The U.S. may (finally) be serious about capping North Korea’s coal exports

For almost three months after North Korea’s fifth nuclear test, the U.N. Security Council remained deadlocked over how to respond, with the U.S. and its allies pressing to limit Kim Jong-un’s access to hard currency and China trying to shield its belligerent protectorate from the consequences of its behavior.

Among the most hotly debated questions was how to limit North Korea’s coal exports to China, one of His Porcine Majesty’s most important sources of hard currency. Although UNSCR 2270, passed in March after the fourth nuke test, banned most of Pyongyang’s mineral exports, there was a gaping loophole allowing exports of coal, iron, and iron ore for “livelihood” purposes. Unfortunately, it soon became clear that “livelihood” translated into Chinese means “whatever.” The exception soon swallowed the rule, and coal exports did not fall; they rose … by a lot. By September, China’s coal imports from North Korea had risen 12.8 percent over the same period last year, to a record high. The Obama administration clearly felt that China was cheating. (See also my posts from March, July, and October and Stef Haggard’s post from yesterday.)

The eventual compromise the U.S. and China reached in UNSCR 2321 was disappointing, to say the least. Rather than take any plausible steps to ensure that Pyongyang really used its coal money to provide for the livelihoods of its hungry people, the resolution simply capped coal exports at $400 million or 7.5 million metric tons a year, whichever is less. (In 2015, North Korea exported $1 billion worth of coal to China) On paper, Chinese power companies were also prohibited from buying any amount of coal from entities associated with North Korea’s WMD programs.

The flaws in this “solution” are obvious. How will we know how much coal North Korea exported, and at what price? By relying on Chinese customs statistics? How will we know which North Korean entities really sold the coal? And more fundamentally, given that cash is fungible and North Korean despots have consistently prioritized their arsenals and their own high lifestyles over the survival of their people, how can anyone verify how the world’s most financially opaque society spent the money? If China really gave a whit about the “livelihoods” of North Koreans — in fact, it holds the lives of North Korean men, women, and children in utter contempt — it would have agreed to pay for “livelihood” coal in the form of food, or to the World Food Program. An unverifiable cap is a license to cheat.

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But Treasury’s announcement last week of bilateral sanctions against certain North Korean coal exporters, who Treasury believes “may benefit the Government of North Korea or the Workers’ Part (sic) of Korea,” could go far to swallow the “livelihood” cap exception to the coal ban that swallows the rule.

OFAC designated Daewon Industries and the Kangbong Trading Corporation for having sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea, metal, graphite, coal, or software, where revenue or goods received may benefit the Government of North Korea or the Workers’ Part of Korea.  The Kangbong Trading Corporation’s parent is the Ministry of People’s Armed Forces.  Daewon Industries also operates in the energy industry in the North Korean economy, and may be subordinate to the Munitions Industry Department, which is sanctioned in UNSCR 2270, designated by the U.S. pursuant to E.O. 13382, and responsible for overseeing the development of North Korea’s ballistic missiles, including the Taepo Dong-2. [U.S. Treasury Dep’t Press Release]

With that action, Treasury’s clear message to Chinese buyers is that certain North Korean sources are off limits, cap or no cap. The recent example of the Dandong Hongxiang indictment and forfeiture complaint hovers over all of this, posing a credible threat that Chinese buyers could have their dollar assets frozen. And in case anyone thinks Dandong Hongxiang was a one-off, our diplomats have said it isn’t.

The United States has warned China it will blacklist Chinese companies and banks that do illicit business with North Korea if Beijing fails to enforce U.N. sanctions against Pyongyang, according to senior State Department officials. The tougher U.S. approach reflects growing impatience with China and a view that it has not strictly enforced existing sanctions to help curb Pyongyang’s nuclear program, which a U.S. policy of both sanctions and diplomacy has failed to dent.

U.S. Deputy Secretary of State Antony Blinken gave the message to Chinese officials in meetings in Beijing in October after North Korea conducted its fifth and largest nuclear test, the officials said. U.S. National Security Adviser Susan Rice and Secretary of State John Kerry stressed the importance of choking off financial flows to Pyongyang during a meeting with Chinese State Councilor Yang Jiechi in New York on Nov. 1. [Reuters]

There are some early signs that Chinese industry may have gotten that message, although it’s typical for Chinese companies to slow their trade with North Korea temporarily after the U.N. passes new sanctions. As I’ve pointed out here more than once, there is undeniable evidence that China has violated North Korea sanctions frequently and flagrantly for years. China will not wait long to resume its cheating and test our resolve. With demand for North Korean coking coal high, we’ll need a strong deterrent to enforce sanctions. If our President-Elect has done anything right, he has sent a clear (and apparently calculated) message that China’s sensitivities will not prevent him from acting decisively to protect U.S. interests. After all, it’s not as if our sensitivities have had much visible effect on China’s behavior.

This wasn’t the only energy sanction Treasury imposed last Friday:

OFAC designated the Korea Oil Exploration Corporation for operating in the energy industry in the North Korean economy.  The Korea Oil Exploration Corporation is a state-controlled enterprise of the North Korea Ministry of Oil.  The Korea Oil Exploration Corporation has reportedly worked to establish contracts with Iranian oil entities, in part to supply crude oil to two refineries in North Korea. [U.S. Treasury Dep’t Press Release]

Among others, that’s probably bad news for James Passin, a hedge fund manager who gambled his shareholders’ money on a refinery and oil exploration in North Korea. U.N. sanctions ban exports of aviation and rocket fuel to North Korea, but not crude. Until recently, China continued to export petroleum products to North Korea. (For the record, I oppose banning exports of gasoline, diesel, and heating oil to North Korea, for humanitarian reasons.)

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The Obama administration’s designation of the North Korean companies consolidates a U.S. shift to a harder line on sanctions enforcement, reflecting a bipartisan consensus for tougher action in Congress. It’s also satisfying to me personally, because the administration has adopted the strategy I advocated here in October.  Note that the language in the Treasury Department’s press release (“revenue [that] may benefit the Government of North Korea or the Workers’ Part of Korea”) does not match the language of UNSCR 2321 (“entities that are associated with the DPRK’s nuclear or ballistic missile programmes or other activities prohibited by [applicable U.N.] resolutions”), because the administration relied on the domestic legal authority of Executive Order 13722 instead:

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:

   (i) to operate in any industry in the North Korean economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to be subject to this subsection, such as transportation, mining, energy, or financial services;

   (ii) to have sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea or any person acting for or on behalf of the Government of North Korea or the Workers’ Party of Korea, metal, graphite, coal, or software, where any revenue or goods received may benefit the Government of North Korea or the Workers’ Party of Korea, including North Korea’s nuclear or ballistic missile programs;  [EO 13722]

Those provisions, in turn, implement sections 104(a)(8) and 104(b)(1) of the North Korea Sanctions and Policy Enhancement Act. They may have also reflected Treasury’s interpretation of the coal export ban as passed in March, in UNSCR 2270. U.N. resolutions don’t enforce themselves. They require U.N. member states to implement their sanctions through legislation. Member states that want U.N. sanctions to work benefit from a U.N. imprimatur to globalize sanctions enforcement. Each level of authority needs and complements the other.

Tactically, it was wise of the administration to wait for the (undoubtedly difficult) negotiations with China to conclude before it acted. The clear message it sent at the conclusion of that negotiation is that, for the time it has left, it will hold China to its word. Let’s hope the next administration is equally serious.

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What the Treasury Department’s blocking of Air Koryo means

Last week’s North Korea sanctions designations by the U.S. Treasury Department’s Office of Foreign Assets Control — commonly known as OFAC — go far to explain why U.N. Security Council Resolution 2321 took so long to negotiate and pass. There were many reasons why I panned the terms of that resolution last week, including new and not-improved coal export limits, and the U.N.’s failure to designate North Korea’s state airline, Air Koryo.

Friday’s OFAC designations — which block any of the targets’ assets in the United States, and more importantly, any dollar assets that move through the U.S. financial system for international transactions — plug many of the holes UNSCR 2321 left. Treasury has sent a strong signal that when China blocks swift and effective consequences for North Korea’s provocations, the U.S. is (at last, at least for now) prepared to join with its allies and go beyond the United Nations. This almost certainly means that the U.S. made no sub rosa agreement to stay its hand.

I. There was strong evidence that Air Koryo had violated U.N. sanctions for years.

U.N. reports alone provided ample evidence to support the designation of Air Koryo. For years, the U.N. Panel of Experts that oversees (non-)compliance with U.N. sanctions had called Air Koryo out for lending its aircraft to the North Korean air force for military purposes, for arms smuggling, and for suspicious financial transactions. In 2014, for example, the Panel reported that Air Koryo was, for all intents and purposes, an arm of the North Korean military, and cited NK News’s reports that Air Koryo Il-76s were sometimes repainted for military exercises and shows. It published photographs of one Air Koryo Il-76 after an air show, with camouflage still showing through the white paint of its civilian livery.

141.  As previously indicated by the Panel, Air Koryo and all airports or airfields within the Democratic People’s Republic of Korea are controlled by the Korean People’s Air Force through its Civil Aviation Bureau. Reportedly, all personnel are members of the air force and all in-country maintenance is conducted by Air Force engineering staff.  The absence of boundaries between Air Koryo and the air force was further highlighted by the 27 July 2013 military parade during which three military Ilyushin (Il) 76 flew over Kim Il Sung square (see figure XXV). [UN POE]

Then, there is this language from the 2014 report, suggesting that Air Koryo may have been running an elaborate money laundering scheme, one that foreshadows its likely sanctions evasion strategy:

178.  An example of a transaction being financed in an unusually complex manner was an Air Koryo contract in 2012 to purchase new aircraft.  Payments were structured through eight Hong Kong, China-registered companies, which asserted that they were trading partners of Air Koryo and were wiring funds they owed it. The resolutions do not prohibit the purchase of civilian passenger and cargo aircraft. The Panel, however, was dubious of the explanation that debts were the source of the funds; some companies appear to be recently formed shell companies. It also finds remarkable the coincidence of all eight firms owing significant amounts to Air Koryo at the time funds were contractually due to be paid to the seller of the aircraft. The names of shells and activities of others appear to share a connection with gold trading. The Panel is suspicious that the Democratic People’s Republic of Korea may be using or considering the use of precious metal sales on credit terms to create “accounts payable”. Such sources for funds would not necessarily show as being under its control and even could be swapped with other firms to further distance its connection and thereby better evade sanctions and enhanced due diligence by banks. [UN POE]

There were also regular reports (and photographic evidence) that North Korean officials and couriers used Air Koryo to import luxury goods and smuggle bulk cash, in violation of U.N. sanctions. The 2016 Panel of Experts report published photographs of a consignment of SCUD missile parts shipped from North Korea to Egypt aboard an Air Koryo flight. In 2015, the Panel made this conclusion:

120. Given the evidence of military use, the Panel considers that providing financial transactions, technical training, advice, services or assistance relating to the provision, maintenance or use of Air Koryo’s cargo aircraft could constitute a violation of the embargo on all arms and related materiel as defined by paragraph 10 of resolution 1874 (2009). [UN POE]

Although it’s apparent that China blocked a U.N. designation of Air Koryo in UNSCR 2321, it’s also apparent that experts appointed to the panel by other nations saw ample justification for a designation of Air Koryo, and had been pushing for one for years. Pyongyang also used Air Koryo to transport slave laborers abroad and back, including the flight that brought home 100 mutinous workers from Kuwait, almost certainly to a very dark fate. Belatedly, UNSCR 2321 expressed “concern” about this exploitation, albeit with non-binding language.

That’s why OFAC’s designation of Air Koryo, two days after the U.N. failed to do so, was anything but “unilateral.” That matters, because we will need the cooperation of other states to make Air Koryo sanctions effective. For example, South Korea’s own designation of Air Koryo will have little direct effect, because Air Koryo doesn’t fly to South Korea, but (depending on how South Korea’s political crisis resolves) South Korean diplomats may soon call on Malaysia, Singapore, Thailand, Kuwait, and other countries to join the ban. (Singapore, an important North Korean trading partner, doesn’t have its own independent SDN list for North Korea sanctions; it just adopts the U.N. list.) The EU will probably also cooperate. Even before the OFAC designation, it had banned most Air Koryo planes over safety concerns.

If anyone in this story acted unilaterally — aside from North Korea, of course — it was China, in blocking Air Koryo’s designation despite all of the incriminating evidence. I don’t doubt that China will try to help Air Koryo continue operating with Renminbi transactions, although it remains to be seen whether Chinese banks will risk handling them. But with each new North Korean provocation, China will find itself increasingly isolated and pressured to yield to the consensus. That’s how Progressive Diplomacy should work.

Now, every venue that gives Air Koryo landing rights will come under diplomatic pressure to stop doing so. Expect Air Koryo’s itinerary and Pyongyang’s tourist income to continue to ebb, but past history (more on that below) suggests that Pyongyang will find ways to keep Air Koryo flying, even if only at a punishing financial loss. Viewed that way, sanctions won’t only be costly if they destroy Air Koryo. They may be even more costly if they don’t.

II. How U.S. sanctions will affect Air Koryo’s operations.

OFAC didn’t just designate Air Koryo last Friday; it also designated its offices and all its individual aircraft — well, almost all. Compare Treasury’s list of designated Air Koryo aircraft to Table 9 from the 2015 U.N. Panel of Experts report, and you’ll see that Treasury’s list is three planes short of the POE’s list — specifically, one Tu-134 and two Il-62s. Did Treasury spare the three remaining aircraft for some reason? Did it simply lack full identifying information about them? Probably not. First, note that the three aircraft are among the oldest in Air Koryo’s fleet. A more likely explanation comes from Paragraph 117 of the 2014 POE report, which says that Air Koryo bought two of its Il-62s from Cuba in 2012 and cannibalized them for spare parts. OFAC probably saw no point in designating two old hangar queens. It’s likely that the remaining Tu-134 aged out, too.

How will the OFAC designation affect Air Koryo? Let’s start by establishing its baseline. Two years ago, the Panel of Experts offered this summary of Air Koryo’s itinerary:

139.  The numbers of air carriers operating scheduled flights and routes to or from Pyongyang Sunan International Airport remain very limited. However, the number of flights per route has changed since May 2013. The number of weekly rotations to Beijing has increased from six to eight, with five rotations operated by Air Koryo and three by Air China, the only foreign airline regularly serving the Democratic People’s Republic of Korea.  Air Koryo now also operates two weekly rotations to Vladivostok. The number of rotations to Shenyang is unchanged (twice a week), while the number to Kuala Lumpur decreased (from twice to once a week). The status of its weekly rotation to Bangkok is unknown. This flight and others to Kuwait City, Moscow, Nanjing, Shanghai and Yanji, China, are most likely operated on an ad hoc and/or seasonal basis. [UN POE]

This is not the first time the Treasury Department has designated a rogue state’s flag carrier. Treasury designated Syrian Air in 2013 for smuggling weapons, and the EU soon followed suit. Syrian Air kept flying to the Gulf states with the help of front companies, money laundering, and bulk cash smuggling. Treasury designated Iran Air in 2011, after years of U.S. export controls made it difficult for the airline to buy spare parts. In 2010, the EU banned some Iran Air craft over safety concerns. After its OFAC designation, Iran Air’s flights to Western Europe had to make fuel stops in Eastern Europe, but the airline limped along until President Obama lifted its designation earlier this year. The 1998 designation of Sudan Airways, along with “financial troubles and mismanagement,” eventually reduced it to just six working (but aging) aircraft. In 2015, the U.S. government fined EgyptAir for leasing two 737s to Sudan Airways. But then, Sudan Airways’s two-letter flight code, “SD,” has long been said to stand for “sudden death.”

This history suggests that Pyongyang will try to keep its flag carrier flying, even if at great expense and inconvenience, to show its defiance and maintain its prestige. But like Iran Air and Sudan Airways, Air Koryo was already straining to maintain a fleet of aging aircraft before its OFAC designation. If North Korea runs an airline as ineptly as it runs, say, its food supply, over time it will be forced to drop routes and flights, which Chinese air carriers will try to pick up. Currently, Air China is the only other airline with regular flights to North Korea. (Spring Airlines had expressed interest in starting flights to Pyongyang, but later shelved that plan.) These airlines will have greater dollar exposure and more reluctance to risk ferrying luxury goods or slaves. They will feel more constrained by UNSCR 2321’s mandate to inspect all checked baggage to and from North Korea for, say, bundles of cash, stashes of gold, or big screen TVs.

Air Koryo may try to collect fares and buy parts in non-dollar currencies, but past history suggests it will simply try to evade the dollar sanctions. This will come with great costs and inconveniences. As we learned from the Dandong Hongxiang indictments, it’s almost impossible to operate in the global economy without dollars, and evading dollar sanctions requires working through shady middlemen who sometimes charge commissions of more than 20 percent. The more layers of protection you want, the more middlemen you need, and each layer adds to that cost. It will be hard, but still possible, for Air Koryo to keep flying with its dollar accounts frozen and its capacity to acquire spare parts and new aircraft curtailed. (UNSCR 2321 bans North Korea from purchasing or leasing new vessels and helicopters, but not fixed-wing civilian aircraft.) The operations of a national flag carrier aren’t easily concealed. Air Koryo will have to market itself to sell seats and operate profitably. Every destination where its planes land will come under investigative and diplomatic scrutiny. 

III. How the designation of Air Koryo will affect the North Korea tourist industry.

Much of the media interest in the designation of Air Koryo has focused on how the designation will impact tourism to North Korea — specifically, tourism to North Korea by Americans and Europeans. That interest, in turn, probably derives from the inexplicably popular idea that (overwhelmingly) white people who travel to North Korea will shine their gentle, warming rays on the local savages by “open speech and simple an hundred times made plain, to seek another’s profit and work another’s gain.” ICYMI:

For some people, visiting North Korea is like dating Madonna — plodding a tired, well-worn, loveless, and morally ambiguous path that gives some people an inexplicable feeling that they’ve entered an unexplored place. Except that Dennis Rodman and countless others already did. 

Designating Air Koryo will undoubtedly reduce Pyongyang tourist revenue, but it’s hard to say by how much. Yonhap has published an estimate that in 2014, tourism poured $43 million into North Korea. Some experts have told me that estimate sounds high, but Sheena Chestnut Greitens (who is, due to unrelated developments, about to become the First Lady of Missouri) previously cited an unnamed South Korean expert’s “high estimate” of $100 million. How much of this income is from Air Koryo’s ticket sales is anyone’s guess. The overwhelming majority of tourists who visit North Korea are Chinese who may find it more convenient to fly Air China or take the train.

Air Koryo’s designation will have a greater impact on Europeans and Americans, who pay a premium to travel to North Korea. Uri Tours, one of the companies that sells group tours of North Korea to slummers, inept evangelists, prospective hostages, and other unrequited masochists turns out to be a business partner of North Korea’s missile-part-smuggling, money-laundering, slave-ferrying airline.

Uri Tours is the exclusive General Sales and Ticketing Agent of Air Koryo in the Americas. We service tourists, business travelers, corporations, foreign workers and government officials to provide expedient Air Koryo ticketing in advance of your trip. We take credit card payment and we can offer same day ticketing.

Air Koryo is North Korea’s only airline and has a history of over 50 years in flight. Air Koryo operates internationally scheduled flights between Pyongyang, China (Beijing, Shenyang and Shanghai), Russia (Vladivostok), Thailand (Bangkok), and Kuwait. It also operates charter flights to and from Malaysia (Kuala Lumpur), Singapore and a handful of other countries. Domestic flights to Mount Paekdu and Mount Chilbo (and soon Wonsan) are also operated by Air Koryo. [Uri Tours]

Uri Tours reacted to OFAC’s designation of its North Korean partner with a blog post that tells us that as of last week, it was still in the denial stage.

Do these new sanctions affect tourism?

E.O. 13722 does not prohibit U.S. persons from engaging in transactions ordinarily incident to travel to or from any country. This means that U.S. persons can travel to North Korea. You are also still permitted to book tours to North Korea with a U.S. tour operator. It is our position that Uri Tours’ travel activities are covered under the IEEPA exemptions and moreover, we were an existing tour service to North Korea before E.O. 13722 which prohibits new investment in North Korea by a U.S. person. [Uri Tours]

To unpack Uri’s “position,” begin with OFAC’s specific legal authority for the designation of Air Koryo, Executive Order 13722, which authorizes sectoral sanctions against North Korea’s transportation industry (along with mining, energy, and financial services). Taking Uri’s arguments in reverse order, it claims that because its business relationship with Air Koryo predated the OFAC designation, its relationship is not affected. But section 1(b) of EO 13722 states as follows:

The prohibitions in subsection (a) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order or pursuant to the export control authorities implemented by the Department of Commerce, and notwithstanding any contract entered into or any license or permit granted prior to the effective date of this order. [EO 13722]

If Uri Tours doesn’t have a lawyer, this would be a good time to invest in one. If Uri Tours has a lawyer, this would be a good time to invest in a better one. The penalties for violating the IEEPA include 20 years in one of these

Uri also cites an OFAC FAQ, Number 464, and characterizes it as opining that Americans are free to travel to North Korea for tourism. In fact, the FAQ only provides guidance on humanitarian travel (which is exempt from sanctions under a general license that doesn’t apply to tourism). The FAQ was published on March 16, 2016, the day after the President signed EO 13722, but long before the designation of Air Koryo. It says nothing about tourist travel.

Uri makes a stronger argument when it cites our old friend, the International Emergency Economic Powers Act, which creates the legal authority for sanctions executive orders and designations, but withholds (in section 203(b)(4)) “the authority to regulate or prohibit, directly or indirectly . . . any transactions ordinarily incident to travel to or from any country.” But if Uri Tours thinks the U.S. can’t designate an airline because of section 203(b)(4), I’ve already shown you ample precedent to the contrary. Whether an individual U.S. tourist can book an Air Koryo flight is an interesting question I’ll leave to the Treasury Department to resolve in a future FAQ, but good luck booking that flight if no bank will process your fare payment. Uri’s suggestion that 203(b)(4) allows it to go right on transacting with a blocked entity seems dangerously wishful, but Uri’s legal risk isn’t my concern. It misrepresents the law at its own peril. It misrepresents the safety and ethics of travel to North Korea at yours.

Clearly, 203(b)(4) doesn’t exempt airlines from the reach of nonproliferation sanctions. Just as clearly, Treasury makes a distinction between blocking one airline’s assets and a travel ban. Do proliferation sanctions that have incidental effects on travel exceed the authority of 203(b)(4)? I’d guess not, but I’ll let OFAC answer that for itself. But then, the fact that Treasury currently lacks the authority to impose a travel ban doesn’t mean that Congress won’t simply impose one, mooting Uri’s argument. Meanwhile, travel to North Korea all you want on a Chinese airline. All that’s stopping you is your intelligence and your conscience.

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In the end, the biggest winners from OFAC’s designation of Air Koryo will be Air Koryo’s passengers, and not just the slaves among them. One of them recently related his near-death experience when an Air Koryo crew ran up and down the aisle of his flight, shouting “no problem! no problem!” as the cabin filled with smoke, the plane plunged toward the earth, and the passengers wept for their dear lives. In that story, I saw a fitting microcosm of, and metaphor for, the entire North Korean condition. That was one of their newer planes, too. But if you really want to hear the definitive analysis of how Air Koryo’s designation affects the North Korea tourism industry, ask Otto Warmbier. Unfortunately, he wasn’t available for comment at post time.

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Why Seoul’s blacklisting of Air Koryo & Dandong Hongxiang matters

South Korea is the first of the Free Three (the U.S., South Korea, and Japan) to announce independent multilateral sanctions on North Korea following the approval of UNSCR 2321. Some of the measures, such as the blacklisting of Choe Ryong-hae and Hwang Pyong-so, will probably mean almost nothing until some future left-wing president tries to give one of them a ticker-tape parade along the Chongro.

An extension of South Korea’s ban on ships that have entered North Korean ports within the last 180 days will do more, by forcing shipping companies to choose between the modest trade with North Korea and the much more significant trade with Japan and South Korea. With North Korea’s own ships already under rising pressure even pre-2321, and now facing a loss of access to insurance, North Korea may soon find itself increasingly isolated from its export markets.

South Korea’s blacklisting of Air Koryo, while not directly significant by itself (Air Koryo doesn’t fly to South Korea) may foreshadow a corresponding action by the U.S. Treasury Department, which would freeze North Korea’s national airline out of the dollar system and seriously crimp its operations. (Update: That turns out to have been a pretty good guess. OFAC just released a new round of designations that includes North Korean banks, slave labor merchants, the Korea National Insurance Corporation, and Air Koryo. I’ll have more to say after work.) It could also clear the way for South Korean diplomats to lobby middle powers like Malaysia, Thailand, Kuwait, and Singapore to deny Air Koryo landing rights. That would be a severe blow to Pyongyang. South Korea’s diplomatic campaign against North Korea’s foreign clients has been highly effective this year.

The most important and courageous move, however, was this one:

In particular, Dandong Hongxiang Industrial Development and four of its executives were included on the list, marking the first time that a Chinese firm is facing South Korea’s unilateral sanctions.

The company is under investigation on suspicions that it exported aluminum oxide — a nuclear bomb ingredient — to the North at least twice in recent years. In September, the U.S. blacklisted it along with its owner and other company officials.

With the latest action by Seoul, a total of 79 individuals and 69 entities will be subject to sanctions in connection with the North’s nuclear programs. The government announced a blacklist in March as a follow-up move to the UNSC’s Resolution 2270 adopted in the wake of the North’s fourth nuclear test in January.

Any financial transactions with them will be prohibited, while their assets in South Korea will be frozen. The blacklisted people will also be banned from entering the country, which is seen as a symbolic action given that there are no exchanges between the two Koreas. [Yonhap]

This could be the first sign that the three allies, acting outside the U.N. and beyond the reach of a Chinese or Russian veto, are forming a coalition to combine their economic power behind secondary sanctions against Pyongyang. If Japan joins in this, it will mean that the Chinese trading companies that prop up His Corpulency’s misrule will now face not only the freezing of their dollar assets, but the loss of their trade relationships with the two most important non-Chinese markets in northeast Asia. If those Chinese trading companies think they can mitigate the risk of secondary sanctions by insulating themselves from the dollar, Seoul has just added an additional layer of risk for those that continue to trade with Pyongyang. If the Free Three have coordinated their sanctions well, Tokyo will soon add its heft to that risk. Trading companies’ shareholders, officers, and bankers may find that risk increasingly unacceptable.

Beijing knows that while Dandong Hongxiang is itself a dead letter, this sort of Progressive Diplomacy represents a dangerous precedent for its interests. I expect it to react furiously. Even a year ago, I could not have imagined Park Geun-hye antagonizing South Korea’s greatest trading partner this way. Today, with all the noise about impeachment and the North Korean crisis, the Chinese reaction could be crowded out of the headlines. But with Park having conceded that she cannot hold onto power for long, she has nothing to lose.

Not only does Park have no reason not to burn bridges, she may have her own reasons to punish China. If she’s at least as paranoid as I am, she may suspect China, or its North Korean dependent, of directly or indirectly supporting the media frenzy that led to her downfall. It seems plausible in the age of Wikileaks that foreign governments give clandestine support to media hostile to leaders who oppose their interests. She may even suspect them of having planted the tablet that first broke the scandal. Personally, I see no direct evidence of it, nor do I think it’s more than 20 percent likely, but I’ve yet to see anyone explain (or even inquire into) the remarkable coincidence by which a discarded device just falls into the lap of a hostile press and topples a head of state. It seems easier to pull off than, say, throwing Wisconsin to Trump.

Either way, Park Geun-hye isn’t going quietly, and she’s gambling that the actions she takes on her way out the door will have the support of a future President Trump. No matter how much the Hankyoreh rages, that will make those actions even harder for her successor to undo than for her to do. What we may be seeing here is the first brick in a multinational sanctions coalition in which the members concentrate their collective power against Pyongyang’s enablers. For now, the Free Three are the core of that coalition, but with skillful diplomacy and time, that coalition may soon include other middle powers, other issuers of convertible currencies, and key members of an increasingly fractious European Union.

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Yonhap: U.S., ROK & Japan to impose coordinated sanctions independently of U.N.

With reaction to UNSCR 2321 ranging from the skeptical to the unfavorable, U.S. and South Korean diplomats have been practicing their skills at porcine cosmetology this week. But if the generals in Pyongyang are already quaffing Hennessey to celebrate the latest advance for the byungjin policy, that may be premature. The Security Council may not have the last word on North Korea’s September 9th nuke test after all:

South Korea, the United States and Japan are preparing to announce their own sanctions on North Korea at the same time in a joint action to maximize their impact to the communist country, Foreign Minister Yun Byung-se said Thursday.

“Basically, (the three countries’ independent sanctions) will be announced concurrently or at a very similar time,” Yun told Yonhap News Agency, referring to the nations’ follow-up measures to the United Nations Security Council’s adoption of Resolution 2321. South Korea is set to unveil its own set of new sanctions on Friday. [Yonhap]

My two greatest concerns with 2321 are, first, that the surprisingly high coal export limits are a license to cheat that may actually raise the amount of coal Pyongyang can export, and second, that within the negotiations with China over the resolution was a sub rosa agreement by the U.S. to abstain from using the power of the dollar against Chinese banks and businesses that are propping up His Supreme Corpulency. This report doesn’t address the first concern, but it may palliate the second.

Obviously, how much the new bilateral sanctions would palliate my concern depends on what the sanctions are, and Yun didn’t say much about that, except that “[b]ilateral sanctions prepared by the U.S. side may be strong enough to hurt North Korea more than the recent UNSC resolution.” This article, however, gives some vague hints at the South Korean actions. Yun also didn’t say exactly when the new sanctions would be announced, because the different countries have different “internal procedures.”

I can certainly imagine what kind of sanction would have that sort of effect. So can the Obama administration, and so can the U.S. House and U.S. Senate, whose most vocal members and committee chairs are going to be pushing for just that for at least two more years. That the allies appear to be practicing Progressive Diplomacy is also excellent news.

I may not miss Park Geun-hye as much as I’d miss Yun Byung-se. I certainly hope he stays on in the banana republic that South Korea has recently become, but then, who am I? I’m writing this from Washington, D.C.

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The U.N.’s new North Korea resolution wasn’t worth the wait

Lest anyone think I’m blindly criticizing the Obama administration as it tries to cover its exit and legacy, start with my favorable comments on UNSCR 2270. That resolution might have been the baseline for a genuinely effective global sanctions program, but the text of the new resolution the Security Council will vote on tomorrow arguably lowers the high bar set by 2270. Indeed, because of our independent authority to enforce 2270 in tandem with our allies, we would have been better off with no resolution at all than a weak one.

Although the text contains some useful provisions, including a ban on shipping insurance and the expulsion of North Korean bank operatives, many of the nominally tough provisions are full of loopholes. For example, how many North Korean diplomats must each country expel? What prevents North Korean diplomats, now limited to one bank account each, from simply putting those accounts in the names of “private” trading companies?

The ban on North Korea using real property abroad for non-diplomatic purposes could, depending on how it’s interpreted, require it to shut down the Chilbosan Hotel, its Chinese base of operations for cyberattacks. And anyone who might have fantasized about reopening Kaesong or the success of Rajin should read paragraph 32 carefully.

The veiled threat in paragraph 19 to suspend North Korea’s U.N. privileges is interesting, but ultimately empty. China and Russia would veto any such move.

The new designations in the annexes are weak, mostly consisting of mid-level officials who will be easy to replace. The absence of Air Koryo, the Korea National Insurance Corporation, and Mansudae Overseas Project Group from the list are big disappointments.

But the biggest overall disappointment may be the text’s lack of hard, clear, enforceable follow-the-money provisions. There is no new requirement for member states to track and report beneficial ownership by North Korean nationals, which would have been a potential windfall of financial intelligence on North Korean money laundering and sanctions evasion.

Many of the provisions — such as the ban on dual-use items, helicopters, and technical assistance — were already prohibited under any reasonable interpretation of UNSCR 2270. Russia, India, and other states have violated those prohibitions.

The addition of two items — rugs and china — to the luxury goods list is laughable.

The most talked-about provision, the new cap on North Korean coal exports, will be difficult to monitor and enforce. How will the U.N. Panel of Experts really know what minerals China is importing, in what volumes, or at what prices? Even if they are enforced, the cuts in coal exports are not deep enough to create the kind of financial crisis in Pyongyang that will force it to reconsider its nuclear weapons program. Pyongyang exports $1 billion worth of coal in a typical year. This text would cut that amount in half. If you’d asked me in March to guess what “livelihood purposes” means, I’d have said it sets a much lower cap than what the Chinese extracted from us. (Update: Also, I’d have said that for “livelihood purposes” to be anything but a farce — a license to cheat, really — it would have required the Chinese to pay the North Koreans in food instead of dollars. But now, Pyongyang and Beijing can safely conspire to starve the North Korean people, while using the profits of their trade to terrorize Koreans on both sides of the DMZ.) Arguably, the Chinese won the right to sell North Korea more coal than we’d have allowed to pass through our financial system under the new U.S. sanctions law and executive order. For the sake of getting China to sign another piece of paper, we threw away that leverage.

Meanwhile, most of North Korea’s other revenue sources are untouched by any enforceable provisions (the text merely expresses “concern” about North Korea’s slave labor exports). A modest exception is a ban on the sale of North Korean crew services.

What hovers over all of this is that Chinese banks and businesses — encouraged by Beijing — have willfully and persistently cheated on the sanctions right up to this very minute. The new resolution would not have restated UNSCR 2270’s requirement to inspect checked baggage and cargo at land borders if China has not failed to enforce those provisions to begin with.

What’s needed much more than new measures is a stark demonstration to Chinese banks, businesses, and ports that those who cheat will suffer the same fate as Banco Delta Asia and Dandong Hongxiang. President Obama has decided to sacrifice the greater need, which is enforcement, for a lesser need, a new resolution. To the very last, this administration’s North Korea policy is much more tongue than tooth. At such moments, I sympathize with Donald Trump’s criticism that this administration doesn’t excel at negotiation. We’ll soon see if he can do any better.

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China breaks N. Korea sanctions it says won’t work because it’s afraid they’ll work

In yesterday’s post, I linked to reports suggesting that China’s failure to agree on the terms of a new U.N. sanctions resolution responding to North Korea’s latest nuclear test may be motivated by a desire to wait out the end of President Obama’s administration. This theory would only make sense if China figures it can get better terms from President Trump next year, but my post pointed to evidence of the opposite of this — that what we know so far about the key people advising Trump is that some want to increase sanctions against His Supreme Corpulency and his Chinese backers, and others would prefer to terminate his command with extreme prejudice. 

First, I’ll offer an important caveat: it can be treacherous trying to divine President Elect Trump’s policy views by listening to his advisors.

With that caveat, then, if the present pattern of selections and nominations continues, differences between the U.S. and China over North Korea may have to get worse under a Trump administration before they can get better. Men like John Bolton, Mitt Romney, James Mattis, and Michael Flynn probably believe that President Obama’s deferential approach to China, rather than improving relations, likely contributed to China’s (correct) calculation that it could get away with grabbing vast areas of the South China Sea, bullying its neighbors, undermining North Korea sanctions, and doing other things to escalate regional tensions. They may see more pressure on China as a prerequisite to defanging North Korea. They may dismiss China’s explanations of its North Korea policy as mendacious and double-dealing, which is only natural, given that China actually has at least six of them — all of them risible, mutually inconsistent, or both.

First, there is China’s official diplomatic position, expressed in its vote for no less than six resolutions at the Security Council. Implicit in these votes are two ideas — that China wants a nuclear-free Korean peninsula, and that economic pressure is an important part of a policy for achieving that end.

Second, there is the reality of China’s material and financial support for the North Korean regime, often in violation of U.N. sanctions, including the sale of proliferation-sensitive technology (missile trucks, for example). China has spent the last decade violating the same sanctions it voted for because trade and engagement and all that. As I’ve pointed out more than once, those violations are much too extensive and long-standing to be anything less than willful state policy.

Third, there is the propaganda line advanced by China’s scholars and acolytes that sanctions — that is, the ones China has spent the last decade violating — never work. (Except, of course, when they do, but more on that in a moment.)

Fourth, when called on its years of flagrant violations, China says it’s afraid that sanctions will work so well they’ll destabilize the regime in Pyongyang. Here’s a typical example of something you’ve read at least a hundred times:

China fears that stricter measures against North Korea, such as cutting off provisions of oil and food, would lead to a humanitarian disaster with millions of refugees flocking across the border. The collapse of Kim’s government could also put soldiers from South Korea and its U.S. ally right on China’s border, a scenario Beijing’s leaders want to avoid. [Bloomberg]

A premise of that view is that China would rather have a nuclear-armed, genocidal North Korea along its border than a democratic one friendly to the United States, which it views with intense hostility. Usually, that premise goes unspoken, but not always.

“The United States cannot rely on China for North Korea,” said Shi Yinhong, a professor of international relations at Renmin University in Beijing. “China is closer to North Korea than the United States.”

China sees living with a Communist-ruled nuclear-armed state on its border as preferable to the chaos of its collapse, Mr. Shi said. The Chinese leadership is confident that North Korea will not turn its weapons on China, and that China can control its neighbor by providing enough oil to keep its economy afloat.

The alternative is a strategic nightmare for Beijing: a collapsed North Korean regime, millions of refugees piling into China and a unified Korean Peninsula under an American defense treaty. [N.Y. Times]

A fifth argument is that Beijing has little real influence over Pyongyang, which is spurious nonsense: 

China provides North Korea with most of its food and energy supplies and accounts for more than 70 percent of North Korea’s total trade volume (PDF). “China is currently North Korea’s only economic backer of any importance,” writes Nicholas Eberstadt, senior fellow at the American Enterprise Institute. [Council on Foreign Relations]

That argument looks especially spurious this year, as China uses trade as a blunt instrument against South Korea over its deployment of the THAAD missile defense system, and against the United States itself. China has made more threats against the U.S. and South Korea over missile defense this year than it has against North Korea in a decade over the missiles and nukes that gave rise to the threat itself.

Finally, China has a last line of defense: We are, too, enforcing sanctions!  If it comes under sufficient diplomatic pressure, for a few weeks or months, Beijing will encourage a few banks and companies to freeze a few accounts, arrest a few North Korean money launderers, or inspect some cargo entering or leaving North Korea. This compliance typically lasts for a few weeks or months until the trade returns to business as usual.

In 2013, and again this year, Chinese banks seemed (for a few weeks) to have frozen North Korean accounts right after a sanctions resolution passed. But by September, the Justice Department’s indictment and forfeiture action against Dandong Hongxiang proved that Chinese banks had gone right back to servicing His Porcine Majesty’s slush funds. At first blush, a new Washington Post report by Anna Fifield, indicating that Sino-North Korean trade dropped off suddenly in recent weeks, looks like the latest Chinese head-fake in response to pressure from the outgoing Obama administration.

[T]rading has become significantly harder in recent weeks, a dozen people involved in doing business with North Korea said in interviews, the result of a double-pronged attempt by Beijing to communicate its anger with the regime in Pyongyang. 

“Everything’s become tougher since September,” a Korean Chinese factory owner who employs North Korean workers here told The Washington Post. “This crackdown is because of the missile and nuclear tests, and it doesn’t look like it’s going to blow over.” [Washington Post, Anna Fifield]

This could be a head-fake, but it could also mean something entirely different and much more significant — Chinese companies may be showing their fear of U.S. secondary sanctions. Specifically, Fifield sees some evidence that the Dandong Hongxiang action had an in-terrorem effect on other Chinese trading companies. Indeed, she speculates that this action had a greater impact than the passage of U.N. sanctions:

But an equal or even bigger influence is the surprise detention of a prominent Dandong business executive, a member of the Communist Party no less, who stands accused of helping North Korea dodge sanctions and obtain materials for its weapons program.

“When business people hear this kind of story, of course we feel very constrained and it makes us very cautious,” a South Korean businessman trading in this area said on condition of anonymity. The atmosphere is so tense that none of the businessmen interviewed were willing to be publicly identified, even as they insisted everything was aboveboard.

Business is down, but no one knows how long that will last. And even now there are plenty of ambiguous signs: The annual trade fair here was canceled- yet coal exports from North Korea are breaking records. China holds the lever, and its intentions can only be speculated upon. [Washington Post, Anna Fifield]

This highlights a point that sanctions skeptics tend to miss or gloss over — that the goal of secondary sanctions isn’t so much to change the attitude of the Chinese government (probably a fool’s errand) but to threaten the divergent interests of the Chinese banks and business that are the instruments of Beijing’s sanctions-busting. Chinese banks and businesses are content to break sanctions if it’s profitable to do so, but not at the cost of their assets or their access to international markets, trade, or finance. 

Fifield treats these reports with justifiable skepticism, noting that the Chinese government’s interest in maintaining North Korea’s status quo (however horrific for North Koreans) probably hasn’t changed. Indeed, I see little clear evidence in Fifield’s report that this drop-off is the result of Chinese government action. What’s interesting and noteworthy is the timing of this change (in September). On September 9th, North Korea conducted its fifth nuclear test, which brought more diplomatic pressure on the Chinese government to enforce sanctions. The Dandong Hongxiang actions were announced on September 26th. One could argue that either event was a greater influence than the other.

Fifield and Andrei Lankov, whom Fifield quotes, then proceed to say that years of sanctions have failed, even as Fifield sees evidence that the Dandong Hongxiang action might have worked. But this is a false distinction. It misses the key point that U.S. authorities acted against Dandong Hongxiang for laundering money for Korea Kwangsong Bank, which was designated by both the U.N. and the U.S. for proliferation financing in violation of U.N. sanctions. This was an example of a Member State using its national laws to enforce U.N. sanctions, which is the only way U.N. sanctions can be enforced. Dandong Hongxiang is precisely what it looks like when someone bothers to enforce U.N. sanctions for once.

It’s difficult to believe that a single enforcement action — particularly one that failed to act against the Chinese banks behind Dandong Hongxiang’s violations — will be enough to put significant and lasting pressure on Pyongyang. Chinese businesses may be waiting to see how the new Trump administration responds. Or, we may be seeing the Chinese government’s latest head-fake. But for now, the report bears watching, and may eventually validate the effectiveness of secondary sanctions. 

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If China is gambling on Trump to blunt N. Korea sanctions, it could lose bigly*

By all outward appearances, President Obama never really had a coherent North Korea policy. While pursuing a deal that Pyongyang either didn’t want or wouldn’t keep, it reacted to each nuclear test by building on John Bolton’s work and nominally tightening the sanctions the U.N. initially imposed a decade ago, in Resolution 1718. The idea, apparently, was to deter Pyongyang by threatening its plans to develop Hamhung and Chongjin, something it no more intends to do than the Confederacy intended to institute a slave literacy campaign. Under President Obama, sanctions were always incremental, were never well-enforced, and never seemed to be part of any plausible broader strategy.

Still, if only to make a display of doing something after each test, the U.S. would expend much diplomatic energy on haggling with China (and Russia — let’s not forget Russia) over the terms of a new resolution. In due course, the Security Council would approve it, and for three or four months, everyone would pretend that this time was different before returning to business as usual.

As of today, 74 days have passed since September 9th, when North Korea conducted its fifth nuclear test, yet there is still no agreed draft resolution. For those keeping score, that’s the longest delay yet between a test and a resolution (the previous record of 56 days was set earlier this year, after the fourth nuclear test).

Three weeks ago, The Wall Street Journal reported that the P-5 were close to a deal on “[a] new sanctions package … that more effectively blocks the regime’s overseas funding sources,” and might narrow a “livelihood purposes” loophole that effectively nullified a ban on North Korea’s coal exports (see also). The U.S. side was also pushing China to agree to “crack down” on North Korea’s slave labor exports.

Meanwhile, Bureau 39 continues to rake in millions of dollars from higher coal prices, at the expense of military-controlled trading companies (but see this contrary report that coal prices are actually falling).

Reports today say that talks between the U.S. and China are in “their final stages,” but we’ve heard that before, and we still have no word that the two sides have agreed on a draft resolution. A few days ago, Obama had his last meeting with Xi Jinping. The meeting produced little more than a pro-forma agreement that the Korean Peninsula should be nuclear-free, a statement that increasingly becomes moot for North Korea as it gains relevance for South Korea. One of Obama’s priorities for that meeting was to push China to crack down on North Korea. If the result isn’t a significantly tougher resolution within a week, we can probably conclude that President Obama failed to achieve that goal.

That would lend credence to reports that China is stalling talks on a new resolution, perhaps until Obama leaves office. According to those reports, China is still smarting over the U.S. indictment of flagrant sanctions cheat Dandong Hongxiang Industrial Development (while sparing the banks that facilitated the violations). It may be calculating that a President Trump will be more focused on economic issues and won’t want to start off by antagonizing China over a low-priority issue like North Korea. That would be a big gamble.

trump-casino

If so, China may be miscalculating. Although the President-Elect has yet to name several key members of his national security cabinet, what we know so far doesn’t suggest that he’s likely to adopt a soft line or make North Korea a back-burner issue. The most talked-about contenders for Secretary of State are Mitt Romney and … John Bolton (enough said?). James Mattis, who recently spoke to the President Elect about North Korea and other issues, didn’t earn the nickname “Mad Dog” by calling for agreed frameworks. (Update: My favorite Mattis quote: “I come in peace. I didn’t bring artillery. But I’m pleading with you, with tears in my eyes: If you fuck with me, I’ll kill you all.”)

There is also direct evidence of what those close to President Elect Trump have said about North Korea policy. In a meeting with South Korea’s deputy National Security Advisor Cho Tae-yong, Michael Flynn, the selectee to be the next National Security Advisor, called the U.S.-South Korea alliance “vital” and said the new administration would make North Korea a priority. At the time, Flynn did not specify how, but Cho later said that Trump would adopt “stern measures,” and that his aides see “no momentum” for dialogue with North Korea. Flynn was previously quoted as saying, “We should not let the current North Korea regime … exist for a long time.” 

Despite Trump’s loose talk of talks with His Porcine Majesty, one Trump advisor, former congressman Pete Hoekstra, has already ruled them out for “the near future.” Heritage Foundation ex-President and Trump advisor Edward Fuelner has specifically said that the U.S. would impose a secondary boycott on Chinese firms that are propping up Pyongyang financially.

Even before Election Day, we knew that the next president could clash with China over North Korea. The result of the election doesn’t seem to have diminished the likelihood of that. I increasingly incline to the view that either the current President or the next one should signal to the Chinese that if they don’t agree to and enforce tough new sanctions, we’ll walk away from talks over a new resolution and act on our own. That strategy would use a combination of progressive diplomacy and the thinly veiled threat of Executive Order 13722 sanctions to get foreign governments to enforce UNSCR 2270. President Obama knows what he needs to do, but lacks the will. China would be ill-advised to assume the same of President Trump.

~   ~   ~

* Update: I couldn’t resist changing the title.

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Treasury finalizes cutoff of N. Korean banks from U.S. financial system

After a long delay, the Treasury Department has issued its final rule prohibiting financial institutions operating in U.S. jurisdiction from providing direct or indirect correspondent account services to North Korean financial institutions. In English, that means North Korean banks are now denied a critical link for accessing the global financial system.

North Korea is now one of only three countries to be declared a Primary Money Laundering Concern by the Treasury Department, and is the only country subject to Special Measure 5. Under section 311 of the Patriot Act, the imposition of Special Measure 5 requires formal rulemaking — notice, comment, and publication of a final rule in the Federal Register — which explains some of the delay since late May, but not all of it.

You can read Treasury’s press release here, the Federal Register notice here, and also, press reports from Yonhap and The Wall Street Journal.

The skeptics will have several responses to this. The first, that North Korea is already heavily sanctioned, I’ve already debunked, and most experts who actually understand sanctions will agree with me here. The second, that North Korea stopped using the dollar system years ago, has been refuted by the Justice Department’s recent indictment and U.N. reports. Indeed, Bill Brown’s analysis tells us that North Korea has dollarized its economy to stabilize it. The most recent counter-arguments are that North Korea doesn’t directly access the financial system through its banks, and that it effectively hides its money using front companies.

The latter arguments are best addressed by pointing to the example of C4ADS’s exposure of hundreds of North Korean ships, agents, and front companies using open-source research. That, in turn, led to the indictment of, and forfeiture action against, Dandong Hongxiang Industrial Development, which used its own bank accounts to provide indirect correspondent account services to a sanctioned North Korean bank, Korea Kwangsong Banking Corporation. The new 311 rule expands the prohibition on providing such services to cover all North Korean banks, not just those designated by the Treasury Department.

The DHID case is illustrative of one of the main strategies North Korea has used to adapt to the BDA action. It uses front companies like DHID, Chinpo Shipping, and 88 Queensway, and others that operate as unlicensed money transmitting businesses, which is itself a criminal offense. Those businesses then use their own accounts in Chinese banks to provide North Korea with indirect correspondent account services. In other words, the DHID indictments reaffirmed that North Korea continues to rely on the dollar system, and we have legal tools that are perfectly suited to shutting down that use — or would be, if the Obama administration had the political will to use them.

One discouraging sign is that Treasury did not also impose Special Measure 2, as Bill Newcomb and I recommended, apparently claiming a lack of jurisdiction.

As described above and in the NOF, FinCEN shares the concerns raised by the comment regarding North Korea’s extensive use of deceptive financial practices, including the use of shell and front companies to obfuscate the true originator, beneficiary, and purpose behind its transactions. However, FinCEN’s authority, as granted by Congress in 31 U.S.C. 5318A(b)(2), applies only to information concerning the beneficial ownership of “account[s] opened or maintained in the United States” and thus would not extend to information relating to the beneficial ownership of property writ large, or to property outside the United States as the comment suggested. [Final Rule]

This is a blue answer to a green question. What we were suggesting, of course, was exactly what paragraph (b)(2) of Section 311 authorizes — that Treasury may “require any domestic financial institution or domestic financial agency to take such steps as the Secretary may determine to be reasonable and practicable to obtain and retain information concerning the beneficial ownership of any account opened or maintained in the United States by a foreign person.” To the extent that North Korea’s front companies transact in dollars and use banks that operate in U.S. jurisdiction, FINCEN has the jurisdiction to impose this measure. Either Treasury is conceding that it has no jurisdiction to enforce this entire provision, or it simply isn’t willing to use it. And when North Korea’s sanctions evasion strategy is all about hiding its money behind shell companies and front companies, exposing these interests will be key to making sanctions work.

The new 311 action thus has one potential advantage and one potential disadvantage over Treasury’s 2005 action against Banco Delta Asia, the effectiveness of which is beyond serious dispute. Unlike the BDA action, Treasury’s new 311 action covers all North Korean banks, not just one small Chinese bank that enabled them. But the advantage that BDA had over Treasury’s final rule is that it signaled a willingness to reach third-party enablers, including Chinese banks, that the Obama administration hasn’t shown. The BDA action was followed by a campaign of global financial diplomacy that sent a clear message to North Korea’s bankers everywhere. Today, in contrast, the designation of North Korea would never have happened had Congress not forced the administration to act through legislation, and Congress seems unanimous in its frustration that the administration isn’t willing to enforce the law.

In theory, the new 311 action could be the single most powerful sanction yet imposed on North Korea. In practice, however, it will amount to nothing if the administration continues to refrain from enforcing the new sanction, by simply looking the other way at Chinese banks’ laissez-faire compliance with Know-Your-Customer rules, and even flagrant cases of money laundering.

All of which promises to set up major tensions between the U.S. and China during the next administration, but I’ll let you read Josh Rogin’s take on that, along with this, this, this, this, and this, all suggesting that if Clinton wins, she’ll intensify sanctions against His Porcine Majesty and his Chinese bankers. Speculate on your own as to whether this is just talk. Also, speculate on your own as to which of Trump’s advisors really speaks for a potential President Trump.

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This time, FATF’s warning on North Korea really is a big deal

It has now been an inexplicably long four months since the Treasury Department announced its Notice of Proposed Rulemaking to designate North Korea as a jurisdiction of primary money laundering concern, in which it stated its intent to cut off North Korean banks’ access to correspondent accounts in the dollar financial system. Under section 311 of the Patriot Act, however, such a cutoff only becomes legally enforceable after Treasury publishes its final rule, which Treasury still has not done, and should have done months ago. To understand why Treasury’s action is potentially such a big deal, read this or this, or (if you haven’t already) read about how it affected a bank in Macau that Treasury accused of laundering money for North Korea in 2005. 

Needless to say, Treasury would not have taken that action had Congress not forced its hand in section 201 of the NKSPEA. Shortly after the passage of the NKSPEA, the U.N. Security Council enacted a similar provision in UNSCR 2270, giving that cutoff the backing of a global legal mandate.

Although the U.S. Treasury Department is the capo di tutti capi of the world’s financial regulators, it is also the case that Treasury can’t effectively isolate a target without global cooperation (case in point: Cuba). Hence, the supreme importance of Global Financial Action Task Force, one of the few international organizations that actually works. FATF is a consortium of industry and government regulators, and critically, it isn’t under U.N. control or subject to a Chinese veto. Originally established to harmonize international money laundering regulation and prevent illicit finance from taking advantage of weak governance in certain jurisdictions, FATF has played a growing role in suppressing terrorist and proliferation finance since September 11, 2001. Most governments take its warnings seriously, and those warnings were an important part of why Iran sanctions worked.

For years, FATF has also issued warnings that jurisdictions should take “countermeasures” against illicit North Korean finance. In that regard, much of the language in FATF’s warning is nothing new.

Democratic People’s Republic of Korea (DPRK)

The FATF remains concerned by the DPRK’s failure to address the significant deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threat this poses to the integrity of the international financial system. The FATF urges the DPRK to immediately and meaningfully address its AML/CFT deficiencies. Further, FATF has serious concerns with the threat posed by DPRK’s illicit activities related to the proliferation of weapons of mass destruction (WMDs) and its financing.

The FATF reaffirms its 25 February 2011 call on its members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with the DPRK, including DPRK companies, financial institutions and those acting on their behalf. [FATF, Oct. 16, 2016]

Still, North Korea was concerned enough about those warnings to make nice with the FATF, and by applying to join one of its associated groups, the Asia/Pacific Group on Money Laundering. FATF’s warnings, however, amounted to little more than recommendations for enhanced due diligence about suspicious transactions, and in the Mos Eisleys of the financial universe, “suspicious” is very much in the eye of the beholder. Although news reports sometimes treated these same-old-same-old warnings like page one news, the warnings have been mostly consistent since 2011. Until now, that is.

Belatedly, FATF has finally begun to implement UNSCR 2270’s more stringent financial sanctions on North Korea, and this time, FATF is telling its members some very clear, specific, and potentially devastating things:

In addition to enhanced scrutiny, the FATF further calls on its members and urges all jurisdictions to apply effective counter-measures, and targeted financial sanctions in accordance with applicable United Nations Security Council Resolutions, to protect their financial sectors from money laundering, financing of terrorism and WMD proliferation financing (ML/FT/PF) risks emanating from the DPRK. Jurisdictions should take necessary measures to close existing branches, subsidiaries and representative offices of DPRK banks within their territories and terminate correspondent relationships with DPRK banks, where required by relevant UNSC Resolutions. [FATF, Oct. 16, 2016, emphasis mine]

More here, at NK News, and here, from the Chosun Ilbo.

This warning is a critical piece in the enforcement of a global crackdown on North Korean banks, which have a very long history of illicit and proliferation financing. By binding the issuers of other convertible currencies, it effectively closes the biggest holes in the global net closing in on North Korea’s banks, and gives Treasury and third-country regulators an internationally accepted basis to isolate other banks that fail to cut off North Korea’s correspondent accounts or close its bank branches. If Treasury gets off the dime and issues its own final rule — and there are reasons to question the administration’s political will to enforce it — we’ll have an opportunity to see, in a few months’ time, how much effect this has. I’ll also be interested in knowing whether Treasury will adopt the comment by Bill Newcomb and me on beneficial ownership.

Meanwhile, FATF’s action is a late step forward, but a very big one. If the U.S., Japan, and South Korea are serious about building a global coalition to put “crushing” pressure on North Korea, this action is a sine qua non toward achieving that.

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While Obama sleeps, China cheats, and Korea’s doomsday clock ticks

“The era of procrastination, of half-measures, of soothing and baffling expedients, of delays is coming to its close. In its place we are entering a period of consequences.” – Winston Churchill

It has now been six weeks since North Korea’s fifth nuclear test, and the U.S. and China remain deadlocked in their talks about a new resolution to close the loopholes in existing U.N. sanctions. Pyongyang is racing to make its nuclear armament a fait accompli before the next U.S. administration warms the chairs in the White House and Foggy Bottom. Kim Jong-un also has reason to hope that after 2017, it might be dealing with the sort of alt-left South Korean leader who would ask his permission before enforcing U.N. sanctions, and who would pressure a Clinton administration to start “peace” talks, Pyongyang’s preconditions for which would amount to de facto recognition of North Korea as a nuclear state. That would put His Corpulency within sight of achieving hegemony over the entire Korean peninsula. At the current rate, he is winning that race.

Would President Park choose to let that happen and go quietly into the night, or would she prefer to take her chances with preemptive strikes, with or without U.S. support? President Park’s Plan B may well look very much like Israel’s Operation Opera in 1982. The risks of miscalculation and escalation should require no elaboration. So when sanctions skeptics warn us of the risk that effective sanctions enforcement triggers a financial crisis in Pyongyang, just consider the alternatives.

Over the last few days, I’ve read a smattering of self-congratulatory reports that China is finally enforcing sanctions against North Korea by cutting back on coal imports. This is flawed and dangerously wishful thinking. First, China has historically reacted to U.S. diplomatic pressure by dialing down commerce with Pyongyang for a few weeks or months until the heat is off. Then, it goes right back to propping up Pyongyang and breaking sanctions like it always has. Second, the skyrocketing price of coal could yield a massive financial windfall for Pyongyang:

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At these prices, His Porcine Majesty can sustain his regime and keep nuking up by exporting a fraction of the volume of coal he exported last year.

China is helping North Korea break sanctions in other ways, too. It’s exporting kerosene to North Korea, in direct violation of UNSCR 2270. Work at the Musan mine near the Chinese border doesn’t appear to have slowed at all. North Korea’s main port at Nampo is crowded with ships loaded with coal, seafood, and other wares for the Chinese market. Some of the North Korean vessels approach the Chinese coast, hover offshore, meet up with smaller vessels coming from Chinese ports, and return to North Korea. Such “hovering vessels” have historically been used for smuggling, by evading customs inspections. This report is consistent with what trusted friends have observed in shipping trackers for months. If I had to venture a guess, I’d say this is probably indicative of the smuggling of bulk cash or gold, either of which would also violate UNSCR 2270.

The idea that China is willfully undermining U.N. sanctions by permitting such brazen sanctions violations shouldn’t shock anyone. It would be absolutely consistent with how China has behaved for the last 20 years. What are a few sanctions violations to a government that routinely aids and abets Kim Jong-un’s crimes against humanity? What will it take for us to realize that a government that talks like our enemy and acts like our enemy is, for purposes of North Korea policy, our enemy?

The administration knows what it needs to do. Regardless of the price of coal, and regardless of the volume of coal — or anything else — that North Korea exports, all of that revenue goes into bank accounts in China. In recent months, I’ve become convinced we know where most of those bank accounts are. What is the answer to China’s years of duplicity, bad faith, double-dealing, and stalling? The answer is to walk away from the negotiations with China, build a diplomatic coalition to enforce sanctions with the authorities we already have, and freeze Kim Jong-un’s offshore accounts.

President Obama’s North Korea legacy will be to leave his successor and our allies with an escalating nuclear crisis, a deteriorating humanitarian situation, and possibly a nuclear arms race in Asia. History will eventually rank it alongside the failure of the Green Revolution in Iran, the near-collapse in Iraq, and the Syria fiasco as one of his greatest foreign policy failures. The question now is whether he will leave his successor with the makings of a strategy to stop Kim Jong-un while there’s still time … if there’s still time.

Enough procrastination. Enough half-measures. We can close the livelihood exception ourselves by using the NKSPEA, Executive Order 13687, and Executive Order 13722 to penalize the banks that hold Kim Jong-un’s revenue and launder his money. Freeze and forfeit the bank accounts, already! It’s the law, the President signed it, Congress wants him to enforce it, our allies want him to enforce it, and a global financial coalition is ready to help us execute it. Once we’ve got them by the banks, their hearts and minds will follow. Until we have, Korea’s doomsday clock will keep ticking toward midnight.

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S. Korean human rights ambassador: Target N. Korean officials with sanctions

The U.N. has issued two more reports finding that North Korea’s abysmal human rights situation still hasn’t improved, and that Pyongyang refuses to even discuss it. Kim Jong-un continues to seal the borders, terrorize and purge potential dissenters, and cut off any subversive information. Camp 18 has reopened, Camps 1214 and 25 have expanded, and the fate of thousands of men, women, and children who were held in Camp 22 remains a mystery.

How do you make the words “never again” mean something in a place like North Korea? Certainly the very publication of the U.N. Commission of Inquiry’s report has done the regime great reputational harm, obstructed the regime’s apologists’ efforts to normalize it, and cost it much investment from which its elites might have profited. I increasingly see and hear talk of kicking North Korea out of the U.N. — which wouldn’t prevent diplomacy or humanitarian aid any more than it does in Gaza, but which Russia and China would certainly veto.

One even sees legal scholars raising the idea of a Cambodia-like tribunal under South Korean law, an idea that was so radical and out of alignment with Park Geun-hye’s policies that I hesitated to suggest it back in 2014. But sadly, that, too, remains a near-impossibility in a political climate in which “mainstream” left-of-center politicians ask Pyongyang for instructions before taking U.N. votes, and continue to stall the implementation of South Korea’s new human rights law. They will have to answer to their children.

But so will we have to answer to ours, and as Kim Jong-un’s enablers obstruct accountability, it falls on the United States to show its allies the way to impose accountability now. Writing in The Washington Quarterly, Jung-Hoon Lee, the South Korean Ambassador for Human Rights and founding Director of the Center for Human Liberty at Yonsei University, and Joe Phillips, an Associate Professor of Global Studies and another founding Director of the Human Rights Center at Pusan National University, review the options and the COI’s recommendations, and find that targeted sanctions are likely one of “our most effective options” now.

Another commission recommendation is targeted sanctions, which focus on leaders, other decision-makers, their principal supporters, and discrete economic sectors. Against North Korea, they can serve multiple goals: they may coerce officials to cooperate on human rights, deny the government resources needed to engage in human rights violations, and stigmatize behavior. [link]

I especially liked this part. Not only was it an accurate statement of the law, it was impeccably sourced.

There are naysayers when it comes to North Korean sanctions. They argue that an array of heavy penalties has failed to produce positive results. That is far from the truth. Until the Security Council’s March 2 resolution, international sanctions were weak compared to those against other countries like Iran.31 Even with the new, tougher Council resolution, enforcement has a long way to go.

Lee and Phillips go on to point out that this must be a multilateral project, and that many U.N. member states have yet to show much understanding of the resolutions, much less submit their implementation reports. That will require stronger diplomatic efforts, which South Korea has exerted and the Obama administration has not.

Besides the WMD-related targets, priority should remain on the sources of North Korea’s foreign currency such as sales of illegal drugs, counterfeiting, arms trafficking, and exporting labor. Embargoing luxury goods is also an effective tactic. North Korean leadership expert Ken Gause has chronicled the critical role that gift-giving plays in the stability of Kim Jong Un’s regime. He argues that sanctions have the effect of constricting the regime’s ability to continue this largess and consolidate power.33

More on Gause’s views here.

China and other countries exporting these non-essential goods are vulnerable to a global ‘naming and shaming’ campaign as well as secondary sanctions. Seoul, meanwhile, is in a much better position to push other states to enforce firmer sanctions now that it has shut down the Kaesong Industrial Park, a North–South collaborative economic project within the DPRK where the North provided workers to South Korean manufacturers. Turning a blind eye to Kaesong’s ‘forced labor’ conditions, not to mention the transfer of about US$9 million annually to the Pyongyang regime, has for years compromised South Korea’s principles. At a minimum, sanctions are a normative declaration that we are not oblivious to the North’s atrocities and that countries and firms which do business with Pyongyang are trafficking with an international pariah.

The article then discusses some of the same loopholes in the existing sanctions that should be closed. While we’re on that topic, I’ve posted a new page on policy options that covers much of this territory, and more.

Other models for bilateral action include the 2016 Gardner-Menendez North Korea Sanctions and Policy Enhancement Act, which requires the U.S. president to investigate any person who knowingly engages in serious human rights abuses, issue a report identifying severe human rights abusers, and sanction them, such as through forfeiture of property. President Obama’s Executive Order 13687, issued in 2015, links U.S. security to ending the North’s human rights violations and allows the Office of Foreign Assets Control to designate for sanctions North Korean cover companies and individuals, exposing them and subjecting their global businesses to penalties.

Hat tip to Steph Haggard. Lee and Phillips don’t mention the individual designation of Kim Jong-un for human rights abuses in July, perhaps because their article was a long time in the writing and publication. Knowing that might have helped them sharpen the debate about how to use sanctions. Those designations ought to have been more than bad publicity. They ought to have marked the start of a global campaign to find and freeze the offshore bank accounts without which Kim Jong-un’s throne would crumble beneath his weight. Until we do this, Pyongyang will never have to make the existential choice to change or perish. 

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Introducing the OFK sanctions explainer and law library

For those who’ve wanted a compilation of the key U.N. documents, U.S. statutes, regulations, executive orders, general licenses, and third-country sanctions laws, along with a brief explanation of how those authorities work, start here and click your way around. It’s still a work in progress, but the most important authorities are there. I also added section-by-section links to the key provisions of the NKSPEA and an FAQ. Enjoy!

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North Korea, secondary sanctions, tertiary impacts, and the coming death spiral

As I write today, rumors are swirling through the South Korean media of defections and purges involving so many North Korean diplomats, spiesminders, workers, and other officials that I haven’t had the time to either keep up with them or sort out the conflicts in those reports. I’ll try to do that by this time next week, and identify any patterns I see in them. In the meantime, an intriguing story by the Daily NK elucidates how well-targeted sanctions can drive disloyalties and fissures within the North Korean regime, and how we can exploit those divisions.

Two weeks ago, the Treasury Department froze, and the Justice Department moved to forfeit, the assets of Chinese conglomerate Dandong Hongxiang Industrial Development and its corporate officers. DHID and its officers were also indicted for conspiracy and money laundering on behalf of Korea Kwangsong Banking Corporation, a sanctioned North Korean bank. These were the first secondary sanctions imposed on a Chinese entity since the Treasury Department sanctioned Banco Delta Asia in 2005. The indictment of DHID was a “secondary” sanction because DHID wasn’t sanctioned for directly engaging in proliferation or arms smuggling. The sole basis for the freeze, forfeiture, and indictment was that DHID helped a blocked party, KKBC, access the financial system and launder funds through the United States. The point of secondary sanctions is to completely ostracize and isolate bad actors. Anything less turns sanctions enforcement into a game of what Marcus Noland calls “whack-a-mole.”

As we saw with Banco Delta Asia in 2005 and Iran in 2013, secondary sanctions can devastate a target. Contrary to conventional wisdom, North Korea has vulnerabilities that Iran does not. One of these is North Korea’s small, dysfunctional economy, which depends on a relatively smaller number of exports, exporters, and bankers. Another vulnerability we often overlook is North Korea’s own zero-defect political system, which imposes strict quotas for its operatives to kick up to their underbosses and ultimately, to His Porcine Majesty.

Evidently, Pyongyang doesn’t accept asset freezes and indictments as excuses from trading company officials who fail to meet their quotas. The Daily NK reports that the DHID indictments also disrupted the operations of plenty of North Korean trading companies in China, and those companies’ officials are now terrified of being punished if they can’t meet their quotas.

A number of North Korean trading companies operating in China have been identified as collaborators with the Hongxiang Group of companies – which is presently under investigation for allegations of smuggling sanctioned materials to support the North’s nuclear weapons program. Daily NK’s sources have reported that these same North Korean companies are now under increasing pressure from Pyongyang to provide further supplies to the regime before the Party’s Foundation Day holiday on October 10. These goods are to be presented as gifts to elite cadres in order to shore up Kim Jong Un’s power base.

“The companies that have been suspected of colluding with Hongxiang to smuggle banned nuclear materials are facing pressure on dual fronts now. Their business activities have been almost cut in half due to the ongoing investigations by the Chinese authorities. And now they’re required to contribute goods to Pyongyang before Party Foundation Day,” a source close to North Korean affairs in China reported. [Daily NK]

Think of the death spiral this dynamic could catalyze. A North Korean trading company official doesn’t meet his quota and doesn’t dare to go home again, for fear of plunging through a trap door into a pool of piranhas, volcano lava, or sharks with laser beams attached to their heads. You can see why these people — who may already have been shaken since the purge of Jang Song-thaek — may be tempted to rethink their loyalties, and why that fear could create the makings of more intelligence windfalls, resulting in yet more asset freezes and indictments, and so on.

When asked how the trading companies are coping with the combined pressure, the source replied, “The heads of these trading companies are being investigated by the Chinese authorities on a daily basis. So these companies have resorted to hiring Chinese companies to procure gift items like alcohol, fruit, and food products for them. After the North Korean managers are released from the interviews, they load up the purchased items on trucks and send them over the border into North Korea.”

Those who are unable to keep up with the pressure face dire consequences. The Party Foundation Day holiday is understood to be a loyalty competition among the foreign currency-earning operations. All enterprises are required to provide ‘basic planning funds,’ loyalty funds, and gifts. Falling short of these obligations is dangerous because those deemed responsible are regarded as politically problematic. In North Korea, earning such a label can result in extreme punishments, including execution.   

Such conditions have only intensified during the Kim Jong Un era, where even slight infractions have led to purging and punishment. The increasingly severe consequences are well recognized by all overseas foreign currency earning operations, explaining why they prioritize the submission of loyalty funds over the safety of themselves and their employees. [Daily NK]

Lather, rinse, repeat.

Having said this, the DHID action was just an appetizer. Dandong Hongxiang claimed to control the lion’s share of trade with North Korea, but that was probably an exaggeration. Like Jende Huang, I suspect that there are still bigger fish in this pond. Now, Obama administration officials are openly threatening to sanction more Chinese entities, and Congress is pushing it hard to do what would be particularly devastating — to sanction the Chinese banks that launder North Korea’s money.

Although none of the parties to the charged transactions between DHID and KKBC were physically in the U.S. or trading goods with Americans, the North Korean and Chinese parties to the transaction had to go through banks in New Jersey indirectly to do dollar wire transactions, to buy the things His Corpulency wants. If you don’t understand why that is, read this article, or this post about how the system worked in this case, or the Justice Department’s forfeiture complaint.

Which brings me to two predictions. First, because Kim Jong-un’s advisors are probably too scared to tell him how these sanctions work, and because elections are coming in the U.S. and South Korea, a sixth nuclear test is a near certainty within the next year. If that happens, it will trigger a second near certainty, no matter who wins the presidential election in the United States — a wave of secondary sanctions against North Korea’s Chinese bankers.

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Leo Byrne is (almost) single-handedly destroying North Korea’s smuggling fleet

The other night, I was chatting with a reader who was surprised to hear me praise NK News. Although I consider Chad O’Carroll a friend, it’s no secret that Chad and I have philosophical differences about North Korea policy. Some of the things I read at NK News make me roll my eyes; others drive me to paroxysms of rage. But what I can never say about NK News is that it pulls punches. Its decision to publish Nate Thayer’s stunning expose of AP Pyongyang was as brave as the report itself was devastating. Its report on the Masikryong Ski Resort exposed serious sanctions violations and wound up being cited in the U.N. Panel of Experts reports. It did better reporting on the Pyongyang apartment collapse story from Seoul than the AP did from a few blocks away (Update: See? This is what I’m talking about.). You can love it, hate it, or alternate between both of those reactions, but NK News has become a public utility for North Korea watchers. 

Yet NK News’s single greatest asset must be Leo Byrne, whose investigative tenacity and meticulousness puts him into contention to be the single best journalist covering North Korea for any publication, anywhere. Byrne does what too few journalists bother to do — he digs up hard-to-find facts; reads the legal authorities that give those facts meaning, consequence, and context; and reports them. Byrne’s recent reporting on shipping sanctions has been a good example of this. For some days now, I’d meant to find the time to write about his discovery that, following the adoption of U.N. Security Council in 2270 in March, 50 North Korean ships re-registered under the Tanzanian flag:

According to data from Marine Traffic, the Equasis maritime database, and inspection records from Port State Control (PSC) authorities, around 15 percent of ships on the NK Pro vessel tracker now sail with under (sic) a Tanzanian flag, with the large majority of changes happening over a three-month period.

The numbers and time frames indicate an unprecedented campaign to reflag vessels with links to the DPRK, dwarfing previous flurries of changes that occurred after the UN and U.S. designated a North Korean shipping company in 2014. [NK News, Leo Byrne]

That’s a problem, because UNSCR 2270 says this:

“19.  Decides that Member States shall prohibit their nationals and those in their territories from leasing or chartering their flagged vessels or aircraft or providing crew services to the DPRK, and decides that this prohibition shall also apply with respect to any designated individuals or entities, any other DPRK entities, any other individuals or entities whom the State determines to have assisted in the evasion of sanctions or in violating the provisions of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013) or this resolution, any individuals or entities acting on behalf or at the direction of any of the aforementioned, and any entities owned or controlled by any of the aforementioned, calls upon Member States to de?register any vessel that is owned, operated or crewed by the DPRK, further calls upon Member States not to register any such vessel that is de-registered by another Member State pursuant to this paragraph, and decides that this provision shall not apply with respect to such leasing, chartering or provision of crew services notified to the Committee in advance on a case-by-case basis accompanied by: a) information demonstrating that such activities are exclusively for livelihood purposes which will not be used by DPRK individuals or entities to generate revenue, and b) information on measures taken to prevent such activities from contributing to violations of the aforementioned resolutions;

North Korea’s merchant fleet is subject to international sanctions because of North Korea’s history of using it for smuggling weapons, in violation of U.N. Security Council resolutions.

To give credit where it’s due, Claudia Rosett first discovered that the Dawnlight, a North Korean ship designated by the U.N. for arms smuggling, hoisted the Tanzanian flag as the Firstgleam, just days after 2270 was adopted. Byrne’s report shows that this was much more than a one-off; it as part of a pattern and practice of violation that was either grossly negligent, corrupt, or willful. In addition to the ex-Dawnlight, Byrne reports that the ships re-registered under the Tanzanian flag include a vessel designated by the U.S. Treasury Department, and others that have been “mentioned” in U.N. Panel of Experts reports. 

The news site All Africa adds that Tanzania has a checkered history of reflagging ships for Iran, which drew a visit from the local U.S. embassy. The Tanzanian Foreign Ministry blamed “a ‘notorious’ Dubai-based agent” and said it would contact the local North Korean embassy to investigate. Well!

“Diplomatically, we can’t rush to act on unverified issues. But, in general, our international shipping registration agents have been categorically warned against permitting countries sanctioned by the UN to fly our flag because by so doing, the country would be deemed to have violated membership sections of the UN,” Dr Mahiga said. [Louis Kolumbia, AllAfrica]

Let’s hope that that investigation proceeds swiftly to a plausible conclusion, because Tanzania’s shipping registration authority is also in great peril under U.S. law, to the extent the transactions are denominated in dollars (which almost always turns out to be the case). 

First, NKSPEA section104(b) gives the President the authority to designate any person who “knowingly engages in, contributes to, assists, sponsors, or provides financial, material or technological support for, or goods and services in support of, any person designated pursuant to an applicable United Nations Security Council resolution.” Then, Executive Order 13722, which (partially) implements the NKSPEA, imposes sectoral sanctions on North Korea’s transportation industry, potentially widening the risk to any transactions involving North Korean shipping. The potential consequence is that Tanzania’s registry could have its assets frozen. Fortunately, that may not be necessary, because Byrne’s report has captured the undivided attention of the Tanzanian government, which says it has already de-registered 13 of the North Korean ships, and has begun the process of de-registering the rest of them.

ZMA director general Abdallah Hussein said in an interview on Tuesday that the process to deregister Democratic People’s Republic of Korean (DPRK) vessels started in June and was ongoing to ensure no vessel with links to North Korea fly the Tanzania flag in compliance with the UN Security Council sanctions. The minister for Foreign Affairs minister (sic), Dr Augustine Mahiga, had told The Citizen on Sunday that the ministry would initiate a diplomatic process to ensure that all vessels linked to North Korea are deregistered. [….]

If the deregistration started in June as Mr Hussein claimed, then, that hasn’t been reflected yet in the Tanzania foreign ships registry, for the investigation carried out by Leo Byrne, a Data and Analytic Director at NK News based in Seoul shows the majority of the vessels that were deregistered by other countries following tightening of North Korean sanctions “transferred their details to the Tanzanian registry, which accepted nearly all the ships between June and August this year.”

Mr Hussein expressed surprise over the same thing. “I wonder why Mr Byrne’s analysis hasn’t reflected ships that we have deregistered,” he said. [AllAfrica]

As a blogger, the pinnacle of my career was the day I saw my work denounced by KCNA — on May Day, no less. Byrne now shares the rare privilege of being called out by an entire foreign government (in his case, by name). As to the defense that Byrne did not credit Tanzania for de-registering 13 ships, well, that’s fair in the same sense that no one thanked Kim Jong-un for not nuking off last weekend, and no one thanked Donald Trump for not grabbing anyone’s hoo-ha all day yesterday. 

As far as I know, anyway. 

Ideally, U.S. and South Korean diplomats in Dar as Salaam should pay courtesy calls to the Tanzanian Foreign Ministry and politely ask, “Hey, what gives?” Maybe they already have. That approach seems to have worked well enough for enforcing Iran sanctions. But if the State Department doesn’t act, I’d expect that eventually, Congress will ask the same question of the State Department. With Tanzania already acting to de-register North Korean ships, it may be that less subtle approaches should be reserved for more recalcitant targets (are you listening, Namibia?).

Overall, the news looks increasingly bleak for North Korea’s merchant fleet. Panama and Mongolia have de-registered North Korean ships, and Cambodia, the single largest reflagger, appears to be moving in that direction. The government of Jordan identified two cases in which its shippers used a North Korean flag of convenience and has since acted to put an end to that practice. As the range of countries reflagging North Korean ships narrows, more media and diplomatic attention will inevitably focus on those that remain, like Tuvalu and Sierra Leone. A sanctions regime is only as strong as its weakest link, but slowly, link by link, the chain is tightening.

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How to close the livelihood loophole in N. Korea sanctions, even without China’s help

It has now been more than a month since North Korea carried out its fifth nuclear test, and the U.N. Security Council has yet to respond by approving a new resolution to strengthen its sanctions. After North Korea’s previous nuclear tests, it took between four and six weeks to overcome Chinese and Russian objections, and the world is growing impatient.

As noted yesterday, the U.S. is correctly focused on cutting off North Korea’s sources of hard currency. Judging by the statements of U.S. officials, one key U.S. demand going into the negotiations is likely the curtailment of, or a ban on, North Korean labor exports, of which China and Russia are major consumers. Another measure under discussion is a ban on tourist travel, which would be useful to making any travel ban more than an inconvenience for Pyongyang, because most of North Korea’s tourists are Chinese, and presumably spend Renminbi during their travels.

A third measure frequently mentioned in the press over the last several weeks is closing the “livelihood” loophole in paragraph 29(b) of UNSCR 2270 — the provision that bans North Korea from selling coal, iron, and iron ore, but carves out an exception for sales exclusively for “livelihood” purposes. In practice, the exception has swallowed the rule. North Korea’s coal sales to China dipped shortly after the Security Council adopted UNSCR 2270, but have since risen to pre-sanctions levels. Typically enough, China is balking at closing this loophole.

“We cannot really affect the well-being and the humanitarian needs of the people and also we need to urge various parties to reduce tensions,” Chinese U.N. Ambassador Liu Jieyi told Reuters on Saturday of discussions with the United States on “a draft resolution with a wider scope of measures.” [….]

U.S. Ambassador to the United Nations, Samantha Power, said on Sunday that some of the exemptions included in the March resolution – out of concern for the welfare of North Koreans – appeared to have been exploited.

“In the negotiation that we are currently in the midst on in the new resolution, we are hoping to address some of the shortcomings that we have seen,” Power told reporters during a visit to Seoul. [Reuters]

China claims that it is resisting tougher sanctions because it’s worried about hurting the North Korean people, an uncharacteristically humanitarian argument coming from the same government that regularly sends North Korean refugees back to Kim Jong-un’s gulag by the dozen, that ignored the U.N. Commission of Inquiry report, and that has consistently opposed U.N. action on Kim Jong-un’s crimes against humanity.

But if the U.S. wants to close the livelihood loophole and China wants to avoid starving the people, the obvious compromise is to force Chinese buyers to pay for North Korean coal in food, medicine, and other strictly humanitarian supplies. Sanctions need humanitarian safety valves to allow U.N. member states to mitigate possible negative effects on the North Korean people. If that’s what China really wants, that’s how China can use “livelihood” coal as that humanitarian safety valve. To prevent cheating, the in-kind “payments” could be monitored by U.N. humanitarian agencies at Chinese ports and customs posts. Surely if North Korea imports enough food, much of this will flood into North Korea’s markets and drive down prices. To further amplify this effect, China should agree to ban North Korea from exporting food — mostly to China — for cash.

The more plausible explanation is that China is more interested in protecting Kim Jong-un and profiting from its access to his resources than it is in enforcing sanctions. China’s violations of the sanctions have been too blatant to be anything but willful. Although the conventional wisdom is that China is simply afraid of a potential regime collapse in Pyongyang, that view doesn’t explain China’s long history of selling proliferation-sensitive materials to North Korea, including a Chinese state-owned company’s sale of missile carriers to North Korea. This evidence suggests a more malicious explanation. It’s almost as if China wants North Korea to be a greater threat to the U.S. and South Korea.

missile-trucks

Of course, all of the aforementioned measures are effectively trade sanctions — the kind of sanctions that legions of peace studies grad students and other unschooled critics are really talking about when they hector us about how long sanctions take to work. We may simply be out of time for such gradualist strategies now. The South Koreans, the Council on Foreign Relations, and even some Chinese speak openly of preemptive military strikes today. South Koreans are justifiably worried about falling under the shadow of nuclear blackmail. The sense of urgency in Seoul, Tokyo, and Washington has never been greater. That sense of urgency has not yet arrived in Beijing.

Without question, trade between China and North Korea has risen recently, diluting the effect of U.N. sanctions, and that is a problem. But those who are legitimately concerned about this rising trade — including coal and iron ore trade — between China and North Korea would do well to remember that all of the money North Korea earns from its sales of everything from coal to seafood to missile parts goes into bank accounts, mostly in China, and we probably know where many of those accounts are. If the U.S. and its allies want to adopt a strategy that will work quickly enough to create a sense of urgency in both Beijing and Pyongyang, the Obama administration should do what Congress has demanded and what the law requires — freeze North Korea’s slush funds and penalize the Chinese banks that keep them on deposit.

(My other suggestions for possible new measures can be found at the bottom of this post by Stephan Haggard; chief among the enforcement gaps is a need to make member states, banks, and businesses report North Korean beneficial ownership interests, to help identify North Korean property and bank accounts.)

Yes, it would be lovely if China suddenly became convinced that all of this represents a threat to its interests and its very security. Certainly, some ordinary Chinese citizens can see that (see, for example, this Chinese-language Google search result for “third fatty,” forwarded by a journalist reader). I’m skeptical that the Chinese government will ever really crack down on North Korea for more than a few months, especially as America is about to descend into the periodic chaos of a political transition.

~   ~   ~

Until reporters and op-ed writers stop misleading their readers with the myth that our sanctions against North Korea have been strong, I’m going to keep linking to my legal arguments that in fact, our North Korea sanctions were comparatively weak until February and March of this year, and that even these authorities have yet to be fully implemented. On paper, however, we finally have enough authorities to threaten the survival of the regime in Pyongyang and force it to choose between its nukes and its survival, if we apply our diplomatic and legal power to forcing other U.N. member states to comply.

Perhaps, then, we’ve reached the point where we’d be better off walking away from deadlocked negotiations with China and Russia and channeling our diplomatic power toward progressive diplomacy. Rather than continue to pound our heads against the Great Wall, perhaps the U.S. and South Korea should start building an ad hoc coalition aimed at the strict enforcement of existing resolutions. Existing U.S. law and U.N. resolutions may provide enough of a legal foundation that we’re better off aggressively enforcing the sanctions we already have than bargain away enforcement to get new ones. After all, the EU didn’t need the U.N.’s approval to designate the Korea National Insurance Corporation, and the U.S. didn’t need the U.N.’s approval to designate the Foreign Trade Bank. By coordinating their designations and secondary trade boycotts in concert with a collection of like-minded states with strong buying power and convertible currencies, a new coalition could put strong pressure on North Korea and its Chinese enablers. Potential partners for that coalition include (of course) South Korean and Japan, the EU, the U.K., Switzerland, Canada, Australia, and Singapore.

If, on the other hand, we just want to close the “livelihood loophole,” why not designate the abusers of that provision under section 104(a) of the NKSPEA? Recently, anonymously sourced news stories have identified the Wanxiang Group as the “largest importer of a wide variety of North Korean minerals,” including “coal, iron ore, gold and rare earths.” Interestingly, a Wanxiang Group affiliate holds “more than 60 properties” in the United States. If further investigation confirms these reports, the Wanxiang Group’s assets in the United States, and its heavy investment in a North Korean industry subject to Treasury Department sectoral sanctions, could make it the perfect target.

Of course, our relations with China would suffer in the short term, but it’s not as if our sotto voce China policy has contained China’s hegemony, protected the security of our allies, or paid obvious dividends in bilateral relations. Our relations with China will probably have to get worse before they can get better. For our relations to get better, China will need a hard shove for its policies to reflect a fair acknowledgment of U.S., South Korean, Japanese, and global security interests.

None of which means we can’t go back to the U.N. Security Council at some point to get a stronger resolution; it just means that we shouldn’t let China prevent us from designating targets that are violating the existing resolutions. If the Chinese government isn’t responsive to our pleas, we already know that the Chinese banking industry is responsive to our threats. If North Korea lost its access to the banking system, its insurance, banking, and shipping industries, and its national airline, it would be reduced to operating a country of 23 million people by trying to smuggle briefcases full of bulk cash around the world on other peoples’ airlines and ships. It’s hard for me to believe North Korea could last long that way. That’s why, as nice as it would be to have Beijing’s cooperation, it would be far better to focus our diplomatic energies elsewhere. In the meantime, the Obama administration should enforce the law the President signed.

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FP: White House “heatedly debating” whether to enforce North Korea sanctions law

Last week, Samantha Power was in Seoul, reassuring our increasingly panicky South Korean allies that the U.S. will use “all the tools in our tool kit” to deny His Porcine Majesty hard currency and WMD materiel, and pressure him to disarm. Meanwhile, a must-read article in Foreign Policy reveals that late in the eleventh hour of his presidency, Barack Obama still hasn’t decided to use “all” the tools after all, particularly the one Congress wants him to use — secondary sanctions against Chinese banks.

Instead, FP reports, senior administration officials are “heatedly debating whether to trigger harsh sanctions against North Korea that would target Chinese companies doing business with the hermit regime, in a crackdown like the one that crippled Iran’s economy.”

Officials told FP that the approach would be similar to the sweeping secondary sanctions that were slapped on global banks handling transactions with Iran. Those sanctions are widely credited with bringing Iran’s economy to its knees in 2013 and forcing Tehran to the negotiating table over its nuclear program. [Foreign Policy, Dan De Luce]

The prime targets of the new strategy under discussion? Exactly the right ones — Chinese trading companies and banks. Open sources alone provide for no shortage of targets. We already know about the recently indicted Dandong Hongxiang. There’s also the Bureau 39-linked 88 Queensway Group; gold dealer Unaforte, which may be exporting to the U.S. in violation of Executive Order 13570; the Wanxiang Group, which may be China’s largest importer of North Korean minerals; banks like the Bank of China, which willfully helped North Korea launder money through the U.S. financial system; and other Chinese banks that turn a blind eye to their know-your-customer obligations on behalf of North Korean customers, as well as Chinese customers that help them circumvent U.N. sanctions and U.S. law.

But a decision to go after Chinese banks and trading companies that deal with Pyongyang could rupture Washington’s relations with Beijing, which bristles at any unilateral sanctions imposed on its companies or drastic action that could cause instability in neighboring North Korea. [FP]

The U.S. has told the Japanese and South Korean governments that it is focused on cutting off North Korea’s sources of hard currency, including labor exports. But with even people in Beijing speaking openly of limited military strikes and South Koreans worried about falling under the shadow of nuclear blackmail, the sense of urgency in Seoul, Tokyo, and Washington has never been greater. Trade sanctions alone will probably take much longer to work than financial sanctions, and are more likely to hurt the wrong people, thus undermining political support for stricter enforcement. Now, having let matters drift for eight years and lost the confidence of the entire Congress, the administration belatedly recognizes that things have deteriorated quickly, and that it needs a quicker strategy. 

“In the past two or so years, there’s a general appreciation that the situation has become worse and that we, the United States and the responsible nations of the world, need to up our game,” said a senior government official, who spoke on condition of anonymity. As a result, the administration is “looking at a more active and more aggressive use of the authorities” for sanctions, the official told FP. [….]

The political calendar in the United States also is shaping the internal discussions, with some officials arguing that President Barack Obama would be better placed to order the move in his final months in office, rather than leaving it to a new administration to enter into a heated dispute with China. [FP]

Since North Korea’s fifth nuclear test, Congress has put the administration under intense pressure to implement the NKSPEA more aggressively. South Korea and Japan are also pushing for the more aggressive strategy.

U.N. resolutions and new legislation adopted by Congress in February give the administration far-reaching legal authorities to block assets, file criminal charges, and cancel visas for individuals or organizations violating sanctions rules on North Korea. But so far, the administration has yet to wield those authorities in a decisive manner, taking action in a relatively small number of cases while it seeks to persuade China to take a more assertive role. [FP]

Which you already know, because you read this blog. FP also picks up on the Senate Asia Subcommittee’s aggressive questioning of the administration in its most recent oversight hearing.

Since approving new sanctions legislation in February, U.S. lawmakers from both parties have complained that relatively few companies or individuals have been blacklisted and charged.

“You have sanctioned no Chinese banks at the end of the day, and they are probably the major financial institutions for North Korea,” Sen. Bob Menendez (D-N.J.) said at a hearing last week with top State Department officials.

Republican Sen. Marco Rubio, speaking at the same hearing of the Senate Foreign Relations Subcommittee on East Asian and Pacific Affairs, accused the administration of timidity when it comes to sanctions that could antagonize the Chinese government.

“We know who these companies are. We haven’t moved fast enough on it. There’s no reason not to have moved faster. There’s plenty of targets of opportunity and plenty of information out there about them,” Rubio said. [FP]

See this link for similar bipartisan pressure coming from the House side of the Mall. So what has prevented the administration from responding to this pressure from our allies and Congress? Deference to China. 

“It could become the defining issue in the U.S.-China relationship. It could push Beijing and Washington into a very unhappy place,” said Evan Medeiros, who served as Obama’s top advisor on Asia affairs at the White House National Security Council until last year.

Pursuing Iran-like sanctions against North Korea would mean “hardcore secondary sanctions in ways that the Chinese aren’t going to like,” he said.

“But the U.S. is simply going to have to be willing to countenance friction in the U.S.-Chinese relationship that the U.S. hasn’t been willing to accept to date, because the North Korean threat is becoming too serious,” said Medeiros, now at the Eurasia Group since leaving the White House. [FP]

That is to say, so far, the White House has given more weight to the views of China — which has willfully violated U.N. sanctions for years — than to staunch U.S. allies abroad, or a united Congress.

Obama has tended to avoid confrontation with China on most issues, including over the South China Sea and economic disputes. The administration, however, did take a forceful stance against Beijing-backed cyberhacking in the United States.

“They have placed a premium on trying to manage the relationship with China in a constructive way and to contain areas of friction or competition,” said a congressional staffer. [FP]

Right. Because it would be terrible if relations broke down so badly that China started, say, unilaterally seizing huge tracts of strategic waters, rounding up and jailing dissidents, or amping up its anti-American propaganda.

De Luce reports that the administration still hasn’t made its mind up, and “may in the end opt to take a more incremental approach, avoiding a major clash with China.” Which would be typical. In fact, I wouldn’t be astonished if the administration had planted this story to pressure China to be more flexible in its negotiations over a new U.N. Security Council resolution, agreement on which is taking even longer than usual. Having said that, what a rare joy it is to read journalism like De Luce’s, which shows that the reporter took the trouble to research and understand the subject matter before writing about it.

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H.R. 6281, banning N. Korea from SWIFT, would be a powerful sanctions upgrade

Via Yonhap, we learned last week that Rep. Matt Salmon (R, Ariz.), the Chairman of the House Asia-Pacific Subcommittee, has introduced a bill to cut North Korea off from the “specialized financial messaging services” that banks use to send wire transfer orders around the world. The industry leader for financial messaging is SWIFT, whose headquarters is in Brussels, but which also has operations in Geneva and Manassas, VirginiaIf you don’t know what SWIFT does and why it matters, I’ll refer you to this post.

“What we can do is deny them access to services designed to quickly and easily transfer money worldwide. Without access to these services, we can force the North Koreans to purchase supplies and receive support in the way typically favored by state sponsors of terrorism: shipments of anonymous, small denomination bills.” [Yonhap]

You may be able to run a mid-size drug cartel that way, but not a country with a population of 23 million and a large, mechanized army. Although a SWIFT cutoff would be based on a different legal authority from the authority Treasury used against Banco Delta Asia in 2005, Yonhap compares the proposed legislation to BDA.

Should the legislation be enacted, it would have powerful impacts on the North, possibly similar or even greater than the 2005 U.S. blacklisting of a Macau bank for doing business with Pyongyang.

By designating the bank in the Chinese territory, Banco Delta Asia (BDA), the U.S. not only froze $24 million in North Korean money held in the bank, but also scared away other financial institutions from dealing with Pyongyang for fear they would also be blacklisted.

The measure hit Pyongyang hard, and reports at the time said North Korean officials had to carry around bags of cash for financial transactions because they were not able to use banks. The sanctions were later lifted in exchange for a denuclearization agreement that later fell apart. [Yonhap]

A better analogy would be the effect SWIFT sanctions had on Iran’s economy more recently. 

Without SWIFT, global trade and investment would be slower, costlier and less reliable. [….]

The earlier SWIFT ban is widely seen as having helped persuade Iran’s government to negotiate over its nuclear programme. The ban was one of the first sanctions Tehran asked to be lifted, points out Mark Dubowitz of the Foundation for Defence of Democracies, a Washington-based think-tank. Though some of the banks blocked from SWIFT managed to keep moving money by leasing telephone and fax lines from peers in Dubai, Turkey and China, or (according to a Turkish prosecutor’s report) by using non-expelled Iranian banks as conduits, such workarounds are a slow and expensive pain. And the sanctions prompted Western banks to stop conducting other business with the targeted banks. [The Economist]

Keep reading that article to understand some of the good reasons to exercise great restraint in using SWIFT as a sanctions tool. I agree with those reasons; I just happen to believe that there are two cases compelling enough to be deserving exceptions — Iran and North Korea. (In the case of Russia, I’m not yet convinced that this is the right tool; I’d rather see us arm and train the Ukrainians.)

As of posting time, the text of H.R. 6281 was not yet available at Congress.gov, but I’d expect it will bear some resemblance to section 202 of the original introduced version of H.R. 1771, the North Korea Sanctions Enforcement Act, a later version of which the President signed into law in February as H.R. 757, the North Korea Sanctions and Policy Enhancement Act (Public Law 114-122, codified at 22 U.S.C. Chapter 99). The bill already has nine original co-sponsors, including three Democrats.

If you own a calendar and had a television in your home in the 1970s, you already know that the obstacles to getting this bill to the President’s desk this year are signficant. The administration has hinted, however, that it may be asking the European Union, which regulates SWIFT, to effect its own cutoff.

“The SWIFT system which is what I think you are referring to is not a U.S. system, and therefore not under our direct control. I believe it’s an EU system up housed [sic] in Brussels,” Daniel Russel, the Assistant Secretary of State for East Asian and Pacific Affairs at the U.S Department of State said, when asked by how the U.S. administration planned to further penalize North Korea. [NK News, Dagyum Ji]

I’m all for doing things diplomatically if that achieves our objective. No doubt, our diplomats’ work has been made easier by the conduct of the North Koreans themselves, who are suspected of hacking SWIFT to rob its client banks of $80 million and laundering the loot through casinos in the Philippines (Rodrigo Duterte, call your office). Russel’s written testimony is here.

The necessity of far-reaching financial sanctions rose to the surface after the North was suspected to be connected to Bangladesh Bank heist back in May.

“We are in discussions with our partners, including the EU, about tightening the application of sanctions and pressure, including and particularly to deny North Korea access to the international banking infrastructure that it has abused and manipulated in furtherance of its illicit programs,” Russel said.

“I think that our hope is that we will in fact ultimately be able to reach an agreement that would further restrict North Korea’s access.” [NK News, Dagyum Ji]

If this bill doesn’t pass in this Congress and diplomacy can’t achieve the same result, I’m sure it’ll be back in the next Congress. In fact, for reasons I’ll explain below, it might be back even if the EU enacts a SWIFT ban. With the arrival of a new U.S. administration and an election year in South Korea, there will be no shortage of provocations to help pass it. North Korea loves to act up during election years. It makes certain kinds of people write op-eds calling for talks and concessions. 

More recently, however, Kim Jong-un’s election-year antics have made him one of Washington’s most effective lobbyists — for new sanctions laws.

This post by Stephan Haggard has sparked some debate as to whether SWIFT is still servicing North Korean banks. According to Haggard’s post, SWIFT’s processing for North Korean banks fell from 50,000 a year in 2011 to a mere 5,000 a year by 2012. Haggard is always very careful with his sourcing and relied on published SWIFT data, but for reasons I shouldn’t share here, I don’t believe the statistics are accurate. I can’t rule out the possibility that SWIFT cut the North Koreans off in mid-2013 or later, however. By then, UNSCR 2094, paragraph 11, prohibited SWIFT from servicing (at the very least) U.N.-designated North Korean banks.

But in the end, whether North Korea is still using SWIFT or not, H.R. 6281 is still useful. If SWIFT is still providing services to North Korean banks, H.R. 6281 can give the Treasury Department and our diplomats more leverage to persuade the EU and SWIFT to cut the North Koreans off now. If SWIFT isn’t providing services to North Korean banks, someone else is. It would make sense that North Korea’s hacking of SWIFT software to steal from foreign banks was both a way to make money and retribution for a SWIFT cutoff.

Either way, North Korean banks need financial messaging services. One of the strongest arguments against the overuse of SWIFT sanctions is that they might give a less responsible service a competitive advantage. If some less responsible competitor has emerged to take on North Korea’s financial messaging business, then H.R. 6281 would enable the Treasury Department to either “reason with” that upstart service or sanction it to extinction. In which case, the potential rise of a SWIFT alternative turns one of the strongest arguments against H.R. 6281 on its head.

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The Senate does North Korea oversight right; also, sell your Bank of China stock now

It took a few weeks for the Senate Foreign Relations Committee’s Asia Subcommittee to put a hearing together after North Korea’s fifth nuclear test, but when that hearing finally happened on Wednesday, I actually found myself feeling sorry for the State Department witnesses, Danny Russel, the Assistant Secretary Of State at the Bureau Of East Asian And Pacific Affairs, and Daniel Fried, the State Department’s Coordinator for Sanctions Policy. A few years ago, they might have gotten away with showing up unprepared, with index cards filled with stock phrases. For example, after Chris Hill’s confirmation hearing, I wrote, “The degree to which the ‘august’ senators on the Committee have paid no attention to the conduct of policies they are charged with overseeing is depressing and stupefying, and yet it all somehow still makes for dreadfully dull viewing.” Thankfully, this Senate — or rather, this part of it — is a very different and much better body.

Under the leadership of Cory Gardner, at least one part of the Senate is doing policy oversight right. You can watch the whole thing here, and although it’s two hours long, it will hold the interest of anyone interested enough in North Korea policy to read this site. Do what I did and watch it in increments as time permits. 

The main headline from the hearing is that the State Department officials said that they are investigating more Chinese companies for sanctions violations, but it’s clear from the questions that the senators will not be placated by the sacrifice of mere goats anymore. Their mood is of equal parts alarm and fury — both in front of and behind the scenes, and among both Republicans and Democrats — that Chinese banks are breaking our laws, and that this administration is letting them get away with it. As they did before the hearing, they want the administration to sanction the Chinese banks that launder Kim Jong-un’s money.

By now, everyone should have expected Republicans like Gardner and Rubio to question State about that. State should have known by now that both men would be well-prepared and unsparing in their criticism. The intellects of both men, and good behind-the-scenes work by the staff — including arms control experts and one with extensive sanctions administration experience at the Treasury Department — ensured that they would quickly sift away talking points and cut directly to the issues. Gardner mentioned at one point that the senators were given a common set of briefing materials. It showed in both the insightfulness and focus of the questions, and in the bipartisan unity of their questions’ thrust. I’ve never worked in the Senate, so I wouldn’t know if that’s standard procedure there, but past hearings I’ve watched didn’t run this well. Gardner himself was in complete command of both the material and the room, and gave every appearance of being a man with limitless potential. Indeed, all of the senators were well-prepared. All, regardless of their party or tribal affiliations, asked good or excellent questions. 

In the end, however, no one can hurt you more than the people who love you. At 58:17, Senator Menendez began questioning Fried by arguing for secondary sanctions against Chinese banks. He then embarked on a well-prepared, determined, and lawyerly cross-examination of Fried about this. Pressured by Menendez’s questioning and clearly unsure of his material, Fried told Menendez that Dandong Hongxiang was a bank (not true). I don’t think Fried was lying, but he didn’t have command of the facts, and when he got out of his depth, he swam into a rip current. Menendez pinned Fried down on his answer. Then, when his time expired, he went back and pulled Treasury’s announcement, probably talked to his staff, and confirmed that this wasn’t true. At 1:35:30, Menendez returned, rearmed. This, ladies and gentlemen, is what it’s like to have a bad day in the United States Senate.

SEN. MENENDEZ: Mr. Fried, I pride myself on my preparation for these hearings, so I went back to your office after your answer, and I looked at OFAC’s statement of Monday. You said in response to my question we’d sanctioned a bank on Monday. Well, I read from OFAC’s statement that they imposed sanctions on Dan-ong Yonhwang (sic) Industrial Development Company and four individuals. Now, is that company a bank? 

A/S FRIED: Sir, it is a financial — it is not a bank — it is the financial company that worked with a sanctioned North Korean bank.

SEN. MENENDEZ: All right, that’s different than saying you’d sanctioned a bank.

A/S FRIED: Yes, sir.

SEN. MENENDEZ: You did not sanction a bank on Monday.

A/S FRIED: Uh, we sanctioned a fi — a Chinese, uh, financial corporation.

SEN. MENENDEZ: All right, well, that’s different than a bank. Let me ask you this. How many banks — banks — has the administration sanctioned as it relates to North Korea?

A/S FRIED: Uh, a nu — do you mean banks in general or Chinese banks?

SEN. MENENDEZ: Chinese — let’s talk about Chinese banks.

A/S FRIED: A number — no Chinese banks.

SEN. MENENDEZ: No Chinese banks.

A/S FRIED: Not in China. We have umm —

SEN. MENENDEZ: That’s my point. That’s the point I was trying to drive at earlier. You have sanctioned no Chinese banks at the end of the day, and they are probably the major financial institutions for North Korea. What this company, as I understand, did was make purchases of sugar and fertilizer on behalf of a designated Korean bank. It’s a trading company, not a financial company. So, when I take testimony as a member of this Committee, I need to make sure that testimony is accurate, because I make decisions based upon it. And I must say that the information you gave me is not accurate. It was not a bank. This was a trading company. And finally, I got the answer that I wanted to hear, which is what I knew, that you’ve sanctioned no Chinese banks that relates (sic) to North Korea. And it is our hesitancy to do so that that takes away one of the major instruments possible to change Chinese thinking. I’m all for persuasion if you can achieve it. But when you can’t, and North Korea continues to advance its nuclear program in a way that becomes more menacing — and its miniaturization and its missile technology — I don’t know at what point we are going to continue to think we can stop them when in fact they’re pretty well on their way. And we allow them to continue to do so. And we don’t use some of the most significant tools that we have. So I’m disappointed that you didn’t give me the right information.

I hold no ill will toward Mr. Fried, but I literally cheered as Menendez calmly bored right to the truth of the matter. Yet on another level, watching this was deeply depressing. Menendez, for all his troubles — and I hope he’ll soon put those behind him — clearly showed us how valuable he is to his state and his country. If the Democrats retake the Senate, I hope he’ll be Committee Chairman again. Markey — watch for him to emerge as a liberal advocate for human rights in North Korea — wisely counseled restraint on South Korea’s military threats. Rubio, who had personally read and commented intelligently on an earlier version of the NKSPEA, had also read and understood C4ADS’s report and its implications. Any one of these senators would have been a better choice as President than the choices before us now. What I can’t help asking myself today is how we elect such good senators, yet such awful presidents.

In the years after the passage of the North Korean Human Rights Act, those who had worked hard to pass that law watched the State Department slow-walk it to a full stop, with Congress seemingly powerless to make it follow the law. That may have been to State’s short-term advantage, but its long-term cost was to plant in many of us a deep distrust of the State Department. We learned that passing a law is only the first step — that laws need robust enforcement mechanisms and a permanent, bipartisan constituency to make sure the executive enforces them. Hence, section 103 briefings, the first installment of which came due just as Kim Jong-un tested his fifth nuke. This Subcommittee is taking full advantage of those oversight provisions. Pray that continues to be the case in the next congress. 

I’ll give The Wall Street Journal the final word, if only to make the point that this issue isn’t going away, and that the next POTUS will come under withering pressure to do what this one has not done — enforce our laws. 

An invaluable report published last week by South Korea’s Asan Institute and the U.S.-based Center for Advanced Defense Studies found that Hongxiang Industrial and its parent company conducted some $532 million in North Korea business from 2011 to 2015. To put that into perspective, South Korean officials have estimated that the North’s main nuclear facility at Yongbyon cost less than $700 million to construct. [….]

In addition to neutralizing Hongxiang, these sanctions are aimed at persuading other Chinese companies to cut off Pyongyang lest they suffer the same fate, as when the U.S. sanctioned Macau-based Banco Delta Asia for about a year starting in 2005. This is the best hope for squeezing Kim hard enough that he might halt his nuclear drive. But China opposes such measures because it fears that squeezing too hard might cause the collapse of its client state.

Chinese trading firms and especially banks are likelier to cut off Pyongyang if the U.S. follows up promptly with further sanctions. One good sign is that the State Department’s Daniel Fried suggested Wednesday to Congress that more penalties are coming for Chinese firms.

Less promising is that in unsealing its indictment Monday the Justice Department said “there are no allegations of wrongdoing” against the banks involved in Hongxiang’s sanctions-busting. So despite imposing billions of dollars in penalties on a range of European banks for violating sanctions on Iran and others in recent years, the Obama Administration is signaling that Chinese banks aiding North Korea are untouchable.

In an open letter this month to President Obama, 19 Senators led by Colorado’s Cory Gardner quoted our Aug. 19 editorial (“North Korea’s Sanctions Luck”) on the evidence, compiled by United Nations experts, that the Bank of China “allegedly helped a North Korea-linked client get $40 million in deceptive wire transfers through U.S. banks.” That’s one of many examples. [WSJ]

If the House and Senate staff believe the administration has held back on specific targets, such as the Bank of China or any of the 12 banks named in the DHID forfeiture complaint, their next step should be to send the President a section 102(a) letter, which triggers a mandatory investigation, and possible designation.

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