What Pyongyang Must Do to Get Sanctions Lifted

If a problem cannot be solved, enlarge it. – Dwight D. Eisenhower

In yesterday’s post, I confronted two unwelcome facts: first, that Kim Jong-un almost certainly will not give up his nuclear arsenal voluntarily; and second, that we cannot learn to live with a nuclear North Korea (or more accurately, it will not learn to live with us). To these, I’ll add a third: things in Korea will certainly get much scarier over the next few years. Pyongyang is blaming sanctions for its own threats, but the inevitability of this crisis isn’t a function of our own policy choices; it’s a function of Kim Jong-un’s psychology, the mass psychology of a system addicted to threats of war, and the fact that as Pyongyang gains more confidence in its weapons, it will feel more freedom of action to provoke and extort without cost. 

Ex-diplomats’ temptation to dialogue, while understandable on certain levels, is an exercise in futility at this point. (Of course, we never really stopped talking to Pyongyang. Not that I necessarily object to talking. I object to paying.) Still, my question remains: if Pyongyang won’t disarm, what’s to talk about?

In yesterday’s post, I ruled out every diplomatic strategy for disarming Pyongyang except one — putting it under so much financial and political duress that its leaders realize that they must change or perish (and it’s much too soon to make effective use of that leverage now). Today’s post will start by answering Sahand Moaref’s question of why the U.S. government chose to sanction North Korea over human rights, thus diffusing what Moaref sees as a necessary focus on disarmament, and denying diplomats the flexibility to achieve a negotiated disarmament. There are two answers to this — a simple legal answer, and the policy reasons behind the legal answer.

The simple legal answer is that section 304 of the North Korea Sanctions and Policy Enhancement Act gave the President 120 days to make a public decision whether to designate Kim Jong-un for human rights abuses. Then, if the President found Kim Jong-un responsible, it was required to designate him and freeze his assets in the dollar-based financial system. State now says that its designation of North Korean human rights violators was years in the making. If that’s true, Congress was pushing against an open door, and the political consensus was already unanimous that there was no diplomatic breakthrough for such a designation to ruin. Still, that consensus went unrequited until three weeks after Congress forced State to say whether Kim Jong-un was responsible for crimes against humanity. Of course, there is only one correct answer to that question.

The reasoning behind the NKSPEA is that our diplomatic strategies — first, appeasing Pyongyang; then, ignoring it — were drifting over a waterfall. There was thus little risk in limiting the flexibility of diplomats to negotiate an agreement that wasn’t happening anyway, and that had little hope of success even if it did. Instead, Congress demanded a comprehensive policy for a comprehensive solution. The NKSPEA requires the President to apply all of our instruments of national power short of military force to coerce Pyongyang to end those behaviors that the U.S. and its allies cannot simply learn to live with. Congress also did something no diplomat has ever done — it told Pyongyang exactly what it must do to get sanctions lifted by writing suspension and termination conditions right into the law. (I’ll get to what those conditions are in a moment.)

To the drafters of the NKSPEA, of which I’m one, State’s negotiating strategy was hopelessly myopic. Its focus on the narrowest of disarmament objectives traded away nearly all of our leverage over Pyongyang to get transitory concessions on just one part of its nuclear program. Thus, that strategy made it more difficult to achieve a comprehensive solution to the greater Korean crisis. It bears repeating that the Korean crisis isn’t just about nukes — it’s about the chemical, biological, thermobaric, and conventional weapons Pyongyang regularly threatens to rain down on millions of South Korean civilians, and the missiles and artillery that would deliver those weapons. It’s about narcotics trafficking, insurance fraud, money laundering, international abductions and assassinations, the sale of weapons to terrorists, cyberterrorism against the U.S. homeland, and the counterfeiting of U.S. currency. It’s also about a system of repression and secrecy so extreme that it renders any disarmament agreement unverifiable.

Thus, by 1998, in pursuit of a freeze of North Korea’s plutonium program, the Clinton administration had lifted most trade sanctions against North Korea and continued to provide it aid, despite a growing body of evidence that it was cheating on the 1994 agreement by pursuing a uranium enrichment program. Both political parties are equally culpable here; by 2008, the Bush administration lifted most financial sanctions in exchange for one blown-up cooling tower and a few boxes of uranium-tainted papers.

Meanwhile, State never even began negotiations in earnest to disarm North Korea of its chemical weapons, biological weapons, ballistic missiles, or the conventional artillery it had aimed at Seoul and other South Korean cities.

By giving away so much so soon, Washington also damaged the cohesion of the most important diplomatic alliances we would need to achieve a lasting peace in the region. In 2007, for example, the U.S. turned its back on treaty ally Japan by removing North Korea from the list of state sponsors of terrorism without having secured a meaningful commitment by Pyongyang to return Japanese abductees. That betrayal caused great controversy in Japan at the time, and it was still harming the U.S.-Japan alliance years later, when Japan cut a separate deal with Pyongyang for the return of the abductees.

Similarly, the Bush administration’s decision in 2007 to let Pyongyang ship weapons to Ethiopia was a clear violation of UNSCR 1718, a resolution the U.S. had just expended substantial political capital to secure. Allowing Pyongyang to violate that resolution squandered a global diplomatic consensus to limit Pyongyang’s arms dealing, which funds its WMD programs. To this day, the U.S. and South Korea are still expending diplomatic capital to get African and Asian states to comply with UNSCR 1718, and with the resolutions that followed it.

North Korea’s human rights abuses have long been a grave concern for many members of Congress, but since the 2014 release of a U.N. Commission of Inquiry report finding North Korea’s government responsible for crimes against humanity, that concern has resonated globally. The world is no longer prepared to give Pyongyang license to commit murder, rape, extermination, and starvation on a mass scale, nor should it be. And if State and Treasury had designated the leaders of Zimbabwe and Belarus for human rights abuses, they could hardly justify their failure to designate Kim Jong-un for far worse.

There are also sound political reasons why any agreement with North Korea must go beyond nukes. Iran continues to support terrorism and test missiles despite the Joint Plan of Action, and Congress isn’t just going to live with that; it will impose new sanctions in response to new evils. Support for terrorism and missile tests are unacceptable to Congress and to U.S. allies, regardless of whether Iran complies with the JPOA or not. These political and diplomatic realities explain why diplomatic solutions with rogue states must be comprehensive, even if comprehensive agreements are harder to achieve in the short term.

More fundamentally, negotiations are doomed to fail as long as Pyongyang continues to lie its way through them. Pyongyang has repeatedly reneged on its agreements, and we’d be fools to trust it again without compelling evidence that it is prepared to become a fundamentally more transparent society, whose commitments, actions, and adherence to the standards of basic humanity can be verified. How can we verify North Korea’s disarmament, especially now that it has admitted to having a more easily concealed uranium enrichment program, if Pyongyang continues to cage foreign aid workers in Pyongyang, miles from where the hungriest people are? Can we really monitor North Korea’s nuclear program if the vast areas that contain its political prison camps — including Camp 16, directly adjacent to its nuclear test site — remain off-limits to us? How could inspectors expect to hear candid answers from North Korean scientists, engineers, or laborers who live in terror of having their loved ones sent to those camps? A closed, terrorized, and opaque society with a long history of determined mendacity is fundamentally impossible to disarm. To be disarmed, it must first be altered or abolished.

Pyongyang, not Washington or Seoul, made the decision to engage in such a wide range of conduct that is unacceptable and offensive to us, to North Korea’s neighbors, or to civilization as a whole. If that breadth of evil complicates diplomacy, Pyongyang alone is responsible for that. If Pyongyang will not live by the basic standards of civilized humanity, it must live without the benefits of commerce with civilized humanity.

To Moaref, the expansion of sanctions leaves Pyongyang confused as to what it must do to get sanctions lifted. But today, no one in Pyongyang need wonder what they must do to get sanctions relaxed or lifted, because clear and specific goals and benchmarks are written into the law. Under the NKSPEA, sanctions can be suspended for a renewable period of a year if the President certifies that North Korea has done the following:

(1) verifiably ceasing its counterfeiting of United States currency, including the surrender or destruction of specialized materials and equipment used or particularly suitable for counterfeiting;

(2) taking steps toward financial transparency to comply with generally accepted protocols to cease and prevent the laundering of monetary instruments;

(3) taking steps toward verification of its compliance with applicable United Nations Security Council resolutions;

(4) taking steps toward accounting for and repatriating the citizens of other countries—

   (A) abducted or unlawfully held captive by the Government of North Korea; or

   (B) detained in violation of the Agreement Concerning a Military Armistice in Korea, signed at Panmunjom July 27, 1953 (commonly referred to as the “Korean War Armistice Agreement”);

(5) accepting and beginning to abide by internationally recognized standards for the distribution and monitoring of humanitarian aid; and

(6) taking verified steps to improve living conditions in its political prison camps.

Eventually, sanctions can be lifted entirely if North Korea meets the following conditions:

(1) met the requirements set forth in section 401; and

(2) made significant progress toward—

   (A) completely, verifiably, and irreversibly dismantling all of its nuclear, chemical, biological, and radiological weapons programs, including all programs for the development of systems designed in whole or in part for the delivery of such weapons;

   (B) releasing all political prisoners, including the citizens of North Korea detained in North Korea’s political prison camps;

   (C) ceasing its censorship of peaceful political activity;

   (D) establishing an open, transparent, and representative society; and

   (E) fully accounting for and repatriating United States citizens (including deceased United States citizens)—

      (i) abducted or unlawfully held captive by the Government of North Korea; or

      (ii) detained in violation of the Agreement Concerning a Military Armistice in Korea, signed at Panmunjom July 27, 1953 (commonly referred to as the “Korean War Armistice Agreement”).

If Congress agrees that the President has reached an agreement on some other acceptable terms, it can always amend the law, but a future President would be understandably reluctant to ask Congress to do this without bringing a very strong case to a future Congress. The North Koreans have burned us too many times to get another pass.

Note that these benchmarks do not necessarily require North Korea to become a fully “open, transparent, and representative” society, but merely to make “significant progress” toward one. This is not an end-state; it’s an abbreviated dialectic. The President could sign such a certification today with respect to any number of authoritarian states. As long as North Korea progresses toward transparency and openness, the President can continue to grant one-year suspensions of sanctions while our leverage remains in place.

Would North Korea view these conditions as political suicide? It agreed to many of them in 1953, so it’s hardly in a position to object to them now. Its agreement to progress toward becoming “open, transparent, and representative” depends how interested its leaders really are in developing their society and improving the living standards of their people. Until recently, U.S. and South Korean diplomats assessed that interest as high. North Korean propaganda still extols economic development as the half of its byungjin policy that isn’t fundamentally objectionable to the rest of humanity.

Whether Pyongyang would agree to this condition also depends on whether its leaders believe their own propaganda. That propaganda ceaselessly emphasizes how much the people adore Kim Jong-un, their single-minded pride and nationalism, and their belief that only a Supreme Leader can protect them from the packs of ravenous capitalists and carpetbaggers beyond the walls of their safe space. Some of the top officials in Pyongyang probably really do believe this, to varying degrees. Because human beings are individuals, and because individuals vary, some demographics in even the poorest regions of North Korea probably share it, too. I’ve met North Korean refugees who admit to having believed it themselves at one time. You don’t have to go all the way to Pyongyang to find experts who believe we underestimate the popularity of the regime, either: both Brian Myers and Andrei Lankov, who disagree with each other more often than not, have both said this at different times. Whether they’re right or wrong is mostly speculative; it isn’t even the point of the discussion. The point is that the leaders in Pyongyang might just believe it, or that they might, in a moment of sufficient duress, take the risk of believing the things they pretend to believe. But the state’s increasingly repressive policies also suggest its general recognition that many North Koreans despise the state’s exercise of totalitarian authority.

If a diplomatic solution is as unlikely as most people think it is, these conditions are probably moot anyway, and sanctions are merely one part of a broader strategy to either collapse the regime in as controlled a manner as possible, or to limit its capacity to threaten the world by putting it in something akin to international financial receivership. I’ll discuss the latter concept in the next post in this series.

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Andrei Lankov doesn’t really know if North Korea sanctions are working

It’s no secret that I’ve been a skeptic of “engagement” with Pyongyang from the very beginning, but I’ve always had a soft spot for Andrei Lankov. His Korea Times columns, his book, and his other writings on social, historical, and political matters have been so useful that I often cite them, despite his unrealized predictions or the silly things he occasionally writes. His view of engagement isn’t just the conventional approach of wheeling a catapult up the DMZ and flinging bundles of unmarked bills over the fence; Andrei also advocates more subversive and creative approaches that I also support. In a field with more than its share of pomposity, he’s humble, affable, and usually honest enough to admit when he’s wrong. He’s been to my house, and he’s still welcome. Our disagreements make for lively discussions. I hope that after what follows, he’ll still stop by. But on the specialized topic of sanctions, Andrei is in over his head.

In an interview with Radio Free Asia, Andrei seems very confident that sanctions aren’t working and never will. But as anyone who follows this story carefully knows, (1) the sanctions are only now being implemented, (2) as he eventually admits, sanctions need more than a few days, weeks, or month to work, (3) the evidence he cites is cherry-picked or unreliable, (4) he overlooks some promising signs that the sanctions are working, and mostly (5) he doesn’t understand the sanctions or how they work.

RFA: What has been the impact of the increased international trade sanctions against North Korea?

Lankov: I believe that four indicators show that the sanctions so far have not produced any significant impact. These involve declining grain prices in North Korea; a steadiness in exchange rates; only a minor decrease in the electrical supply in Pyongyang; and zero change in major North Korean construction projects.

U.S. and U.N. sanctions passed in February and March, respectively, and their implementation deadlines are only now coming due. For example, the U.S. can’t implement its designation of North Korea as a primary money laundering concern and cut off North Korean banks’ correspondent relationships until August 2nd, because 31 U.S.C. 5318A(b)(5) requires formal rule-making and a notice-and-comment period. Nor is it realistic to believe that we’d have found and frozen Kim Jong-un’s hidden slush funds just two weeks after designating him. The European Union only added North Korea to its own anti-money laundering blacklist last week, and Switzerland only enacted implementing regulations in May.

The deadline for nations to file their compliance plans with the 1718 Committee was June 2nd, but many African and Middle Eastern have yet to comply. In some cases, diplomatic pressure was necessary to secure that compliance. Our diplomats have years of hard work ahead of them.

RFA: The South Koreans have been urging some African nations to cut their ties with North Korea. Uganda said that it wouldn’t renew contracts for North Koreans who are training their military and police. Is this a significant development?

Lankov: Africa isn’t a major source of income for North Korea. Many more North Korean workers are employed in Russia and China—more than 40,000 altogether. And thousands of North Korean workers are employed in the Middle East, in countries such as Kuwait, the U.A.E., and Qatar. North Korea sells weapons to Middle Eastern countries with no questions asked, and these are countries that don’t worry about the human rights side of all this.

There are signs that diplomatic and financial pressure are impacting North Korean operations in Kuwait, Qatar, and other countries. For reasons I explained here, if we’re smart, we’ll turn to China and Russia last. Each of these income sources is small by our terms, but important for some factions in the North Korean regime. All of these income sources must come under pressure for sanctions to work.

To give you some frame of reference, it took three years for the last key piece of sanctions legislation to crush Iran’s economy. Treasury declared Burma to be a primary money laundering concern in 2004; Congress passed tough sanctions in the Burma JADE Act in 2008; and global diplomatic pressure continued to rise until the government released Aung San Suu Kyi in 2010. 

Andrei also overlooks a growing body of evidence that sanctions are starting to have an impact. Bureau 39 agents can’t pay their debts, which may or may not mean that Chinese banks froze their accounts. The regime is squeezing its overseas workers and diplomats so hard that some of them are defecting or mutinying. That, in turn, is causing Pyongyang to withdraw some of them and clamp down harder on others. A global diplomatic and human rights campaign is causing other states to send those workers home or stop granting visas to their replacements.

RFA: The U.S. and South Korea as well as human rights groups have called on other nations to stop employing North Korean workers, because many of these workers labor under harsh conditions and most of their income goes to the Kim Jong Un regime. Has this been effective in curbing the regime’s income?

Lankov:  I would say that two thirds to three quarters of the workers’ salaries go to the state. But the remaining amount still makes these by far the best jobs that ordinary North Koreans can get. It might make sense to stop North Korea from making money from the income of these workers. But let’s not pretend that we’re helping these suffering workers by doing so. People pay bribes to get these jobs.

Just to remind you what Andrei is defending here, North Korean workers in his homeland toil 20 hours a day, only to have their wages stolen by the state or by their managers, and loggers who run away are literally hamstrung by their managers. Anyone who pays a bribe to get that kind of work has been deceived about what he’s getting himself into.

RFA: China agreed to the U.N.-sponsored sanctions. But do you see signs that China is doing enough to implement them?

Lankov: It’s unclear whether China is deliberately avoiding the implementation of some sanctions, but the participation of China is absolutely vital. One problem, however, is that relations between the U.S. and China are worsening. The Chinese will see no reason to help sort out what they see as essentially an American problem.

It’s correct that China’s compliance record has been mixed since it voted for UNSCR 2270. This is still a vast improvement over its long history of willfully flouting U.N. sanctions, but mixed enforcement isn’t good enough anymore.

Russia turned in its compliance plan just last week — six weeks late and evidently written on a vodka-stained bar napkin. The entire report is one page long, a curiously brief submission for a nation that hosted the Ocean Maritime Management office that arranged the Chong Chon Gang arms shipment, which has invited North Korean nuclear scientists into its laboratories, which still allows designated North Korean companies to operate on its soil, and which has set up a ruble clearinghouse with North Korea as an obvious sanctions dodge.

The U.S., South Korea, and their allies must keep the pressure on Chinese and Russian interests. China isn’t a monolith. Its banks, ports, and government ministries have different interests, and therefore, different responses to sanctions. The critical decision we must make for sanctions to work is to threaten the interests of its banks and businesses that enable Kim Jong-un, and that need access to our markets and our financial system. They must be forced to choose between doing business with North Korea and doing business with the United States, or they’ll continue to choose both.

Even so, there has been a sharp decline in China-North Korea trade recently. Official statistics show declines in coal exports, overall exports, and North Korea’s trade with China. I’ll allow that we should treat these statistics skeptically. China’s economic decline and North Korea’s pathological ambivalence about trade could also account for this decline, although it’s noteworthy that bilateral trade actually rose in the first quarter of 2016 before falling sharply. Evidence of vacant office buildings, half-empty warehouses, and reports of disruptions to trade and banking relationships all suggest that there is some truth behind the official statistics. If these reports are accurate, Pyongyang’s financial situation will deteriorate in the coming months.

Yes, food prices in North Korea have remained mostly stable, and for the reasons I explained here, that’s good news. Sanctions do not target the food supply. So far, their targeting appears to be working as intended. 

RFA: And if grain prices have decreased, isn’t this a sign that the sanctions were designed to spare ordinary North Koreans from suffering any more than they do already?

Lankov: The idea of selective sanctions—the idea that sanctions can spare the ordinary people—is a fantasy.

Evidence, please? Where, for example, is the evidence that the Banco Delta Asia sanctions caused suffering to ordinary North Koreans? The evidence of the pain they caused Kim Jong-il even a year after they were imposed, on the other hand, is difficult to deny. The argument is also contradictory — on one hand, Andrei argues that sanctions are failing because they aren’t starving the poor; on the other hand, he argues against sanctions because they will starve the poor.

Can we avoid all adverse impacts on ordinary North Koreans? Regrettably, probably not, and we should be ready to mitigate those impacts with food aid if necessary. But so far, I can cite more evidence that sanctions have improved North Korea’s food supply than Andrei can cite that they’ve strained it. Sanctions have prevented Kim Jong-un from exporting luxury food for cash; that food has been sold at a discount in the markets instead. Sanctions have also forced trading companies to shift from sanctioned trade to non-sanctioned trade in food. Whatever adverse impacts sanctions may have, they’ll surely pale in comparison to the sanctions Kim Jong-un has imposed on his own people by restricting market trade, cutting down private crops, confiscating and replanting private farms, and restricting cross-border trade.

As for that new construction, it’s largely supported by the use of forced labor. Its specific purpose, as RFA reports, is to persuade foreign observers that sanctions aren’t working.

RFA: When you mention electricity supply holding relatively steady, how can you measure this? Don’t electricity shortages vary from region to region in North Korea? And the North Koreans consider themselves technically at war. They’re big on camouflage, concealment, and deception.

Lankov: Studies at Stanford University have shown that under sanctions, the North Korean leadership can simply reallocate electricity from the countryside to the capital. Of course, they still face electrical shortages, as always. But the regime has to keep the elite citizens of the capital happy.

I’ve already fisked that study here. It did too poor a job of surveying the sanctions to establish a causal link to any condition inside North Korea. Nor did it account for any number of alternative explanations for its observations. In fact, a source I can’t name reports that since the sanctions were imposed, Pyongyang has had more hours of electricity than usual. For what it’s worth, my source speculates that that’s because Pyongyang is using coal it can’t export to generate electricity at home.

RFA: There’s a long history of sanctions not working in a number of cases, but they did work against South Africa.

Lankov: Sanctions against South Africa worked because it was a democracy. They had to take into account what their own people were thinking. Sanctions don’t work when a leader can ignore the views of the common people, which is the case with North Korea … Sanctions worked in Iran because while the system is twisted and lacking in many ways, they do have elections and some accountability. They do have to listen to public opinion. Sanctions do not seem to work well against an isolated country.

Wait, apartheid was democracy? This certainly would have shocked the non-white South Africans I knew there in 1990! I lived just west of Johannesburg for a few pivotal months in South African history, four years after the passage of the Comprehensive Anti-Apartheid Act, three months after the release of Nelson Mandela, and just as F.W. DeKlerk began repealing the apartheid laws. 

Legally speaking, by the way, North Korea and South Africa sanctions have as much in common as elderberries and Fruity Pebbles. The CAAA was a dog’s breakfast of symbolic gestures (banning Krugerrands) and protectionist goodies (banning sugar, iron, and steel imports) unworthy of the just cause it was meant to serve. It never invoked the International Emergency Economic Powers Act, even in its paleozoic pre-9/11 form, never blocked South African government assets, never cut its banks’ access to the financial system, and politely warned P.W. Botha to move his government’s money from U.S. banks to, say, Switzerland within 45 days.

Four years after those sanctions took effect, my anecdotal impression of South Africa’s economy was that it was stagnant but functional. The impact of the sanctions was mostly psychological, but powerfully so. Sanctions didn’t wreck the South African economy, but they did persuade the white minority that the world was closing in. All oligarchies are sensitive to that perception, even if North Korea’s one percent has fewer ways to express that. The preponderance of the evidence suggests that the world will soon begin to close in on Pyongyang, too.

If you pushed Andrei, I suspect he’d be honest enough admit that he’s not a sanctions expert, and that he’s really arguing his policy opinions. This isn’t to say that only experts can craft reasonable conclusions and arguments in specialized topics. I’m no expert on missile defense, so for this post, I consulted two people who are. I can’t say for certain how many of the relevant resolutions, statutes, or executive orders he’s read (I tried to ask him, but he’s traveling). Sanctions are a specialized field. Not every generic “North Korea expert” qualifies as a sanctions expert.

I raise this point, despite some hesitation, because most generic North Korea experts spent the last two decades repeating — and most journalists spent the last two decades printing — the myth that North Korea was the world’s most heavily sanctioned country. Legally, this was nonsense, and anyone who had bothered to research it could have questioned it, but it supported the inference that “tough” sanctions had failed. Maybe people repeated this because it supported their policy arguments. Or, maybe they’d heard so many people say it that they didn’t bother to check.

Now that this myth has been mostly debunked, sanctions are a hot topic again. Ironically, some of the same “experts” who got the sanctions story wrong for years are still being quoted as experts in the newspapers. I don’t mean to pick on Andrei here. Jenny Town is a lovely human being and, as far as I know, a fine arms control expert. Joel Wit is such an experienced diplomat that every time he talks North Korea into disarming, someone asks him to disarm it all over again.

Still, maybe it’s time for those reporters to expand their rolodexes to keep up with the times. William Newcomb, David Asher, Juan Zarate, George Lopez, Stephanie Kleine-Ahlbrandt, Peter Harrell, Martin Uden, Andrea Berger, and Joseph DeThomas all have expert-level knowledge of sanctions law or experience in sanctions administration at the national or international level. These aren’t all people I agree with, but they know more than the people who’ll read their opinions in the papers. That’s the least that any journalist should expect of an expert.

To work, sanctions will need good faith compliance by U.N. member states and time. Gaining international support and time, in turn, will require governments to put their diplomatic muscle into the fight. As Ambassador Mark Lippert said recently, “sanctions aren’t just a short-term game.” 

Yet some supporters of engagement policies, many of them people who never understood sanctions and still don’t, are ready to declare sanctions a failure at the starting line. The policy fiasco they backed wasted decades and billions of dollars, and I have yet to hear one of them cite a single significant, positive change engagement achieved. This is not to say that all would keep digging us deeper into that hole. Evans Revere, for example, now wants to make North Korea “stare into the abyss,” and I suppose he should be commended for yielding to the evidence. James Hoare confesses that “after 40 years,” he is “rather bored with it all.” The views of Chris Nelson and Daniel Pinkston have quite obviously shifted, too. As Andrei admits elsewhere, Washington’s consensus has shifted toward support for sanctions, at least for the time being.

But to the bitter-enders who want to go back to these failed appeasement policies now, and who measure success in terms of designer shoe sightings in Pyongyang, how many decades must pass, how many billions must we spend, and how many nukes will Pyongyang have before it opens a Jimmy Choo’s? How many North Koreans must die before we see the changes and reforms they’ve spent decades promising us? Engagers demanded endless patience with their Sisyphean fiasco, yet beat the drum of fierce urgency to pressure President Obama into Agreed Framework III. Now, they call on us to abandon sanctions before we’ve even begun to turn the screws. I’d like to borrow a cup of chutzpah from these people.

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When Kim Jong-un nukes off — and he will — here’s how we should respond (updated)

The U.N. Security Council was already meeting about how to respond to North Korea’s latest missile tests when Pyongyang drew the curtain on its next act of satellite theater at Punggye-ri. Even without the latest sanctions, His Corpulency would probably have carried out another nuke test within the next year, if only to help consolidate his rule, and because the U.S. and South Korea are holding presidential elections. (North Korean dictators prefer to nuke off as new administrations assemble their policies and policy-makers.)

With this year’s new rounds of U.S. and U.N. sanctions, that already high likelihood became a near certainty. We knew all along that the North Korea crisis would have to get much worse before it can get better, and we’re still one to three years of aggressive implementation away from concentrating the igneous temperature and metamorphic pressure needed to make Pyongyang reconsider its policies. We should expect an interesting year, and we should have a list of options ready for it, rather than let a crisis go to waste.


[You should definitely skip over that part around 1:44.]

Fortunately, the most important legal authorities are already in place. If we did nothing for the next year but fully enforce UNSCR 2270, the North Korea Sanctions and Policy Enhancement Act, and the Obama Administration’s two most recent executive orders, we could still identify and destroy most of the financial network that sustains Kim Jong-un’s misrule. This isn’t to say that new sanctions couldn’t help close loopholes; it just means that the most important priority has shifted to enforcing the sanctions that are already in place. So with much of our Plan B now in place, the effort now shifts to enforcement and the closing of loopholes. Call it “Plan B-plus.”

For the U.N.

Designate, designate, designate: You know who still ferries banned luxury goods into North Korea? Air Koryo, that’s who.

 

Who insures Pyongyang’s smuggling fleet? The Korea Shipowners’ Protection and Indemnity Association, which is probably a subsidiary of the infamous Korea National Insurance Corporation (which the EU has already designated, but we haven’t). Chinpo Shipping still isn’t designated despite having been convicted for its part in smuggling arms from Cuba to North Korea. All of the ships controlled by the (already designated) Reconnaissance General Bureau should be designated individually, by IMO number. The U.N. can also ban North Korea’s provision of crew services to foreign flagged ships.

The Central Bank of the DPRK sells gold — which is mined with forced labor, or in concentration camps — in violation of UNSCR 2270. Sam Pa and the 88 Queensway Group are already designated for violating Zimbabwe sanctions, and Pa is being prosecuted in China and has his bank accounts blocked, but a new North Korea designation for his dealings with Bureau 39 would send an important message by double-tapping a target the Chinese government is willing to sacrifice. Kumgang Economic Development Corporation, also known as KKG, is Pa and 88 Queensway’s North Korean business partner and, reportedly, a Bureau 39 front. They should be designated, too.

Korea Rungrado General Trading Corporation and the DPRK Chamber of Commerce rent out North Korean slave laborers. If we have any evidence that they pass their revenues to Bureau 39 (already designated), those entities should be designated, too. Mansudae Overseas Projects Group partnered with U.N. designated KOMID at that weapons factory in Namibia; it should be added to the blacklist. So, for that matter, should the Mansudae Art Studio, for the revenue it sends to Pyongyang by charging highly inflated sums for monstrosities such as these.

ugly statue

[Also, for crimes against humanity.]

Expulsions of North Korean operatives. In the last three years, the U.N. Panel of Experts has named dozens of North Korean operatives working around the world who have yet to be designated. Designating them would force other countries to deport them. Similarly, Treasury’s designations of North Korean smugglers and money launderers are still years behind the excellent work of the U.N. Panel of Experts. There are dozens of names in those reports that ought to appear on the U.N.’s own blacklist, and on ours.

Ban Labor Exports. I have a Y chromosome, so admitting that I was wrong isn’t easy for me, but I’m ready to admit that my first impression of Samantha Power was wrong. Just a few years ago, in blog posts and speeches, I taunted Ambassador Power by saying, “Samantha Power, North Korea is your Rwanda.” But since then, Ambassador Power has won me over. She has emerged as a calm, tough, steady, and effective diplomat and critic of Kim Jong-un’s crimes against humanity. She has also become an intelligent advocate for better sanctions enforcement. Power may yet end her term with as strong a legacy as the much-maligned John Bolton, whose tough bargaining built the foundation for everything the Obama Administration has achieved since. Maybe Power still can’t persuade China and Russia to refer His Porcine Majesty to the International Criminal Court, but she might get them to support sanctions that shut down North Korean practices that have human rights implications, or that earn it enough cash to resist the pressure to reform and disarm. After all, isn’t this what the Security Council did when it banned luxury goods imports in UNSCR 1718? The message then was that North Korea should provide for its people. It was the closest the U.N. has ever come to an effective response to Pyongyang’s failure to protect them. In the same sense, China and Russia might be pressured into agreeing to ban North Korean labor exports, if only because labor exports almost certainly finance proliferation.

Ban Food Exports. There is no excuse for a country that relies on food aid to simultaneously export food for hard currency, while contributing a relative pittance to importing grain to feed its own malnourished children. North Korea’s apologists reflexively predicted that sanctions would only starve the poor, but there is more evidence that the very opposite of this is true. This year, we saw two interesting dynamics when China began to implement UNSCR 2270. First, luxury foods (seafood, pine mushrooms) that Pyongyang usually exported but now couldn’t suddenly became available in North Korean markets for the first time most North Koreans could remember. (Limits on North Korean coal exports had a similar effect; they lowered the market price of coal, and according to sources I can’t attribute here, are credited for a better electricity supply in Pyongyang than at any time in recent memory.) Second, state trading companies that needed to earn cash to make their “loyalty” payments but found it harder to trade in sanctioned goods began shifting toward importing food into North Korea instead. Both of these dynamics suggest that a ban on food exports from North Korea could draw more food into the markets that feed most of North Korea’s people and actually help ameliorate the food crisis, while denying Pyongyang a key source of hard currency. Given the long-standing failure of U.N. aid programs to solve North Korea’s food crisis, it’s time to turn our attention to those markets, rather than the state’s corrupt and discriminatory distribution system, as a better solution to hunger in North Korea.

Define “Livelihood Purposes.” The “livelihood” loophole is UNSCR 2270’s most obvious shortcoming. It’s a loophole in coal and iron export sanctions that you can drive a freighter through. The exception should not be terminated completely; sanctions need safety valves so that member states can react to unintended consequences. Instead, the U.N. should define “livelihood purposes” to exclude any sale of coal that provides hard currency to His Porcine Majesty.

The term “livelihood purposes” means the sale or export by the Government of North Korea of coal, iron, or iron ore in exchange for food, medicine, or other humanitarian supplies to be imported into North Korea under the auspices of the United Nations World Food Program, and subject to adequate safeguards to ensure the distribution of such food, medicine, and other humanitarian supplies in accordance with the humanitarian needs of the North Korean people.

SWIFT. Really, how hard an ask should that really be at this point? North Korea is a prime suspect in the theft of $80 million from SWIFT member banks after hacking SWIFT’s software. If we were to ask the EU to support a new sanction disconnecting North Korean banks from SWIFT — and crucially, any other financial messaging services — would it really push back?

For Congress

Oversight. Congress’s most important function now is to make sure the Executive Branch enforces the laws Congress has already passed. The “appropriate congressional committees” should reserve a SCIF for regular briefings from the Treasury, State, Commerce, and Homeland Security departments. The Executive Branch already has most of the authorities it needs to enforce sanctions effectively. I could, of course, draft many pages of text to force the Executive Branch to use those authorities (and just for shits and grins, I have).

Tourist Travel. But again, that isn’t to say that new legislation wouldn’t help. With North Korea effectively using two Americans as hostages, it’s long past time to ban transactions incident to tourist travel to, from, and within North Korea. Ideally, this could be done by U.N. resolution, but let’s not pretend that that’s likely this year. Doing so bilaterally would require an act of Congress, which means that it’s not going to happen until after Election Day, at the very soonest. (Sometimes, the mills grind slowly. It took three years for the NKSPEA to become law, but it still happened.) Although such a ban would be far from airtight, it would inflict significant financial pain, and it would reduce Pyongyang’s supply of American hostages. It also has the potential to affect not just travel by Americans, but any dollar-denominated travel transactions, including those by third-country nationals. Pyongyang increasingly relies on those transactions to remain solvent as sanctions take effect. 

For the Executive Branch

Progressive diplomacy. When it comes to North Korea, I’m not widely known for commending the work of diplomats, but this year, I think we’ve gotten the sequence mostly right. We started with our friends. The U.S., South Korea, and Japan began 2016 by papering over their historical differences and forming an effective diplomatic alliance. Seoul and Washington have had the discipline and the foresight to reject Pyongyang’s divide-and-rule appeals for talks. Maybe it has finally occurred to them that the longer they stick together and build pressure against Pyongyang, the stronger their bargaining power will be, and the greater the odds that their diplomacy will actually succeed for once.

Seoul also invited European nations into that alliance and turned wavering states into friends. It has done an admirable job of unplugging the HAL 9000. Each chip unplugged allows Seoul to focus its attention on a diminishing list of enablers that reflag Pyongyang’s ships, buy its missiles, rent its slaves, and launder its money. The U.S. may have played some role in assisting that campaign, but if it has, it hasn’t publicized it. Similarly, the EU and Japan have been cooperative, but haven’t led on sanctions enforcement as they led on human rights at the U.N. We have yet to see the Obama Administration undertake anything that compares to the Bush Administration’s campaign of financial diplomacy, which quickly disconnected so many of North Korea’s financial links to the Outer Earth. Maybe that’s about to change. If the U.S., South Korea, Europe, and Japan join forces to pare North Korea’s enablers down to a few stubborn bitter-enders, those bitter-enders will feel increasingly isolated, North Korea’s money men will be increasingly exposed, and secondary sanctions against the worst of them will meet less international blowback.

Update: Follow the Money:  North Korean exiles agree that designating Kim Jong-un for human rights abuses was a powerfully symbolic act, one that sends a clear message to the North Korean people that he is our target, not them. It is telling that North Korean media have been vague about the reason for the designation.

But this act could be much more than symbolic. According to open-source reports, Kim Jong-un keeps billions of dollars in slush funds abroad; estimates vary from as low as $1 billion in Switzerland, Austria and Luxembourg to as high as $6 billion overall. Top North Korean official Ri Su-yong allegedly managed some of them in Switzerland, and also served in The Netherlands and Liechtenstein, where Pyongyang allegedly kept some of its money. Ri still has close family ties to Bureau 39. Switzerland has recently committed to cooperating with sanctions against North Korea and enacted new regulations to implement the sanctions. The Treasury Department may have also identified hundreds of millions of dollars in North Korean accounts in Shanghai, including the names of the account holders. The 2014 defection of Yun Tae-hyong of Korea Daesong Bank may have provided the South Korean NIS another windfall of financial intelligence.

New EU regulations blacklisting North Korea for money laundering require the disclosure of accounts’ beneficial owners will illuminate more slush funds. Although a top Treasury Department (now the CIA’s Deputy Director) stated in 2013 that Treasury was “actively looking for” “very large amounts” of North Korean money, Treasury offered a disappointing lack of commitment to pursuing those slush funds when it announced its recent designations of Kim Jong-un and his top henchmen. The designation of Kim Jong-un and North Korea’s security forces can be more than symbolic. Nothing the U.S. can do would do more to open up North Korean society to the Outer Earth than to starve the security forces of the funds they need to fence the borders, pay border guards, and buy cell phone trackers. Nothing would damage regime cohesion and Kim Jong-un’s image more than working with foreign governments to identify and freeze the proceeds of Kim Jong-un’s kleptocracy, a specific sanctions authority Congress gave the Treasury Department in section 104(b) of the NKSPEA.

Secondary shipping sanctions. With worrying signs that Chinese ports’ compliance with UNSCR 2270 is slipping, it’s time for the U.S. to take a closer look at Section 205 of the NKSPEA, which provides for secondary shipping sanctions on non-compliant ports. U.S. Customs and Border protection could start by publishing a watch-list of the ports that are allowing North Korean ships to dock, and that aren’t inspecting all North Korean cargo. Cargo coming from those ports, in turn, will face additional delays as they face increased inspections in U.S. ports. My watch list would include Bayuquan, Dandong, Dalian, Longkou, Nantong, Penglai, Rizhao, Shanghai, Qingdao, and Yingkou, and the Beijing Capital International Airport in China; Abadan, Bandar-e-Abbas, and Khorramshahr, in Iran; Nakhodka, Vanino, and Vladivostok, in Russia; and Latakia and Tartous, in Syria. The administration should also harness the Proliferation Security Initiative to target non-compliant ports for closer inspection globally. That’s an important protection against whatever the North Koreans might be tempted to slip into a shipping container coming to one of our ports. The U.S. and South Korea should also redouble their efforts to end the prohibited reflagging of North Korean ships.

Investments. Although Executive Order 13722 bans new investments in North Korea, it doesn’t necessarily ban the existing ones. One step toward squeezing investment out of North Korea would be for the Securities and Exchange Commission to require any company — including foreign companies — that issues securities in the U.S. to disclose its investments in North Korea. That would expose those investors to boycotts, shareholder protests, and possible sanctions. Another, which I’ll explain in greater detail in an upcoming post, would be to require the disclosure of beneficial ownership in investments in North Korea, or in which any North Korean person has an interest. Here, the EU’s tighter rules on beneficial ownership disclosure, just announced this week, are a good example for us to emulate.

Fortunately, most of the necessary legal authorities are in place. If we did nothing for the next year but fully enforce UNSCR 2270, the North Korea Sanctions and Policy Enhancement Act, and the Obama Administration’s two most recent executive orders, the U.S. could cripple North Korea’s palace economy in two to three years. The distraction and potential disruption of the upcoming U.S. and South Korean elections are the greatest threat to this strategy now.

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U.S. joins diplomatic squeeze on North Korean labor exports

Last week, the Leiden Asia Centre made headlines around the world with the release of its exhaustive, 115-page report, “Slaves to the System,” on North Korea’s overseas labor arrangements and how those laborers are treated. The Leiden report coincides with new diplomatic efforts by the U.S., South Korea, and now, the International Labor Organization to bring those arrangements to an end.

The Chosun Ilbo reports that the U.S. government “is preparing a series of reports on the abuse of North Koreans who toil for the regime overseas or have fled abroad, as well as abuses within the isolated country,” to be submitted to Congress by mid-August. Those reports, in turn, are required under section 302 of the North Korea Sanctions and Policy Enhancement Act, which requires as follows:

SEC. 302. STRATEGY TO PROMOTE NORTH KOREAN HUMAN RIGHTS.

(a) In General.—Not later than 180 days after the date of the enactment of this Act, the Secretary of State, in coordination with other appropriate Federal departments and agencies, shall submit to the Committee on Foreign Relations of the Senate and the Committee on Foreign Affairs of the House of Representatives a report that details a United States strategy to promote initiatives to enhance international awareness of and to address the human rights situation in North Korea.

(b) Information.—The report required under subsection (a) should include—

   (1) a list of countries that forcibly repatriate refugees from North Korea; and

   (2) a list of countries where North Korean laborers work, including countries the governments of which have formal arrangements with the Government of North Korea or any person acting for or on behalf of that Government to employ North Korean workers.

(c) Strategy.—The report required under subsection (a) should include—

   (1) a plan to enhance bilateral and multilateral outreach, including sustained engagement with the governments of partners and allies with overseas posts to routinely demarche or brief those governments on North Korea human rights issues, including forced labor, trafficking, and repatriation of citizens of North Korea;

   (2) public affairs and public diplomacy campaigns, including options to work with news organizations and media outlets to publish opinion pieces and secure public speaking opportunities for United States Government officials on issues related to the human rights situation in North Korea, including forced labor, trafficking, and repatriation of citizens of North Korea; and

   (3) opportunities to coordinate and collaborate with appropriate nongovernmental organizations and private sector entities to raise awareness and provide assistance to North Korean defectors throughout the world.

The Obama Administration is starting with bilateral diplomatic appeals to “ramp down” existing labor arrangements rather than terminate them abruptly. Adding to the administration’s powers of gentle persuasion is the veiled threat of sanctions.

“The (executive order) includes the authority to target North Korea’s exportation of labor in order to provide Treasury the flexibility to impose sanctions and ratchet up pressure as needed. At this time, we are closely studying the issue,” said Gabrielle Price, spokeswoman for the State Department’s Bureau of East Asian and Pacific Affairs. [Reuters]

U.S. sectoral sanctions in the new Executive Order 13722, promulgated to implement the NKSPEA, block the property of any person found to “to have engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea.” Those sanctions can reach funds that pass through the U.S. financial system.

Although the reports are required by an Act of Congress, and although the State Department had never devoted much attention to this issue until the NKSPEA deadlines approached, the administration insists that it has always intended to make human rights issues a higher priority. For what it’s worth, I believe this really is true of some administration officials, but that the administration’s broader policy was paralyzed by internal divisions until Congress settled the argument for them at the eleventh hour. You can hear those divisions reflected in this unauthorized bit of State Department snark:

[O]ne State Department official described it as in large part an effort by the Obama administration to counter charges that it has been weak on other human rights fronts, including Saudi Arabia, China, Bahrain, Vietnam, and Iraq. This official said the move was not expected to have any effect on the regime’s behavior and was largely “a legacy move” by the Obama White House. [….]

However, John Sifton of Human Rights Watch defended targeting Kim, saying talks were dead. “This is an area where the administration is not acting politically or cynically,” he said. “They are actually trying to do the right thing.” [Reuters]

The good news is that the right officials sound determined to continue investigating abuses and adding names to the SDN list. The bad news is that there are just seven months left in this administration — enough to do some damage, but not enough to devote resources to a sustained investigation.

South Korea is also joining the campaign, following its promising reports from Africa and Cambodia, whose Prime Minister has promised to “reconfigure ties” with Pyongyang. Yonhap reports that, after a meeting between the South Korean and Qatari foreign ministers in Seoul last week, Qatar has “has been limiting the issuance of new visas to North Korean workers.” Significantly, South Korean Foreign Minister Yun Byung-se also “called for Qatar’s continued interest in the human rights situation of North Korean laborers in the Middle Eastern nation.”

Although U.N. Security Council resolutions do not directly ban the use of North Korean labor, the same argument I’ve made against Kaesong applies equally well to the income Pyongyang generates from labor exports, and the potential for that income to be used for WMD programs.

Qatar, the site of the 2022 World Cup, has received bad press about its use of North Korean laborers recently. Earlier this year, two North Korean workers defected in Qatar, although subsequent reports have not clarified whether they escaped. At the time, a hundred North Korean workers mutinied in nearby Kuwait. They were repatriated on special Air Koryo flights.

Oh, and Foreign Minster Yun also asked his Qatari counterpart “for his support for South Korean firms seeking to participate in various infrastructure projects in Qatar ahead of” the World Cup. Nothing wrong with that, I guess.

If Qatar follows through on the promise, and if the North Korean workers’ visas expire soon, this could be yet another significant diplomatic win for South Korea. Qatar is one of the largest users of North Korean labor. Yonhap estimates that there are 2,000 North Korean laborers in Qatar; The Wall Street Journal puts the number at 1,800 in this excellent graphic:

Screen Shot 2016-07-11 at 7.45.00 AM

[Wall Street Journal]

Radio Free Asia, citing an unnamed source, says that “[t]he number of civilian workers sent to Kuwait has dropped from about 4,000 last year to approximately 3,200” as of last month. Since then, Pyongyang has increasingly sent active duty military personnel to replace them, perhaps because soldiers are more obedient than the increasingly restive civilian workers.

The soldiers, all in their 20s and belonging to engineering battalions in North Korea, are employed by the Middle East-based North Korean construction firms Namgang and Cholhyun, the source said.

“So far, the Namgang Company has dispatched about 800 North Korean [soldiers] as laborers to Kuwait and about 750 to Qatar,” he said, adding that the Cholhyun company too has “steadily increased” the number of soldiers it has sent to work in Kuwait since its first deployment of 70 soldiers in 2010.

“Almost 30 percent of North Koreans now working in Kuwait are soldiers on active service,” he said.

North Korean authorities tell the soldiers sent to the Middle East to grow their hair long to disguise their identity, RFA’s source said.

North Korea’s growing use of soldiers as laborers sent abroad to work may be due to their readiness to quickly obey orders and to work without pay during their period of service overseas, he said.

The soldiers are “feisty and aggressive,” though, and are resented by North Korean civilian workers for sometimes taking their jobs, he said.

“The ordinary laborers call the soldiers ‘Makhno’—a Russian word meaning ‘reckless gangsters’—and avoid all contact with them,” he said. [RFA]

Under pressure from bad press and (so I’ve been led to believe) back-channel U.S. diplomacy, Poland is also said to have stopped issuing new visas for North Korean workers.

Mongolia, another major user of North Korean labor, is also coming under pressure from U.S. and South Korean diplomats, and from the International Labor Organization.

North Koreans are hard-working and cheap to hire, said a labor broker for construction companies in Ulaanbaatar. He said North Koreans typically earn around $700 a month but receive around $150-$200, with the rest withheld by their government. Human-rights researchers cite similar figures.

One North Korean construction worker who moved to Mongolia in 2011 said he worked 12 to 14 hours each day. He said his pay had been reduced due to an economic downswing and he hadn’t been able to send any money to his wife and daughter in Pyongyang for a year. [Wall Street Journal, Alastair Gale]

In 2011, the BBC reported that North Korean workers based in Ulaan Bator were making “Designed in Scotland” clothing for the Edinburgh Woolen Mill. At the time, a British factory manager defended the arrangement, saying, “They’re hard workers. They don’t complain and they get stuck in. They’re quite skilled.” A British tabloid subsequently reported that he had left the company.

The WSJ also reports that North Korean “doctors” in Mongolia are peddling quack medicines, as in Tanzania:

After diagnosing a patient with a liver ailment, he recommended a $100 course of injections with medication that North Korean state media says can also be used to treat viral diseases such as Ebola and AIDS. “Yes, it really works,” he said.  [WSJ]

Below the fold, an excerpt from Secretary of State John Kerry’s remarks in Kiev last week, while meeting with Ukrainian President Petro Poroshenko. Kerry was asked about sanctions against His Porcine Majesty, and answered this way:

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A blanket trade embargo won’t help us disarm or reform North Korea

In Wednesday’s post, I wrote about Beyond Parallel’s imagery analysis pointing to a decline in cross-border trade between China and North Korea, along with the limitations of that analysis and its great potential if expanded and focused. But I also alluded to a broader policy concern about the error of equating trade volume with sanctions enforcement: that while China’s under-enforcement of sanctions has historically been the greatest impediment to our North Korea policy, sanctions over-enforcement is an equal danger. Recently, I’ve heard influential people — including recovering engagers, preaching with the zeal of converts — advocating what sounded like a total trade embargo. (To be clear, Beyond Parallel’s study did not advocate this.) This would be inhumane, misguided, and politically unsustainable. It would play right into the regime’s hands by validating its disinformation and strengthening the arguments of its apologists.

The greatest long-term danger to an effective multilateral sanctions enforcement strategy is a loss of political will by one or more key nations. Pyongyang’s overhead is lower than that of most states because it doesn’t provide for its people, so breaking even one key nation out of a multilateral coalition can allow Pyongyang to get by for a year or two while it cultivates its next divide-and-conquer ploy. In South Korea and Europe in particular, public support for strong enforcement is vulnerable to charges — almost always made of lies, half-truths, ignorance, and appeals to emotion — that sanctions harm only the ordinary people. (And in the case of, say, old-fashioned trade sanctions against Iraq, the charge was mostly true. Many people who still don’t understand financial sanctions and who don’t know they don’t understand are still stuck in this paradigm.)

To maintain political support for such a multilateral sanctions enforcement strategy long enough for that strategy to work, policymakers must answer those charges, because people who are either sympathetic to the regime or myopically focused on aiding a tiny minority of its people are certain to lodge it, and shallow thinkers in the press are certain to echo it.

Thus, policymakers need more than just a sanctions strategy. They need to understand how sanctions complement other tools within a broader policy, and how all of those tools combine to achieve a plausible outcome. And to sustain any of it, they need an information strategy for answering these predictable arguments.

First, they must keep pointing out exactly how many North Koreans Kim Jong-un could feed with what he has instead chosen to spend on nukes, missiles, weapons, yachts, palaces, ski resorts, armored limousines, flat screen TVs, and … I could go on.

Second, they must emphasize their principled insistence that sanctions must only be targeted against the income sources the regime uses to buy all of these things instead of food. They must avoid unforced errors like this one at all costs. They should move quickly to identify and correct adverse and unwanted impacts from sanctions. Both the U.N. Security Council resolutions and U.S. sanctions law have provisions and general licenses for that purpose.

Third, they should point to what Pyongyang itself is doing, for the sake of its own internal control, to inhibit private agriculture, domestic market trading, and cross-border consumer-level trade. Those activities probably keep most North Koreans alive today. What almost no one is saying — and more people should be saying — is that Pyongyang’s sanctions against its own people are causing far more harm than international sanctions against Pyongyang itself. The latest example of that is this report that His Supreme Corpulency has ordered the planting of trees on private farm plots that probably grow a substantial portion of North Koreans’ food supply.

After Kim’s declaration, the government started to enforce laws against slash-and-burn farming all over North Korea. However, this is a matter of life and death for ordinary people. Consequently, last year, as long as trees were not cut down, in return for bribe, agriculture officials looked away if a person was cultivating short crops. Since then, the writer of this article confirmed that many farmers have given up slash-and-cut agriculture, though tree replantation is yet to take hold. [….]

“They wouldn’t allow us to go near our fields in the mountains. If we planted something, they’d pull it out of the ground. I recently planted potatoes, and they pulled them out. It was growing well…….” [Rimjin-gang]

Fourth, leaders should say more about how quickly and easily Pyongyang could end its quarter-century-long, man-made food crisis with a few bold policy decisions. For one thing, it could stop exporting so much of its food production for cash. This practice has even yielded some evidence that sanctions have actually improved North Korea’s food supply, by barring the exports of mushrooms, seafood, and other delicacies for cash, and forcing trading companies to shift from sanctioned trade to non-sanctioned trade in food. (My suggestion for the next round of U.N. sanctions? A ban on food exports.) North Korea could solve its short-term hunger problem in 30 days by halting food exports, and by choosing to import more food and less swag. Sanctions would do nothing to interfere with any of that. It could end its long-term hunger problem in less than a year with land reform that redistributes land to the tillers, and by ending the confiscation of private farms.

Finally, they should quietly pressure U.N. aid agencies to reassess well-meaning but flawed aid policies that haven’t addressed North Korea’s food crisis and may be prolonging it. Aid will never help more than a tiny percentage of North Korea’s population as long as the regime continues to inhibit aid workers’ access to the hungry. What North Korea needs is fundamental land reform and a change in its government’s priorities.

A strategy for enforcing sanctions, then, must be both coordinated and calibrated to hurt the right people and not the wrong ones. China’s role is obviously critical here. No one should want China to impose a blanket trade embargo on North Korea, because a blanket trade embargo will affect commerce that fills the markets and sustains the majority of North Koreans, and this will erode the political and diplomatic unity of a sanctions enforcement coalition. In the long-term, starving the North Korean people will discredit the use of sanctions to starve the regime.

On the contrary, it would be far better to open the taps on street-level jangmadang trade and hinder only the trade that exclusively funds the regime. Over time, the effect of this would be to deny the military and security forces a steady income and force them to turn to corruption to survive. This would catalyze more smuggling and more defections. It would mean more copies of “Descendants of the Sun” on sale in the markets. The good news is that the early signs suggest that since sanctions have taken effect, corruption has increased among the internal security forces and railroad police, and that the flow of refugees into South Korea has increased, although there still isn’t enough evidence to identify a pattern in these reports or assign a cause to them.

Still, these reports suggest how cutting the regime’s funds and blocking its accounts would preferentially impact the elites and break down their cohesion to the regime, starting with its financially critical overseas workers and trade agents, and progressing to those who maintain the system of internal security. It would force the regime to launch ever more mass mobilizations and confiscatory demands for “loyalty” payments that sap Kim Jong-un’s domestic political support among the poor.

Collectively and gradually, these trends would accelerate an ongoing shift in North Korea’s internal balance of power downward in North Korea’s songbun system, from generals to donju, from border guards to smugglers, from party members to non-members, from soldiers to sotoji farmers, from police to market traders, in every village, factory, and neighborhood. Only when Pyongyang realizes this will it realize that time is not on its side. And only when Pyongyang realizes that time is against it will diplomacy stand any chance of lasting success. If it doesn’t, and consequently drowns in the tide of history, that would be far from the worst possible outcome.

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The designation of His Corpulency for human rights abuses is symbolic. Powerfully symbolic.

About a week later than my prediction in this post and a full decade after it should have done so, the Treasury Department has finally designated His Porcine Majesty, ten of his worst henchmen, and nine government agencies for human rights abuses.

“Under Kim Jong Un, North Korea continues to inflict intolerable cruelty and hardship on millions of its own people, including extrajudicial killings, forced labor, and torture,” said Adam J. Szubin, Acting Under Secretary for Terrorism and Financial Intelligence.  “The actions taken today by the Administration under an Act of Congress highlight the U.S. Government’s condemnation of this regime’s abuses and our determination to see them stopped.”  [….]

OFAC designated North Korean leader Kim Jong Un pursuant to E.O. 13722 for having engaged in, facilitated, or been responsible for an abuse or violation of human rights by the Government of North Korea or the Workers’ Party of Korea.  Under the rule of Kim Jong Un, North Korea remains among the world’s most repressive countries, with significant restrictions on the exercise of fundamental freedoms and serious human rights abuses, including extrajudicial killings, enforced disappearances, arbitrary arrest and detention, forced labor, and torture.  Kim Jong Un leads the Ministry of State Security and Ministry of People’s Security.  These ministries, along with the Ministry of People’s Security Correctional Bureau and the Ministry of State Security Prisons Bureau, are also being designated today pursuant to E.O. 13722 for having engaged in, facilitated, or been responsible for an abuse or violation of human rights by the Government of North Korea or the Workers’ Party of Korea. [Treasury Department]

The targets include the State Security Department (kuk-ga anjeon bowi-bu), the North Korean equivalent of the Totenkopfverbände that runs the concentration camp system; the Ministry of People’s Security (inmin boan-bu), the Gestapo equivalent that investigates political crimes; and two sub-bureaus of the Reconnaissance General Bureau, for kidnapping North Korean refugees from China and for sending hit squads to assassinate exiles in South Korea. The full list is here, and below the fold.

Separately, the State Department issued a report on the reasons for the designations. With yesterday’s action, 161 North Korean entities are designated, equal to the number of designated Zimbabwean entities. Contrary to another rumor I heard but did not publish, there were no waivers of any of the sanctions.

Legally, the targets’ assets are now blocked in the financial system, the practical meaning of which I’ll address below. Because the designations were triggered by the North Korea Sanctions and Policy Enhancement Act, strict performance-based conditions apply to their suspension or termination. The designations came several weeks after the passage of a deadline in section 304 of the NKSPEA to report to Congress on the individual responsibility of North Korean officials, including Kim Jong-un, for human rights abuses in North Korea, and to designate any responsible officials under section 104(a).

Although the report and designations were effectively mandated by an act of Congress, senior administration officials stressed in a background-only conference call yesterday that this report was actually years in the making. Well, maybe. The first rumors the administration circulated publicly about this action came in 2015, a year after the House of Representatives passed the North Korea Sanctions Enforcement Act on a voice vote. So while I take the administration at its word — in part, because it’s useful to accept even reluctant new friends into the circle of consensus — it’s also true that whenever the administration began working on this report — which comes to four whole pages of Times New Roman 12-point type — it must have known that the legislative writing was on the wall.

At the same time, the State Department report provides more detail about the people responsible for crimes against humanity in North Korean than any other report has before. A great deal of intelligence work obviously went into it. Among the details we learn is that Kim Jong-un was born in January of 1984, which means he wasn’t even 30 the first time he sat on his double-wide throne. The State Department also appears to have used the discussion of the Reconnaissance General Bureau in “Arsenal of Terror” as a source for two of the designations. That discussion, in turn, cites Joseph Bermudez, to whom I express my gratitude again here.

So, what does all of this mean, practically?

Direct Financial Impact. Many reporters, who denigrate the potential impact of these sanctions, make two arguments, one false and one true. It is almost certainly false that Kim Jong-un has no assets “in” the United States. Again, that assumption flows from an ignorance of how international banking works, as I explained it here. As the U.N. Panel of Experts reports have demonstrated again and again, North Korean regime funds continue to flow through our banking system via correspondent accounts, where those funds can be frozen or forfeited (see 18 U.S.C. 981(k)). The real trick is identifying which funds are North Korean. One of our best sources of information is the banking industry, but banks won’t report North Korean wire transfers to their American correspondents as long as they continue to get away with concealing those funds, as the Bank of China did recently.

It is true that there is no single golden vault in Geneva with Kim Jong-un’s name engraved on the door, whose combination can be changed overnight. But the same was true of Bin Laden, Qaddafi, Assad, Milosevic, Mugabe, Lukashenko, and countless drug lords. The work of tracing and identifying assets down to the aliases, fictitious names, front companies, shell companies, and bagmen who hold those accounts is what the Treasury Department does, and does well. It will take years of hard work, and it will require a strong signal to the banking industry about their Know-Your-Customer obligations. One shortcoming here is Treasury’s failure to invoke Special Measure Two in its otherwise commendable Patriot 311 designation of North Korea. That special measure would require banks to gather information about North Korean beneficial owners of accounts. As the Panama Papers showed us, that’s key information regulators need to embark on a serious assets hunt. I’ll be posting a detailed public comment to that effect, in response to Treasury’s 311 Notice of Rulemaking, before the August 2nd deadline.

What I did not see in the transcript of the senior administration officials’ background discussion with reporters was any commitment to devoting the necessary investigative resources to the pursuit of those assets. That will be an important oversight function for congressional staff in the coming years.

World Opinion. First, these actions could — I repeat, could — help further galvanize both domestic and world opinion against Kim Jong-un’s regime, which will itself have a range of secondary effects.

Wavering states that now supply Pyongyang with much of its income will face more pressure to distance themselves from it. Governments will face greater domestic political pressure to comply with existing U.N. sanctions, especially if that domestic pressure is combined with sweeteners brought by visiting South Korean diplomats. They will face greater pressure to vote for resolutions condemning North Korea at the U.N. Here are there, governments may begin to follow Botswana’s lead and cut diplomatic relations with Pyongyang entirely. China, which opposes the new sanctions, will see North Korea as a greater diplomatic liability than ever. South Korea, which welcomed the new sanctions — and certainly would not have even a year ago — could make use of it in its skillful and increasingly effective diplomacy to isolate North Korea from the overseas funding that sustains the regime in Pyongyang.

The consensus among liberals in both Europe and America will shift. That consensus once generally favored engagement; it will now shift toward sanctions and accountability, as evidenced by Congressional Democrats’ support for much tougher sanctions. The description of Kim Jong-un as “a sadistic dictator” in a draft of the Democratic Party platform suggests that a Clinton presidency would be at least marginally tougher than Obama’s.

This will have financial effects in the near term. Governments and companies will be more reluctant to use North Korean slave labor, a subject that also made headlines yesterday with the launch of the second part of the Leiden Asia Center’s report, “Slaves to the System.” Corporations will hesitate to invest in North Korea and risk boycotts by customers, or protests by shareholders.

After two wasted years since the release of the Commission of Inquiry’s report, I now sense that the world is closing in on Kim Jong-un, and that time is not on his side. The critical question is when that sense will take hold in Pyongyang.

Opinion Inside North Korea. I have heard the word “symbolic” used to describe this act; I’d raise that to “powerfully symbolic,” with regard to a regime that devotes arguably more attention than any other on earth to the cultivation of symbol and myth. Word of this action will spread through the jangmadang, where it will erode some of the regime’s key narratives. The regime, of course, tells the people how much Kim Jong-un cares for them. This act specifies precisely how his men torture, rape, and murder them. Few North Koreans can be ignorant of those crimes, but some must cling to the idea of “if only Kim Jong-un knew.” But this will also contradict the more subtle and powerful “Barrel of a Gunnarrative that America is weak, cowed, and in awe of North Korea, and that any North Korean who feels aggrieved is isolated and forgotten by the world. This action may open more minds to the true cause of their suffering, and to the hope of liberation. It could shake the smug confidence of officials in Pyongyang. In that sense, Congress’s latest move to direct the clandestine distribution of the Universal Declaration of Human Rights, the Commission of Inquiry Report, and their own nation’s constitution is a powerfully subversive one.

Could word of this action cause some North Korean officials to modify their behavior? The answer is as complicated and variable as the psychologies of the men — they are almost always men — who compose such evil systems. Hitler and Goebbels killed themselves as final acts of defiance. Himmler killed himself as a final act of cowardice, but only after negotiating the release of thousands of Jews to try to mitigate his own guilt. Kaltenbrunner, a key executor of the Holocaust, took the stand at Nuremberg and matter-of-factly inculpated everyone, including himself. Streicher was brought to trial, sullen and defiant until he was hanged. Goering put on an agile pro se defense, then took cyanide the night before he was to hang. Speer expressed remorse, if not quite convincingly. And in July 1944, as it became clear that the war was lost, a collection of mid-level officers very nearly killed Hitler and overthrew the whole Nazi government. We’ll probably see similar variations in the behavior of North Korean officials one day. And we should be prepared to extend clemency to those who are willing to bring this nightmare to an end with a minimum of bloodshed.

Ten years ago, the idea that a North Korean prison camp kommandant would have heard that his name was on a blacklist would have been unthinkable. Today, that that same kommandant will find out is almost inevitable, particularly if his children call from Shanghai to tell him that the bank account is frozen. Those named in yesterday’s action will now feel that their backs are against the wall, but given what these men have done, they were bitter-enders anyway. As with Himmler in the closing days of World War Two, some will still feel pressure to mitigate their brutality for the sake of their own skins. Whether each man feels that the regime is likely to survive will be important to how each man acts. Men who feel untouchable will go on with their dirty work, and those who feel the hot breath of the hangman will begin to think about accountability.

By tomorrow, expect an epic rant from KCNA. Expect the regime to respond with provocations. Those provocations will be a testimony to the symbolic power and subversive potential of what happened yesterday. The crisis in North Korea will have to get worse before it gets better. It will only get better when the regime feels metamorphic, existential pressure to change. Yesterday’s action was a step toward building that pressure.

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The evidence of China’s compliance with North Korea sanctions is still mixed.

This week, there has been much talk and excitement about a new study, by the new blog Beyond Parallel, analyzing satellite imagery of six select sites along the Chinese-North Korean border, and finding evidence of a recent decline in bilateral trade. From this, the study concludes that China may be (as Josh Rogin paraphrases it for The Washington Post) “Beijing has been quietly punishing Kim by cutting off the flow of funds to his regime.” Here are the study’s two main findings:

First, the satellite images indicate a substantive reduction of economic activity on the Sino-North Korean border measured by the fewer trucks, trains, and boats in the February 2016 image compared to a similar timeframe in 2015. [….] In the aftermath of North Korea’s January 2016 nuclear test, this observed downturn in activity was comprehensive across customs areas, railway, and road traffic.

Second, the images also suggest that independent Chinese actions were taken to reduce trade in this region after the nuclear test and prior to China’s signing on to UN Security Council Resolution 2270. These findings run contrary to some estimates that Sino-North Korean trade (particularly Chinese exports) increased in the first quarter of 2016, and might confirm large anomalies in trade data as reported by China’s customs statistics, KOTRA (Korea Trade-Investment Promotion Agency), and other organizations.

The study is interesting and data-driven, and every North Korea-watcher should celebrate the launch of any new information source that promises this kind and quality of analysis. What’s more, by analyzing the volume of traffic at multiple sites over several months, the study is less vulnerable to the regime’s manipulations than the satellite theater that is almost the only good reason to read 38north (the contributions of J.R. Mailey and Andrea Berger being two other notable exceptions).

It’s especially tempting to feel triumphal about Victor Cha’s conclusions that China has taken “unilateral measures to drastically curtail trade interaction along their border,” and that China is “squeezing [North Korea] more than we were led to expect.” Still, the evidence and my objectivity restrain me to say, “Not so fast.”

First, there is also substantial evidence that China is still violating key provisions of the sanctions to prop North Korea up. North Korea’s most important export by reported volume is coal, followed by other minerals, and as NK News’s invaluable Leo Byrne has noted, the trade in sanctioned minerals continues. To some extent, North Korea has shifted its coal exports to other avenues, including Alibaba.com. At the land border, trucks loaded with titanium are still crossing into China. Worse, North Korean ships that have been specifically designated by the U.N. are still operating, and in some cases, are coming very close to Chinese ports they aren’t even supposed to approach. Then, their transponders go dark. This suggests that those ships are either landing in Chinese ports or off-loading their cargo onto smaller vessels without landing. Both alternatives violate UNSCR 2270.

Second, the kinds of commerce that benefit the regime most (as opposed to market trade that benefits the North Korean people) aren’t easy to measure with satellites. North Korea’s other lucrative exports include gold, weapons and weapons and technology, and labor. Its most essential imports include bulk cash, wire transfers, gold (again), and luxury goods that come in on Air Koryo. It probably also earns significant revenue through tourism. These are not things that can be measured by counting railcars.

Third, the study focuses on overland trade but tells us little about maritime trade. If the authors of the study want to improve the utility of this project — and I emphasize that it’s potentially a very valuable one — it should also examine maritime traffic to and from the key North Korean ports of Nampo and Sinuiju. Maritime trade is more likely to be under the control of, and to the immediate benefit of, the regime. It should specifically look for trade in bulk cargo like coal, imports and exports of fuel, and the movement of designated ships (it’s possible to match IMO numbers from transponders with satellite images).

Fourth, there may be other explanations for Beyond Parallel’s observations. I’ve long felt that Korea-watchers were far too trusting of officially reported statistics on China’s trade with North Korea, and the case of China’s fuel exports to North Korea illustrates just how easily China can manipulate those statistics. But to the extent we believe those stats, they do show a significant decline in North Korea’s exports over the last six months. The problem with attributing this to sanctions is that this decline extends a trend that we began to observe earlier, particularly in the mining industry. In fact, at Benjamin Katzleff Silberstein has pointed out on several occasions, this decline in trade volume has a closer correlation to the decline China’s economy than it has to sanctions. An interesting question is whether China’s own internal market controls, including its restrictions to prevent capital flight, may be playing a role, but that question is beyond the depth of my knowledge of economics (anyone? Bueller?).

Other potential causes of a decline in bilateral trade include regime-driven trade and travel restrictions leading up to the party congress in May, and problems with North Korea’s infrastructure, such as the partial collapse and subsequent repair of the Sino-Korean Friendship Bridge last October. (The effects of this may or may not have ended before Beyond Parallel’s study began.) That would also help explain why the study found that trade began to decline before U.N. sanctions were increased in March.

Finally, we should not hope for China to enforce sanctions in unilateral ways that depart from the strict letter of the U.N. Security Council resolutions, whether by under-enforcing or over-enforcing sanctions. The main reason sanctions haven’t worked thus far has been — and continues to be — China’s under-enforcement of sanctions. That is why Congress decided that secondary sanctions were necessary to force China to comply, by dividing the interests of China’s fundamentally hostile government from those of its more pliable banks and industries, which need access to American markets. But what we don’t always realize is that sanctions over-enforcement is an equal danger. This veers off onto a long tangent, so I’ll save it for tomorrow’s post.

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Sanctions Diplomacy: Yesterday Uganda, today Namibia, tomorrow Cambodia

Earlier this week, when a senior Namibian official who had defended her government’s military cooperation with North Korea showed up in Pyongyang, I conceded that she could be there to terminate that cooperation, but didn’t assess that possibility as very likely. But yesterday, the Namibian government announced it was ending its joint projects with North Korea, including a North Korean-run arms factory, to comply with new U.N. sanctions:

“The Government of the Republic of Namibia, in fulfilling her international obligations to abide by UN Security resolutions, has decided to terminate the services of KOMID and MOP in Namibia, for as long as the UN Security Council sanctions against the DPRK are in place,” the statement read. [NK News, Hamish Macdonald]

See also Reuters and Namibia’s own New Era Newspaper. Namibia’s announcement follows Uganda’s termination of its contracts with North Korea to train its police forces.

Presumably, this is the work of good diplomacy by someone, although I couldn’t tell you who. Africa had become an important arms market for North Korea in recent years — and continues to be —  but with the Namibian announcement, it’s clear that diplomatic efforts to get African countries to terminate their military relations with North Korea are gaining traction. Seoul has publicized its efforts — including outreach to Ethiopia, Kenya, and Tanzania — but Washington hasn’t publicized its own, perhaps for perfectly sound reasons, and perhaps because they’re non-existent.

One point that comes through clearly is that the threat of secondary sanctions is a part of why countries that ignored U.N. sanctions against North Korea for years are enforcing them now. Just look what I found in my visitors’ log after I first posted about the sanctions against Namibia that would be mandatory under the North Korea Sanctions and Policy Enhancement Act:

[Now that I have your undivided attention ….]

In retrospect, the Namibian official’s visit to Pyongyang was probably meant to express regret at the termination of mil-mil cooperation with North Korea, and to express Namibia’s desire to maintain good relations anyway. That is, Namibia complied with U.N. sanctions reluctantly, but it still complied. Sometimes, the diplomat’s velvet glove works better with a regulator’s iron fist. So, to the anonymous diplomat who (I assume) presented that stark choice to the Namibian government, you may redeem a copy of this post for the beverage of your choice.

This isn’t the full extent of the public reporting on Seoul’s diplomatic offensive against Pyongyang’s arms dealers. Its diplomats have recently lobbied the governments of the EU, France, Bulgaria, and Russia. This week’s visit by a large, high-level delegation of South Korean diplomats to Laos and Cambodia could be even more critical.

“During the talks with senior officials, (Hwang) plans to request cooperation in dealing with North Korea’s nuclear issues, including efforts to push for the implementation of a United Nations Security Council resolution,” according to the ministry statement. [Yonhap]

The diplomats will come bearing gifts.

“Hwang will meet with Cambodia and Laos’s senior defense officials and discuss bilateral defense cooperation,” the ministry said in a press release.

Hwang is the highest ranking South Korean defense ministry official ever to visit the two countries. The delegation comprises working-level officials from Cheong Wa Dae, the Ministry of Foreign Affairs as well as the Ministry of National Defense.

During his visit, Hwang will also make a courtesy call to Cambodian Prime Minister Hun Sen.

“In the talks with senior officials, Hwang plans to request cooperation in dealing with the North Korean nuclear issue, including efforts to push for the implementation of UNSC resolutions,” the ministry said.

Hwang will also meet with senior defense officials in Laos to discuss a wide range of issues, including cooperation in demining, according to the ministry. [Korea Times]

Both countries, with their lax and corrupt regulatory environments, have become key links in North Korea’s access to global shipping and finance. The strange North Korean happenings in Cambodia include the recent deaths of two North Korean doctors, the arrests of 15 North Koreans in Phnom Penh for running an illegal gambling website, the hosting of North Korean restaurants that are suspected havens for money laundering, and many reports of North Korean ships flying the Cambodian flag, a practice that was recently banned by UNSCR 2270. If Cambodia doesn’t fall into line with U.N. sanctions, the U.S. should impose sanctions against its shipping registries, and then perhaps some of its banks, under section 104(a) of the North Korea Sanctions and Policy Enhancement Act. Laos, with its record of repatriating North Korean refugees, should lose its tier status under the Trafficking Victims’ Protection Act.

Previously, President Obama had urged Vietnam, a long-time North Korean arms client, to implement new U.N. sanctions, which will impact its exports to U.S. markets.

The news is not entirely good. For example, almost five months after the U.N. Panel of Experts named dozens of North Korean operatives, front companies, and third-country enablers, the Treasury Department hasn’t designated a single North Korean target since March 15th. I’m frustrated by the fact that, contrary to rumors I’d heard, there are still no human rights designations of North Korean officials, weeks after a statutory deadline to name names under section 304 and apply designations under section 104(a)(5).

All that is deeply disappointing and may soon draw unwanted attention from Congress, but at least we can say that the results of our progressive diplomacy are promising. As our Ambassador in Seoul, Mark Lippert, has said, sanctions enforcement is a long diplomatic game. Fortunately, North Korea’s friends tend to be poor countries, tied to Pyongyang by little more than fading Cold War memories and convenience. With continued effort and patience, those ties can be undone, and we’ll continue to see good results.

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Afterthought: Perhaps I’ve been too quick to assume that the Namibian government’s actions will follow its words. I suppose the wiser course is to keep watching for signs that the Namibian government is really doing this. Nor should we let it off the hook for doing everything that UNSCR 2270 requires — expel KOMID’s representatives, freeze its property, and dispose of it.

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

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

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

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

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

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

Kim Jong Il counterfeit

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

cheonan

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

Camp 16 HQ @4500

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

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

starving children

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

Camp 25 crematorium

[The crematorium at Camp 25]

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

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

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

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

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

His Porcine Majesty

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

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

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Top Namibian official visits Pyongyang

 

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

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

Namibia

[via NK News]

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

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

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

Here are the relevant provisions of UNSCR 2270:

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

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

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

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

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

[….]

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

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

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

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

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

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

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

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

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

~   ~   ~

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

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

[….]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[….]

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

Not quite, but go on.

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

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

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

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

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

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

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

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

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

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

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

[….]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~   ~   ~

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

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

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

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

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

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

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

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

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

[….]

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

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

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

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

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

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

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

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

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

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

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

[….]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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