

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Obama sanctions Syria’s Russian enablers (but not North Korea’s Chinese enablers)

Let’s resume this week’s “why not North Korea?” theme with a pithy summary of where we stand today. The Obama Administration has frozen the assets of SyrianIranian, and Sudanese (but not North Korean) officials for human rights violationsIt has frozen the assets of Iranian and Syrian (but not North Korean) officials and entities for censorship, and fined the enablers of censorship in Sudan, Iran, and Syria (but not North Korea). Treasury has frozen the assets of nearly all of the leaders of Belarus and Zimbabwe (but not North Korea) for undermining democratic processes or institutions. The administration has frozen the assets of Russian (but not North Korean) officials and financiers for aggression against a neighboring country. Until two weeks ago, it had frozen the assets of Burmese generals for buying North Korean weapons, but no North Korean officials for selling Burma the weapons.

And on Sunday, of course, I wrote about President Obama’s imposition of sanctions against human rights violators in Burundi, something it has not done to a single North Korean official.

More broadly, the Treasury Department has designated Iran and Burma (and previously, Nauru and the Ukraine) as Primary Money Laundering Concerns, threatening their very access to the financial system, but not North Korea, which counterfeits our currency. It lists Iran and Syria as state sponsors of terrorism, but not North Korea, which sponsored terrorist threats against American moviegoers one year ago, sells arms to Hezbollah, and sends assassins to murder defectors and human rights activists. 

Why not North Korea? Which of these targets is a greater danger to our security, to our freedomto our allies, or to its own people? But by now, you should know that this is no place to come for answers to that question. This is the place you come to watch the list of unanswered questions grow longer.

~   ~   ~

Last week, the Treasury Department added ten entities to its list of Specially Designated Nationals under its Syria sanctions program. Of these entities, four (including a bank) were based in Russia, three in Cyprus, one in Britain, one in Belize, and one in both Russia and Cyprus. The Treasury Department says it designated these targets — most of them bankers, financiers, and oil dealers — for “materially assisting and acting for or on behalf” Bashar Assad’s regime, thus helping him to continue his war against his own people.

Treasury’s new sanctions search tool shows a total of 209 Syrian entities designated, including Bashar Al-Assad, Foreign Minister Farouk Al-Sharaa, and most of the top officials and agencies in Syria’s security apparatus. (Not one senior North Korean official is designated.) There are also many Iranian, Lebanese, and Russian entities and individuals listed. Including the Iranian aircraft that are listed and blocked, there are more third-country entities blocked under the Syria sanctions program than there are total entities blocked (43) under North Korea-specific sanctions programs.

Now, using the sanctions search tool, highlight the two North Korea-specific sanctions programs, “DPRK” and “DPRK2,” and count the third-country entities designated. The good news is that it’s more than zero. The bad news is that it’s three. The list includes one Singaporean individual, one Singaporean company, and one Egyptian company, all designated within the last four months. I did not count vessels flagged by third countries, because these are mere flags of convenience for vessels that are owned or controlled by North Korea.

None of which is to argue against the need for financial sanctions against the Syrian government, and crucially, against the enablers that arm, support, and finance this horrendous, barrel-bombing recruiting machine for terrorists. There was a time when we used a similar strategy against North Korea, admittedly for different reasons. The strategy worked, even beyond Treasury’s expectations. We should be using it now. We should never have stopped using it at all. Instead, with its unserious approach to sanctions enforcement, the Obama Administration has declared North Korea a de facto free-fire zone for proliferation, terrorism, and crimes against humanity.

If the Obama Administration isn’t serious about sanctions, and if His Corpulency’s idea of a diplomatic solution is spurious to us, in what sense can anyone say that this administration has a plausible North Korea policy at all?

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Obama sanctions enablers of censorship in Iran, Sudan & Syria (but not North Korea)

Another announcement, last week, from the U.S. Treasury Department’s Office of Foreign Assets Control:

Barracuda Networks, Inc. (“Barracuda U.S.”), of Campbell, California, has agreed to pay $38,930 on behalf of itself and its United Kingdom subsidiary, Barracuda Networks Ltd. (“Barracuda U.K.”), (collectively “Barracuda”) to settle potential civil liability for alleged violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560;1 the Sudanese Sanctions Regulations, 31 C.F.R. part 538, and the Syrian Sanctions Regulations, 31 C.F.R. part 542. From August 2009 to April 2012, Barracuda U.K. sold Web filtering products including products that could be used to block or censor Internet activity; internet security products; and related software subscriptions to individuals and entities in Iran and Sudan, and to Specially Designated Nationals and Blocked Persons (“SDNs”) under the Syrian Regulations. In addition, from August 2009 to May 2012, Barracuda U.S. provided the firmware and software updates for these and other software subscriptions.

So, what has our government done to find and sanction the (reportedly German) exporter of those cell phone trackers North Korea is using to seal its borders? Anyone?

Or the trading companies, controlled by the North Korean internal security services, that are financing Kim Jong-Un’s border crackdown

The Treasury Department has not sanctioned North Korea’s Ministry of People’s Security or its State Security Department, their leaders, or the Chinese and other third-country entities that trade with them.

It has sanctioned the Islamic Republic of Iran Broadcasting service and its director of news services for “censorship or other activities that limit the freedom of expression,” but it hasn’t sanctioned the Korean Central News Agency, the Rodong Sinmun, or Korea Central Television.

Why not North Korea? Has our government recognized Pyongyang as a dead zone for freedom of information? What honest and conscientious believer in engagement with North Korea can say that its government should have the right to close off our best avenues for engagement with the North Korean people?

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Obama sanctions Burundi (but not North Korea) for human rights violations

Last week, President Obama signed a new executive order blocking the assets of four current and former officials of the government of Burundi for “killing of and violence against civilians, unrest, the incitement of imminent violence, and significant political repression.” The targets certainly seem deserving

On closer investigation, this turns out to be another case of the U.S. leading from behind; the EU designated an overlapping list of Burundian officials a month ago. That’s not necessarily a bad thing. Sanctions always work better when the U.S., the EU, and (hopefully) other nations cooperate to enforce them. One hopes that in return for U.S. support this time, the EU might also follow our lead on other important targets.

So while I take no issue with these designations, it’s absurd that no North Korean officials at all — not one! — have yet been designated for crimes against the people of North Korea analogous to these:

(1) actions or policies that threaten the peace, security, or stability of Burundi;

(2) actions or policies that undermine democratic processes or institutions in Burundi;

(3) human rights abuses;

(4) the targeting of women, children, or any civilians through the commission of acts of violence (including killing, maiming, torture, or rape or other sexual violence), abduction, forced displacement, or attacks on schools, hospitals, religious sites, or locations where civilians are seeking refuge, or through other conduct that may constitute a serious abuse or violation of human rights or a violation of international humanitarian law;

(5) actions or policies that prohibit, limit, or penalize the exercise of freedom of expression or freedom of peaceful assembly;

(6) the use or recruitment of children by armed groups or armed forces;

(7) the obstruction of the delivery or distribution of, or access to, humanitarian assistance; or

(8) attacks, attempted attacks, or threats against United Nations missions, international security presences, or other peacekeeping operations;

[Executive Order 13712]

With the possible exception of (6), North Korea has engaged in conduct analogous to every item on this list. North Korea may also be contributing to Burundi’s human rights violations. In 2011, Burundi was found to have purchased a shipment of (defective) North Korean weapons through a Ukrainian arms dealer, in violation of a U.N. arms embargo. This month, Burundi was also one of just 19 nations to vote against a U.N. General Assembly resolution condemning North Korea’s crimes against humanity.

So what principled explanation can the Obama Administration or its Special Envoy for Human Rights offer to explain why it has imposed targeted sanctions on human rights violators in Burundi, but not in North Korea? Who supposes that the human rights violations in Burundi, as bad as they are, are the equal of this?

Michael Kirby, the Chair of a U.N. Commission of Inquiry, has said, “The gravity, scale and nature of these violations reveal a state that does not have any parallel in the contemporary world.” The Commission’s report recommended that the Security Council “adopt targeted sanctions against those who appear to be most responsible for crimes against humanity.” Given that China and Russia are complicit in supporting North Korea’s political system, and are almost certain to block any move toward accountability in the Security Council, the U.S., the EU, and other allied nations would be perfectly justified in saying, “Enough is enough,” and imposing sanctions as a coalition.

Certainly, given the many U.N. General Assembly resolutions condemning North Korea’s crimes and calling for accountability, the Obama Administration could find strong international support for imposing multilateral sanctions against the North Korean leaders who are responsible for crimes against humanity. And yet, inexplicably, it chooses not to.

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Orascom’s Big Turkey Drop: Why the SEC should require disclosure of investments in N. Korea

For years, Koryolink was the showpiece of economic engagement with the North Korean government. The service, a partnership between Pyongyang and the Egyptian conglomerate Orascom, provided cell phone service to North Korean officials, elites, security forces, and a few other customers with enough cash and connections to afford them. As a sweetener for Kim Jong-Un, Orascom also clothed the Ryugyong Hotel, the awkwardly naked (and still vacant) colossus of an embarrassment to Pyongyang’s economic system. According to the Daily NK, taxing Koryolink has become a significant source of hard currency for the regime.

For a few years, Koryolink looked like a solitary exception to the rule that Pyongyang always reneges on its bargains, but a few months ago, thanks to Martyn Williams, we first heard that Orascom and the North Korean government were at odds over exchange rates and the repatriation of Orascom’s earnings. Attempts to mediate the dispute turned sour after Pyongyang set up a competing cell service provider and demanded a majority interest in Koryolink.

Then, last Sunday, Orascom announced that it would remove Koryolink from its consolidated financial statements, and Yonhap has since reported that Orascom has lost control of Koryolink. Some reporters have even suggested that Pyongyang would nationalize Koryolink. Orascom may be facing the write-off of $585 million trapped in banks in Pyongyang. And so began Orascom’s Big Thanksgiving Turkey Drop.

The stock market ended trading with retreats across its main indices, its benchmark index dropping by 2.01 percent, continuing a dip that started on Monday. [….]

Ahmed Zakaria, the director of customer accounts at Okaz Securities Brokerage said that rumours of the nationalisation of OTMT’s North Korean operation Koryolink are “still dominating the market.”

“There are great fears because of this rumour,” he said.

Orascom Telecom, whose executive chairman is telecom magnate Naguib Sawiris, who denied the rumours, is listed in the Egyptian stock exchange. Its stock fell by 13.2 percent since the beggining (sic) of trading this week, after the company said on Sunday that it is excluding its North Korean investment from its financial statements. [Aswat Masriya]

On Monday alone, Orascom Telecom’s stock fell 7.6%, and “dragged down” the entire Egyptian market. Although ISIS’s bombing of a Russian airliner over Egypt contributed to the broader losses, the collapse of Orascom’s share prices was largely due to shareholder concerns (or panic) about Koryolink. By Tuesday, the losses had reached 13.2%; by week’s end, according to the Wall Street Journal, it had fallen more than 28%.

Even this is only part of the story; after all, there have been whispers about Orascom’s troubles for months now. For the year to date, the losses amount to a whopping 58%. Reuters shows a pessimistic “analysis consensus,” meaning that the stock may fall further this year. This leaves Orascom’s Executive Chairman, Naguib Sawaris looking foolish.

Orascom, understandably not wanting to aggravate the situation, denies that Koryolink has been nationalized, and blames sanctions instead of Pyongyang’s policy decisions. This excuse doesn’t withstand scrutiny. The sanctions, as currently enforced, would only be a problem if Orascom’s holdings are trapped inside the Foreign Trade Bank of North Korea or another sanctioned North Korean bank. There is no shortage of non-sanctioned banks in North Korea that Orascom could theoretically use, including the Central Bank of the DPRK.

Furthermore, Orascom has no one to blame but its own poor choice of partners, and of course, its North Korean partners themselves. Even if Orascom’s woes were a consequence of sanctions, Orascom fully assumed that risk. It obtained its license to set up Koryolink in 2008, two years after the U.N. Security Council imposed its first two rounds of sanctions, with UNSCR 1695 and 1718. It can hardly blame the U.N. and its member states for tightening the sanctions — modestly at that — in response to two additional nuclear tests.

Even if Naguib Sawaris and the Orascom management chose to overlook those risks, they still should have warned their shareholders about them. In the United States, the Securities and Exchange Commission requires issuers with investments in countries that are (or may be) subject to sanctions to disclose those investments in their public filings. That requirement applied to North Korea until 2008, when President Bush rescinded North Korea’s listing as a state sponsor of terrorism. Certainly Orascom’s ties to Pyongyang were no secret, but how many other companies are invested in North Korea more discreetly? How many Americans hold mutual funds that are invested in those companies? 

Although I’ve long argued here that North Korea sanctions today are far weaker than is widely assumed, it is also true that companies linked to North Korea face significant sanctions exposure. Pressure is growing in Congress to re-list North Korea as a terror sponsor. A far greater threat is that Pyongyang’s next provocation will cause Congress to pass more comprehensive sanctions legislation, now pending in both houses of Congress.

Surely these are risks that any ethical issuer should inform its investors about.

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Scott Snyder: increase sanctions, including secondary sanctions, on Pyongyang

In a new paper for the Council on Foreign Relations, Snyder has called for increasing pressure on Pyongyang through sanctions, to persuade it that it must disarm or perish:

Since defecting from Six Party negotiations on denuclearization in 2008, North Korea has pursued nuclear development unchecked by international constraints. Barack Obama’s administration has demanded that Pyongyang make a strategic choice to denuclearize and tried to build a regional consensus opposing North Korea’s nuclear efforts, but it has been
unable to halt the country’s nuclear weapons development. Instead, North Korea’s continued nuclear and missile development is designed to force U.S. policymakers to make an undesirable choice: either acquiesce to the reality of a nuclear North Korea or mobilize international support for the destabilization of the North Korean regime.

To stop the North Korean nuclear threat, the United States should take three steps. First, Washington should increase pressure on Pyongyang so that the regime recognizes its existential choice between survival and nuclear status. Second, the United States should pursue five-party talks (Six Party framework members minus North Korea) to develop a viable pathway for North Korea to survive and benefit from denuclearization. Such a regionally supported consensus on a route to denuclearization would seek to induce a debate inside North Korea regarding the costs and benefits of its pursuit of nuclear status. And third, the United States should encourage China and Russia to withdraw political support for and increase pressure on North Korea until the regime commits to denuclearization. [Scott Snyder, Council on Foreign Relations]

Read the rest on your own; it’s only a few pages long (HT: Yonhap). Whatever my small quibbles with Scott Snyder’s writings on occasion, there’s no question that he’s one of the most respected Korea scholars in Washington, and any shift in Snyder’s thinking is likely to reflect or catalyze more shifting opinions within the conventional wisdom here. I find much more to agree with in this paper than Snyder’s previous take on sanctions policy.

The paper still raises some questions. The first of these is how we can “encourage” a recalcitrant China and Russia, when both countries have engaged in a pattern of willful non-enforcement. In China’s case, I recently described that pattern in great detail. I’ll present a similar case about Russia later this week. Would Snyder be willing to go as far as taking up Andrea Berger’s call for secondary sanctions? I’d say “yes,” based on this:

The Obama administration should apply increased political and economic pressure on North Korea to convince its leaders that a nuclear North Korea is a dead-end option. The United States should work with its allies to expand sanctions to target businesses and banks that refuse to cease cooperation with North Korea. At the same time, the United States and its allies should emphasize to Pyongyang that expanded sanctions will be relieved if North Korea takes meaningful, concrete steps toward denuclearization, such as resuming cooperation with the International Atomic Energy Agency (IAEA) by allowing the return of international inspectors to the country. The United States should also remind North Korea that military provocations risk escalation that could lead to the country’s demise.

We know from past experience that whatever the objections of the Chinese government to secondary sanctions — and I was recently regaled over dinner with how furiously some of its representatives reacted to this paper, much to my amusement — historically, Chinese banks have been responsive to the threat of secondary sanctions. It’s reasonable to believe that Russian banks would respond to the same forms of “encouragement.”

Then, would Snyder focus our demands exclusively on the nuclear issue, excluding concerns about North Korea’s chemical and biological weapons, its cyber-warfare, its money laundering, its increasingly dangerous artillery rocket arsenal, and its crimes against humanity? It may be that our interests demand that Pyongyang commit to a more fundamental change of its world view than disarmament alone; after all, its expansion into uranium enrichment makes disarmament much harder to verify, especially without Pyongyang’s acceptance of much more transparency.

The human rights issue is of growing importance to policy debates in Europe and elsewhere. This also points to one flaw of the five-party formulation. The use of progressive diplomacy instead would allow us to enter talks with a coalition behind us, rather than by going straight to talks with governments that are disunited or (in the case of China and Russia) hostile to our interests.

Overall, however, Snyder’s paper is refreshingly realistic about Pyongyang’s intentions, and about the need for us to be more aggressive about curtailing them.

 

 

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