With the pace of news of North Korea sanctions news lately, my bookmarks folder is starting to look like what the paramedics found at the Cat Lady’s house after the neighbors noticed a foul odor. Today, I want to catch up with our efforts to deny Pyongyang a haven for its money laundering network, with a focus on Southeast Asia. To review the administration’s progress since January, you may want to start here and here. Ambassador Nikki Haley also gave this summary in a recent speech at the U.N.:
In addition to our work here in the Security Council, many nations have taken their own strong actions against North Korea’s threat to peace. Just this year, as North Korea’s behavior has become more intolerable, over 20 countries from every corner of the globe have restricted or ended their diplomatic relations. Mexico, Peru, Italy, Spain, and Kuwait have expelled North Korea’s ambassadors from their countries. Portugal and the United Arab Emirates have suspended diplomatic relations. The Philippines and Taiwan have suspended all trade with North Korea. Singapore, formerly North Korea’s seventh largest trading partner, has cut all trade ties. Uganda has halted all military and security ties. The European Union, Australia, South Korea, and Japan have made additional sacrifices for peace and security by going well beyond what the Security Council requires. [link]
After which, she castigates a certain unnamed country for violating the coal ban — if you were here, you’d hear me sneezing, “ah-CHI-na!” and you’d say, “Gesundheit.” By now, I’d think we’ve given any remaining Chinese buyers of that coal fair warning.
– If you start anywhere, start with this report by Sheena Chestnut Greitens on efforts by the Obama and Trump administrations to convince South Asian and Southeast Asian nations to cut ties with Pyongyang. The record is mixed, but Trump has clearly had more success here than Obama. Burma has also kicked out a North Korean diplomat, and Malaysia is reviewing its diplomatic relations with Pyongyang.
– This commendably detailed report by (believe it or not) Buzzfeed examines why, in light of the Kim Jong-nam assassination, Malaysia still has not cut its diplomatic or commercial ties with North Korea. I previously wrote about Malaysia’s lax sanctions implementation and lack of anti-money laundering compliance here.
– India continues to say it’s making efforts to restrict trade with North Korea.
– Vietnam has expelled the local head of Wonyang Shipping, a subsidiary of Ocean Maritime Management, the U.N.-designated North Korean arms smuggler. It has also denied visas for more than 20 North Korean hackers PUST graduates “IT workers.”
– Angola, which has been implicated in several reports of the U.N. Panel of Experts for its arms trade with North Korea, including patrol boat engines, says it has deported 50 North Korean workers, who follow “dozens” of others who left the day before. Their employer was named as “Mansudae,” a likely reference to the U.N.-designated Mansudae Overseas Projects Group.
It may be that for our diplomats, the easy work has already been done. We’re now working on persuading states whose ties to Pyongyang are more persistent. I’m all for asking nicely once, and sometimes twice. I have to think we’ve asked (to name an obvious example) Malaysia nicely enough times. If I were calling the shots, I’d put Glocom, Pan Systems, and MKP Partners on the SDN List now.
~ ~ ~
Update: See also this report from that other organization called ISIS, naming the countries that continue to violate sanctions.
One of the more maddening tropes I see in reporters’ coverage is a question that’s usually presented as dispositive to the success of sanctions: “Will China cooperate?” For reasons I’ve already explained and don’t have time to repeat today, I always answer that question by asking what the questioner means by “China.” The point being: yes, it would be nice if Xi Jinping finally came around to the rising risk that Kim Jong-un will bring war, instability, disrepute, and bankruptcy to China, but he hasn’t. He hates us more and fears us less than he hates and fears Kim Jong-un, and I strongly doubt that we’ve brought him close to that tipping point.
What matters more is whether the Chinese banks that hold North Korean accounts, and the Chinese businesses that deal with North Korea and also use the financial system that runs through New York, have developed a healthy fear of the Treasury Department. For somevery good reasons, yes, I think the banks have and the businesses are starting to. Consequently, we continue to see reports from the China-North Korea border that some of the divergent interests we lump together into a million-person jiaozi we call “China” are indeed cooperating.
Is this mainly because of (a) Chinese government action to enforce sanctions, (b) fear of public or legal exposure by Chinese exporters that use North Korean labor or materials, or (c) the fact that both parties are having difficulty finding finance for North Korea-linked transactions? I can’t say for certain, and I suspect that (a), (b), and (c) are all factors to different degrees, but I’m going with (c). Why? First, because that’s consistent with reports I compiled in September, going back over the preceding weeks, that banks in China were freezing or closing North Korean accounts. Second, because we continue to see reports like this one.
The trader in the Chinese border city of Dandong has seen business all but dry up, and he spends his days scrambling to obtain payment from the suddenly broke North Korean state companies to whom he sold on credit.
“They have no money to pay us in cash, and the worst is that because of sanctions they can’t settle the bill with goods such as coal, as they did in the past,” said Yu, reached by telephone at the offices of his Dandong Gaoli Trading Company.
Yu said he’s owed about $1 million in all for deliveries of toothpaste, instant noodles and other household items. He’s trying to avoid laying off staff by continuing to export foodstuffs such as pine nuts and red beans. “If they become unemployed, it would be bad for both the state and society.”
Yu’s plight appears increasingly commonplace across Dandong, where the bulk of the cross-border trade is handled. Interviews with four trading companies and recent media reports indicate Chinese companies are hurting in a city where North Korean trucks used to rumble across the Yalu River bridge several times a week delivering metal scrap and returning with everything from televisions to toilet bowls.
The owner of another firm, Dandong Baoquan Commerce and Trade Co., which used to import iron ore and coal and export basic consumer goods, said he was owed around $200,000 by his North Korea clients.
“I had to lay off about 10 staffers, but I had no other choice because it was the government policy,” Han Lixin said, referring to the sanctions. “I’m still in business hoping to trade with other countries, but it takes a lot of time and efforts to develop customers.” [AP]
See also this report, indicating that the root cause of the trade slump is that the North Korean traders are suddenly broke; this report that North Korean traders can’t pay their debts to their Chinese partners; and this report on the slowing of trade in Rason. North Korean workers also continue to leave China, including its fishing industry. The Chinese businesses are now backfilling their production lines with Chinese workers.
In the interest of balance, and to give some very cautious credit where it’s due, there have also been some reports that the Chinese government has ordered North Korean businesses to close down. Adam Cathcart also points to a Chinese-language report of a corruption crackdown in the border region (I can’t read Chinese, so I’ll take his word for that). On the other hand, this report by the Financial Times tells us that sanctioned North Korean entities, including Minzheng International Trading, continue to operate freely in Hong Kong. Other reports confirm that China’s flagrant cheating on shipping and coal import sanctions continues (see here, here, here, and here).
An October report that the elites in Pyongyang were being deprived of rations has not been backed up by other reporting since then, and I’d add that rations almost certainly make up a very small portion of what the Pyongyang elites live on.
~ ~ ~
My suspicion has long been that China tends to crack down on North Korean money laundering either (1) to make good headlines until we lose interest and quietly go back to business as usual, or (2) to claim credit for, and conceal our influence on, trends that occur for other reasons, such as market fears of secondary sanctions. There are still not enough such reports for me to feel confident that this is an across-the-board trend that will endure, but it has certainly introduced both uncertainty and additional cost into any supply chain that begins in North Korea.
Overall, the news encourages us that if the administration continues to accelerate its enforcement efforts, they will present Kim Jong-un with the difficult choice to disarm or lose the confidence of his crocodiles. There is still much more that we haven’t done, and there is no time to lose in doing it.
Finally, an interpretive advisory for journalists: when you read Ambassador Haley’s threat to “take the oil situation into our own hands,” rather than immediately jump to alarmist conclusions and spread panic, consider a much more likely possibility — that Haley may be threatening that the U.S. will freeze and/or forfeit the assets of shippers, merchants, and refineries that deal with North Korea (see, e.g., the Treasury Department’s designation of Velmur and its corporate officers, and the Justice Department’s recent forfeiture suit against its funds). I have mixed feelings about oil sanctions, frankly, and will probably do a post on that at some point, but every policy decision is a balance of risks against threats, and I need not tell you that the threat is rising.
~ ~ ~
Update:This interview with a resident of Pyongyang from mid-November, however, indicates that sanctions weren’t having much of an effect there. Yet.
Here at OFK, we’ve chronicled a curious fact that few professional foreign policy scholars have noticed: China is opposed to unilateral sanctions, except when it isn’t. Last week — barely a week after President Trump returned from Beijing — he gave Xi Jinping something to oppose.
OFAC designated Dandong Kehua Economy & Trade Co., Ltd., Dandong Xianghe Trading Co., Ltd., and Dandong Hongda Trade Co. Ltd. pursuant to E.O. 13810. Between January 1, 2013 and August 31, 2017, these three companies cumulatively exported approximately $650 million worth of goods to North Korea and cumulatively imported more than $100 million worth of goods from North Korea. These goods have included notebook computers, anthracite coal, iron, iron ore, lead ore, zinc ore, silver ore, lead, and ferrous products.
OFAC designated Sun Sidong and his company, Dandong Dongyuan Industrial Co., Ltd. (Dongyuan), pursuant to E.O. 13810. Sun and Dongyuan were responsible for exporting over $28 million worth of goods to North Korea over several years, including motor vehicles, electrical machinery, radio navigational items, aluminum, iron, pipes, and items associated with nuclear reactors. Dongyuan has also been associated with front companies for weapons of mass destruction-related North Korean organizations. [Treasury Dep’t Press Release]
All told, last week’s designations include four Chinese companies, one Chinese individual, seven North Korean shipping or trading companies, two North Korean government agencies, and 20 North Korean ships. Most of the designations target North Korea’s shipping industry, and OFAC, the Office of Foreign Assets Control, even included photographs of North Korean ships doing ship-to-ship transfers of oil, in violation of UNSCR 2375, paragraph 11. If I had to guess, I’d guess that those photographs were taken by a spy satellite.
Treasury did not name the other ship or its nationality; however, in testimony at the House Foreign Affairs Committee in September, Treasury Assistant Secretary Marshall Billingslea showed other photographs “provided by the intelligence community” and named the ships, the flag states, and their destination ports (in China and Russia, of course).
The designation of the North Korean entities suggests that Treasury is pursuing a phased strategy. In the first phase, Treasury blacklists North Korean entities to put third-country companies, insurers, and banks on notice to avoid doing any business involving them. Treasury is still years behind the U.N. Panel of Experts, however, in naming the various persons and entities known to be involved in violating North Korea sanctions. Although a person designated by OFAC can sue to challenge the designation, the courts would apply a deferential standard and uphold any designation supported by “substantial evidence.” In most cases, the U.N. Panel’s careful and thorough work, including its annexes, would be more than sufficient to meet that standard.
Take, for example, the case of one of Treasury’s designations, the North Korean Maritime Administration. The U.N. Panel of Experts had recommended its designation in its most recent report, in September, for helping U.N.-designated North Korean arms smuggler Ocean Maritime Management evade sanctions. I’ve pasted the relevant text from the POE’s report below the “continue reading” link.
The next phase will require Treasury to hit some third-country targets to sever that business and warn others of the consequences of breaking that boycott. In the case of the Sun Sidong network, we’ve reached that second phase. Sun’s network first came to our attention last August, when a leaked U.N. report revealed that the Egyptian authorities had found a large shipment of PG-7 rocket-propelled grenades aboard a Chinese-flagged merchant ship, the Jie Shun, at the southern end of the Suez Canal. At the time, I’d guessed the rockets were headed for Syria, but the Washington Post later reported that the customer was none other than Egypt itself.
By June of this year, the Center for Advanced Defense Studies had pursued the POE’s clues and traced the ownership and control of the Jie Shun back to a Chinese national named Sun Sidong.
#SunSidong formerly owned the Jie Shun, a ship seized during a multimillion arms transfer from North Korea to Egypt, highlighting how “licit North Korean businesses are being used to facilitate North Korean illicit activity” (@JobyWarrick) https://t.co/WGlDscjFSn
It then released a remarkable report that not only exposed Sun’s network, it effectively mapped out most of North Korea’s money laundering network in China. C4ADS found that this network was “centralized, limited, and vulnerable” to sanctions. Sun and his companies account for a large portion of that network.
For example, one of its subsidiaries, Dandong Zhicheng Metallic Materials Company, was until recently the single largest purchaser of North Korean coal.
“These companies will have a tough time continuing operations as even Chinese banks will increase scrutiny of their transactions, if not completely cut them off,” Anthony Ruggiero, a Senior Fellow at the Foundation for the Defense of Democracies, told NK News.
“These actions continue the narrative on the problem China has in Dandong and Dalian, something Treasury highlighted in its advisory where it noted the activities of Chinese banks and companies working with North Korea.” [NK News, Leo Byrne]
Last week’s designations are not the feds’ first strike on the Sun Sidong network. In August, the Justice Department filed a civil forfeiture complaint against DZMM. Last month, the Wall Street Journalreported that Sun was under investigation by the FBI, so it may not be the last strike, either.
One other company, the Korea South-South Cooperation Corporation, was designated for slave labor exports to “China, Russia, Cambodia, and Poland.” Technically speaking, UNSCR 2375 permits member states to allow labor contracts with North Korea to expire, but in this case, Treasury is telling the parties to those transactions to keep them out of the dollar system.
Although the designations came one day after President Trump announced that North Korea would be returned to the list of state sponsors of terrorism, the designations are not directly related to North Korea’s recent sponsorship of terrorism. It would not surprise me, however, to see future designations of North Korean nationals under Executive Order 13224. The President has indicated that we’ll see more designations soon.
President Donald Trump, in announcing Monday his administration’s decision to designate North Korea as state sponsor of terrorism, indicated that additional sanctions measures were on the way. “It will be the highest level of sanctions by the time it’s finished over a two-week period,” Mr. Trump said. [WSJ, Felicia Schwartz]
The designations also tell us a few things about the role of China in enforcing these sanctions. First, although I’d feared that Trump would get hoodwinked by Xi Jinping in Beijing and ease off on secondary sanctions, it’s clear that he hasn’t eased up entirely. It’s also clear that the visit by a Chinese emissary to Pyongyang, which was much ballyhooed on Twitter (including by the President himself) achieved exactly as much as I’d expected (bupkes). By now, all wizened Korea-watchers either know or should know that the words “great expectations,” “diplomat,” and “Pyongyang” can only be assembled into transitory delusions.
We soon learned that when Xi Jinping’s messenger showed up, His Porcine Majesty was conveniently out of town looking at things. No doubt, Xi is unhappy with both Donald Trump and Kim Jong-un now. But he’d have no reason to be unhappy with us now if he enforced the sanctions his government voted for at the U.N.
The Chinese government unexpectedly arrested the head of a major company operating cargo ships linking North Korea and China, which the United States had designated as an entity subject to its independent sanctions, a joint investigation by The Dong-A Ilbo and Channel A found on Sunday. Beijing is reportedly conducting far-reaching investigation of all companies engaged in trade with North Korea, as well as Chinese firms and individuals Washington included in the list of entities subject to its independent sanctions since this past summer, and is taking disciplinary action if illegal acts are detected.
According to informed sources on North Korea, the Chinese government arrested a man identified by his last name Jin, head of Dalian Global Unity Shipping, and is probing him in a location other than Dalian. Jin, a Korean Chinese, is an entrepreneur widely known in the field who is almost monopolizing shipping service linking Dalian and North Korea. Since his arrest, the operation of all the vessels linking Dalian and North Korea has been suspended. The measure is reportedly putting heavy pressure on North Korea, with the North’s export to China having been halted. [Dong-a Ilbo]
Dalian Global Unity isn’t part of the current round of designations; it was added to the SDN List back in June.
Finally, OFAC designated Dalian Global Unity Shipping Co., Ltd. (Dalian Global Unity) pursuant to E.O. 13722 for operating in the transportation industry in the North Korean economy. Dalian Global Unity is reported to transport 700,000 tons of freight annually, including coal and steel products, between China and North Korea. According to the 2013 report by the UN Panel of Experts on North Korea, Dalian Global Unity was actively involved in eight cases of luxury goods smuggling incidents and is suspected of involvement in at least one other case. Middlemen from Dalian Global Unity gave specific instructions about how shipments and transactions could evade the UN-mandated luxury goods ban. [U.S. Treasury Dep’t]
Remember the ten-week rule: never celebrate any apparent Chinese compliance with North Korea sanctions until it has been in effect for at least ten weeks.
“Singapore will prohibit all commercially traded goods from, or to, the Democratic People’s Republic of Korea (DPRK),” the city-state’s customs said in the notice sent to traders and declaring agents last Tuesday, referring to the country by its official name.
The suspension would take effect from Nov. 8, Fauziah A. Sani, head of trade strategy and security for the director-general of customs, said in the notice. [Reuters]
The first question is what this means. NK News adds the useful detail that this order will ban all commercial trade, “regardless of whether [it is] imported, exported, transhipped or brought in transit through Singapore.”
If this means anything, it will help end a brisk trade in prohibited luxury goods of the kind that fill elite shops in Pyongyang while people in the outer provinces barely survive. NK Pro’s remarkable investigation into OCN (S) Pte, Limited’s luxury good exports to Pyongyang, in partnership with Bureau 39, is behind a very high paywall, but it’s well worth reading if you can afford a subscription. If you can’t, this story or this one will give you the gist of it (see also). I’d think that this would end the role of Pan Systems Singapore as a middleman in the trade in components for Glocom’s wares, but someone should get a clear answer to that question.
For years, Singapore’s regulation implementing the U.N.’s North Korea sanctions was several resolutions out of date. Since then, Singapore has done a better job of keeping its regulation updated. Reuters describes Singapore as North Korea’s seventh-largest trading partner, but exporters like OCN, who want to avoid legal scrutiny, may claim a different country of destination for their merchandise. Be skeptical of any official trade statistics about North Korea.
The reports Singapore filed with the U.N. this year and last year on its implementation of North Korea sanctions suggest that Singapore already had tight export controls, and was already enforcing U.N. resolutions requiring the inspection of cargo going to and from North Korea. We now know that this wasn’t true. Just before NK News blew the whistle on OCN, Singapore told the U.N. that it had “completed its review and update of its existing list of luxury goods prohibited for transfer to” North Korea. In 2016, the U.S. offered to assist Singapore with a cargo monitoring system to detect exports of prohibited goods. Clearly, Singapore could use that help.
There is also the question of what this new ban does not cover. After all, Singapore’s main importance for North Korea isn’t as a direct trading partner, but as a hub for laundering its money and registering its front companies. Yet on its face, Singapore is only banning the trade in “goods.” It has said nothing about services.
The DPRK’s Jinmyong Joint Bank also operates a branch in Singapore, while a brochure for Pyongyang’s First Credit Bank claimed it has had ” a joint venture agreement with Singapore for 50 years.”
The U.S. Department of the Treasury in late August designated two Singapore-based companies – Transatlantic Partners and Velmur Management – for links to the North Korean state. [NK News, Dagyum Ji]
In 2013, the Burmese opposition website The Irrawaddy, citing unnamed businessmen, reported that a Burmese general designated by the Treasury Department and linked to the North Korea arms trade, and who visited North Korea in 2008 to seek help with Burma’s ballistic missile program, “may have opened several bank accounts in Singapore in past years in order to help Burma’s military sort out international arms deals.” It noted that “[t]he fact that many of the generals were on a US sanctions list has not hindered their opportunities to visit and do business in Singapore.”
We learned more about North Korea’s money laundering and front companies in Singapore from the Glocom case, from the Velmur forfeiture case, from the U.N.’s investigation of the Chinpo Shipping case, and from Chinpo’s appeal of the fine levied on it. Singapore’s implementation reports claim that it has complied with the U.N. asset freeze provision, but China’s interference and the inefficiency of the 1718 Committee — which still hasn’t even designated Glocom — means that relatively few North Korean entities are designated.
UNSCR 2270 bans direct and indirect correspondent services for North Korean banks, and UNSCR 2371 bans joint ventures with North Korea. If Singapore enforces the resolutions as written — and if its local bank branches know what’s good for them — they ought to shut Pan Systems, any other North Korean joint ventures, and all of their bank accounts.
Singapore also exports other services to North Korea. In 2015, NK News reported that a Singapore firm was building a department store for the elites in Pyongyang. U.N. resolutions do not prohibit the provision of construction services or materials to North Korea, but deals in non-sanctioned goods and services sometimes involve a sanctioned North Korean entity as a partner.
Singapore says it will not end diplomatic relations with North Korea. That’s within the Singapore government’s discretion, but UNSCR 2321 calls on all states to reduce the number of staff at North Korean embassies and require them to limit those staffers to one bank account each. Implementation reports filed by Singapore say nothing about compliance with those provisions. Singapore has warned its citizens against tourist travel to North Korea. Last year, it also ended visa-free entry by North Koreans.
The ultimate question is whether Singapore will follow through on its word. Yesterday, the State Department said that Sudan would also end all trade and military ties with North Korea. That would be the third time this “news” has been reported in the last year. North Korea’s commercial ties can be surprisingly resilient, and Singapore has long been a major hub for North Korea’s smuggling and money laundering operations. It will continue to be one as long as Pyongyang is allowed to post a large number of agents on Singapore’s territory under diplomatic cover. Be skeptical of this story until you see evidence that North Korean accounts are frozen, and that North Korean nationals are packing their bags and boarding flights back to Pyongyang.
Last week, while I was writing my rave review for Donald Trump’s speech to the South Korean National Assembly, the Senate Banking Committee was working to put more tools in his hands to bankrupt the man he would never stoop to calling “short and fat.”* By a unanimous vote, the committee passed the newly renamed Otto Warmbier Banking Restrictions Involving North Korea (BRINK) Act, which I previously discussed here and here. The bill now awaits Senator McConnell’s nod to get on the full Senate calendar. The House is already looking at the text.
This being the Senate, an august deliberative body, the committee vote came after the majority and minority members reached an agreement on a compromise text. As a general rule, compromise amendments are like Star Wars sequels — never as good as the original, and usually a little worse with each iteration. In this case, however, the text actually seems to have improved in the negotiations, if you can believe that. (Next time someone asks you what’s in it for Kim Jong-un to show some restraint, tell them he might get less of this.)
[Chris Van Hollen (D, MD) and Pat Toomey (R, PA) were the bill’s original co-sponsors.]
Under the new bill, many of the discretionary sanctions authorities that were just added to section 104(b) of the NKSPEA by the KIMS Act would now become mandatory. Other new section 104(a) sanctions would mirror sanctions imposed by the U.N. Security Council in UNSCR 2371 and 2375. In addition to requiring the blocking of the bad actor’s assets, section 104(a) sanctions carry more other serious consequences, such as asset forfeiture, immigration sanctions, and the loss of government contracts.
I’m especially pleased that the NKSPEA’s sanctions on His Porcine Majesty’s kleptocracywill also become mandatory.
The most powerful provision, however, is section 111:
This imposes a range of secondary sanctions on banks that continue to process transactions for North Korea. The concept here is similar to what Ed Royce wanted to do back in 2013, in the original version of the NKSPEA (then called the North Korea Sanctions Enforcement Act). Section 201 of that bill allowed for a range of secondary sanctions against financial institutions that dealt with North Korean entities. At the time, however, the Obama administration’s Treasury Department thought that went too far, so instead, section 201 was replaced with the language that would later force the Obama administration to declare North Korea to be a primary money laundering concern, show some promising (if early) results in freezing North Korean accounts, and kill** the Bank of Dandong for laundering Kim Jong-un’s money.
I’ll believe the Treasury Department is really serious when it starts imposing fines like this one on banks, including big banks, that fail to meet their due diligence obligations to prevent North Korean money laundering. As the new Chinese curse goes, “May subpoenas rain down on your correspondents.”
~ ~ ~
If secondary financial sanctions this sweeping were ahead of their time in 2013 politically speaking, today, liberal Maryland Democrat Chris Van Hollen, joined by moderate Pennsylvania Republican Pat Toomey, has written the toughest secondary financial sanctions on North Korea to date. Just so you get a sense of how far the consensus has shifted.
The BRINK Act sends a clear and unequivocal message to these banks and firms: you can do business with North Korea or you can do business with the United States, but if you choose to support the North Korean regime or their business associates, you will be held to account. [CNN.com, Senators Chris Van Hollen & Pat Toomey]
Critics argue that, for more than two decades, the United States has unsuccessfully employed a mix of sanctions and economic incentives to convince North Korea to abandon its nuclear arsenal and contain the threat. But our sanctions regime against North Korea is not nearly as tough as what we had in place against Iran, in the lead-up to Iranian nuclear negotiations.
Specifically, the United States has not, in a serious way, gone after the foreign banks that provide illicit support to North Korea and extend credit and financial services to companies engaged in illegal trade with the regime. This is a major hole in our sanctions regime, but one that our legislation would close.
The sanctions in the BRINK Act are known as “secondary sanctions,” because they apply to non-US entities. They target foreign banks and firms serving North Korean enterprises. This bill is modeled on the same secondary sanctions that helped to bring Iran to the negotiating table over its nuclear program.
The reasons for our approach are clear. North Korea’s economy is neither as weak nor as isolated as most people believe. While exact figures are unknown, its annual gross domestic product is estimated to be $40 billion. China accounts for nearly 90% of North Korea’s trade, while others, such as Malaysia, still maintain diplomatic ties.
The United Nations found that North Korea evades existing international sanctions and maintains access to the international financial system through a comprehensive network of front companies, many based in China. North Korea relies heavily on this network to directly support its weapons of mass destruction and ballistic missile programs. Our aim is to cut off North Korea’s remaining access to the international financial system, deprive Kim Jong Un of the resources needed for his regime’s survival, and create the leverage necessary for successful nuclear negotiations.
Section 115 of the bill directs the administration to team up with the Financial Action Task Force — which has just issuedtough new guidance to financial institutions on implementing U.N. financial sanctions — to hunt down and freeze the slush funds of Kim Jong-un and his top goons. (See Anthony Ruggiero’s analysis of the FATF advisory and what that means.)
Other provisions prod U.N. member states to step up their enforcement game, ask Treasury to report on North Korea’s use of front and shell companies to hide its beneficial ownership interests, put stricter congressional controls on the licensing of transactions with North Korea, and make it easier for fund managers to divest from companies with investments in North Korea. Congress also asked for reports on North Korean money laundering and cyber capabilities.
However improbably, and despite the alleged dysfunction on Capitol Hill, on this issue, Congress is behaving in a bipartisan, statesmanlike, and diplomatic manner. It’s keeping up with the U.N. in passing implementing legislation, and it’s either forcing or helping the Treasury Department to act like the steward of the financial system that it needs to be for sanctions to work well enough to prevent another Korean War.
That assumes, of course, that the administration enforces this competently and aggressively. It’s not a good sign at a time like this to see the administration cut Treasury’s budget. It’s going to require some aggressive congressional oversight to make this work, but Democrats seem to be positioning themselves to “own” the sanctions issue if they see Trump slow down. Good for them. They can clearly see what the alternative would be.
~ ~ ~
* Here at OFK, our position is that jokes about physical stature and body size are beneath our editorial standards. But as a former boss once said, a good lawyer can tell you the rules; a great lawyer can tell you the exceptions. So, by a narrow-yet-unanimous vote, the OFK Editorial Board has approved an amendment to the Style Guide to authorize the use of the term “His Porcine Majesty” for any hereditary, morbidly obese absolute ruler of a country where a third of the kids are stunted due to malnutrition while he exports seafood and other produce for hard currency.
** It’s possible that the Bank of Dandong could do what Banco Delta Asia did and survive for years as a glorified check-cashing / payday loan storefront, using only local currencies. The last time I checked PACER a few months ago, BDA was still in settlement negotiations with Treasury to have its 311 blacklisting lifted.
I still remember my excitement, bordering on giddiness, when in May 2013, a few big banks in China froze some North Korean accounts. That action came two months after the Treasury Department designated North Korea’s Foreign Trade Bank, and just over a week after Ed Royce dropped the first draft of the NKSPEA. But as we’ve learned from our friends in the FBI and the Justice Department since then, big Chinese banks began clearing the FTB’s transactions as soon as they felt that the coast was clear.
The lesson I’ve learned from this and other, similar episodes is that one should be cautious before believing any highly publicized case of China enforcing sanctions against Pyongyang or applying economic pressure to it. I’ve seen this show enough times to suspect that China has a deliberate media manipulation strategy of making a big deal of enforcing sanctions until reporters lose interest.
For example, reports that China has halted tourism to North Korea just before President Trump arrived in China seem suspect. Technically, there are no U.N. sanctions prohibiting tourist travel. North Korea’s business partners — UNSCR 1718, paragraph 8(d) if you doubt me — are obliged to “ensure” that they aren’t indirectly funding WMD programs and other prohibited purposes (spoiler alert: in a place like North Korea, they can’t), but I doubt that most Chinese businesses either know or care about that obligation yet. Instead, remember the ten-week rule: check back in ten weeks and I’ll tell you if it’s for real.
~ ~ ~
Take the coal export cap under UNSCR 2321, which later became a coal ban in UNSCR 2371. Remember August, when China announced that it was halting coal imports from North Korea? We’ve since learned that this is yet another case of China initially complying with an obligation, only to resume its cheating as soon as reporters looked the other way. The flaw in this strategy is that nowadays, too many reporters don’t look the other way for long. The sharp-eyed crew at NK News has been especially diligent about spotting North Korean bulk carriers at Chinese coal terminals, but this time, I’ll credit VOA.
China imported 509,000 tons of coal from North Korea last month, raising doubts about its implementation of U.N. sanctions over Pyongyang’s nuclear and missile programs, Voice of America (VOA) reported Tuesday. VOA’s Korean Service said China bought US$44 million of coal from the North in September, citing data from the Korea International Trade Association. [Yonhap]
China is now saying that the coal landed in February but did not clear customs until September because Beijing implemented the ban so suddenly. But this does not resolve the question in China’s favor. First, under a strict reading, China should have returned any coal that wasn’t “imported” before the full ban. Second, by February, China had already exceeded the existing quota for 2017, under the most recent resolution then in effect, UNSCR 2321. Third, two of the three largestsuppliers of North Korean coal are companies controlled by U.N.-designated entities — the Reconnaissance General Bureau and the Munitions Industry Department. If the RGB or the MID ultimately controlled the coal that was sold to China, China’s legal obligation under UNSCR 1718, paragraph 8(d), was to seize the coal and dispose of it. Hold that thought.
The resolution that finally imposed a total ban on coal exports, UNSCR 2371, does not have a grace period for coal exports. It’s a flat ban. Now, a friend with deep knowledge of the facts and law tells me it’s actually more complicated than that, for reasons that the person was unable to make clear to me. Still, I don’t see anything in the language of the resolution that permits the purchase of North Korean coal in September. I read this as a violation of the resolutions.
What can we do about that? For one, the President should be raising it with Xi Jinping. For another, if any of those coal transactions were denominated in dollars, paid to one of the blocked North Korean coal exporters, and cleared through the United States, he should unleash the Justice Department, whose aggressive prosecutors have begun to enforce the legalprohibitions against dealing with sanctioned North Korean entities strictly. The fact that Congress is keeping the pressure on and tightening the coal ban further will also help. It will take more of that strict enforcement to make the coal ban stick.
Last Friday’s post was not the first time I’ve criticized the Trump administration for the inadequacy of its recognition that America shares common interests with the North Korean people in a less murderous North Korean government. I’ve also criticized the inadequacy of the administration’s public diplomacy advocating for those common interests. Long-time readers know I also criticized the last president and the president before that one. But shortly after I published Friday’s post, as if on cue, the State Department issued a new reportdetailing Pyongyang’s censorship and other abuses of the people. I couldn’t have been more pleased to be refuted. State’s report even drives home the essential point that Pyongyang’s pursuit of the means to terrorize us is inseparable from its acts to terrorize its own people. Someone gets it.
This report continues to shine a spotlight on the serious human rights abuses committed by the Government of North Korea, including those involving extrajudicial killings, forced labor, torture, prolonged arbitrary detention, as well as rape, forced abortions, and other sexual violence inside the country. Many of the country’s human rights abuses underwrite the regime’s weapons program, including forced labor in the form of mass mobilizations, re-education through labor camps, and overseas labor contracts. Thousands of North Koreans are sent abroad every year to work in slave-like conditions, earning revenue for the regime. [U.S. State Dep’t]
The report then names and shames individual top officials of the Military Security Command, the Ministry of the Peoples’ Security (MPS), the Ministry of Labor, and a construction company that employs forced labor.
And the report did, indeed, “shine a light” on those abuses. The Wall Street Journal covered the slave labor designations here. The Washington Post covered them here, and published a video report with an exclusive interview of North Korean slave laborers in Mongolia, showing the squalid quarters they’re packed into — living, eating, and shitting together like livestock.
OFAC identified the Military Security Command, also known as the Military Security Bureau or the Korean People’s Army Security Bureau, pursuant to E.O. 13722 as an agency, instrumentality, or controlled entity of the Government of North Korea or the Workers’ Party of Korea. OFAC also designated Jo Kyong-Chol, the Director of the Military Security Command, and Sin Yong Il, the Deputy Director of the Military Security Command, pursuant to E.O. 13687 for being officials of the Government of North Korea. According to the Department of State, the Military Security Command monitors military personnel for anti-regime activity and investigates political crimes in the military, and it has been described by the United Nations Commission of Inquiry as “the military’s own secret police.” [U.S. Treasury Dep’t]
This represents a strategically smart attack on the military’s immune system against rising — and increasingly violent — dissent among the enlisted ranks. If the MSC can’t pay its cadres, those cadres will have no choice but to neglect their duties and turn to bribery or smuggling to get by, internal discipline will continue to weaken, and Pyongyang will see that time is not on its side.
An even more welcome designation, coming just as the President prepares to leave for Beijing, was this one:
OFAC designated Ri Thae Chol, the Democratic People’s Republic of Korea (DPRK) First Vice Minister of the Ministry of People’s Security, Ku Sung Sop, Consul General in Shenyang, China, and Kim Min Chol, a diplomat at the North Korean Embassy in Vietnam, pursuant to E.O. 13687 for being officials of the Government of North Korea or the Workers’ Party of Korea. Ku Sung Sop and Kim Min Chol are also associated with the Ministry of State Security and, according to the State Department, have participated in the forced repatriation of North Korean asylum seekers. On July 6, 2016, OFAC designated the Ministry of State Security and the Ministry of People’s Security pursuant to E.O. 13722 for having engaged in, facilitated, or been responsible for an abuse or violation of human rights by the Government of North Korea or the Workers’ Party of Korea. [U.S. Treasury Dep’t]
No previous administration has ever sanctioned anyone for involvement in the inhumane and illegal repatriation of North Koreans from China to Kim Jong-un’s gulag. The administration deserves particular commendation for doing this, especially now.
~ ~ ~
Shortly after the announcement of these designations, Isaac Stone Fish criticized them as disingenuous efforts to attack Pyongyang’s proliferation by back-handed means. Isaac may be struggling, as many others are, to separate his judgment of a polarizing president’s policies from his judgment of the President himself. But in this case, the policy decisions were right, and they had overwhelming bipartisan support from the Congress that mandated them.
The same was true in July 2016, when the Obama administration, almost certainly with the knowledge of the President himself, designated Kim Jong-un for human rights abuses. Administration officials told me at the time that this decision was imminent regardless of Congress’s actions, but it did not happen until the coming of a statutory deadline in a law Congress passed by a veto-proof, nearly unanimous vote. Politically, President Obama had little choice but to sign the law. Title III and section 104(a) of that law, the North Korea Sanctions and Policy Enhancement Act, required the President to investigate North Korean officials responsible for human rights abuses, designate them, and impose a series of serious sanctions on them. Now it is the Trump administration that must comply.
That’s why we shouldn’t view the new human rights sanctions against North Korea through a partisan lens. I write as one with first-hand knowledge of exactly what motivated the Republican and Democratic staffers who drafted the legislation that mandated those sanctions. Their motives did not arise from partisan conflict, but from humanitarian compassion and institutional conflict. Congress writes forcing mechanisms into sanctions laws because it has lost confidence in the State Department to do what our elected representatives want it to do — to attach financial, diplomatic, and political consequences to Pyongyang’s crimes against humanity.
Chairman Ed Royce, whose views are shaped by his father’s presence at the liberation of Dachau, and who probably has more influence on North Korea policy than anyone in Washington today, has long spoken with sincere passion about human rights in North Korea. So have his many Korean-American constituents. Ranking Member Elliot Engel is the grandson of Jewish immigrants from the Ukraine. Engel must be conscious of the fact that his immigrant ancestors left behind communities that were later exterminated during the Holocaust. I know I’ve had similar thoughts about the communities my own ancestors left behind in Belarus and Hungary. Those thoughts have helped to motivate me to write here for more than a decade.
Royce was also one of the strongest critics of George W. Bush’s 2007 agreement to lift sanctions against Pyongyang, while sidelining human rights and effectively nullifying the North Korean Human Rights of 2004. In the short term, State protected its prerogative to do nothing with great skill and guile. But in the long term, the price State paid was a loss of confidence that still endures in the form of forcing mechanisms that divest it of that discretion. We learned some bitter lessons from the North Korean Human Rights Act. One of them was to write basic human rights conditions for the lifting of sanctions into the statute itself.
In 2004, it was easier legally, politically, and diplomatically to sideline human rights. Today, Congress is far less likely to overlook it, the U.N. continues to talk about it, and NGOs and journalists — with the obvious exception of the New York Times — are paying more attention to it. Pyongyang may protest at the mention of human rights as though it fears for its very survival, and some in the State Department may view Pyongyang’s objections as obstructions to their myopic goals, but this is not an issue that will go gently away.
Chinese police arrested several North Koreans dispatched to Beijing on suspicion of plotting to murder Mr Kim Jong Un’s 22-year-old nephew, South Korea’s JoongAng Ilbo newspaper reported.
Two of seven North Korean agents were arrested over the alleged plot to kill Mr Kim Han Sol, whose father Kim Jong Nam was assassinated in Malaysia earlier this year, the newspaper said, citing an unidentified person familiar with North Korean issues.
Some agents are being interrogated in special facilities on the outskirts of Beijing, the paper said, without elaborating on whether the other five were arrested. China’s Foreign Ministry did not immediately respond to a faxed request for comment. [Bloomberg, crediting the Straits Times]
Let’s review the elements of “international terrorism:” To qualify, the conduct must be —
1. an act of, an attempt at, or a threat of violence,
2. that is unlawful where it was or would have been committed,
3. involves the citizens or territory of more than one country,
4. is carried out by clandestine agents or subnational groups, and
5. is done with the apparent intent* to influence the conduct of a government or a civilian population.
For a list of recent North Korean state-sponsored attempts to assassinate human rights activists and dissidents in exile, I’ll refer you to my report for HRNK. (You don’t have to read all 100 pages. The table of contents will direct you to the appropriate section.) This week, when Thae Yong-ho testifies — under extraordinarily tight security — before the House Foreign Affairs Committee, I hope the members will ask him about this latest report. I hope they’ll ask him how reports like this make him feel about his own safety and the safety of his family. I hope they’ll ask him just what message he thinks Kim Jong-un is trying to send by dispatching these terrorists, how he intends to respond, and whether he will remain silent. What message do you suppose Secretary Tillerson will send to Thae and other North Korean dissidents in exile if he, like his predecessors, refuses to call North Korea a state sponsor of terrorism?
So, to summarize, Secretary Tillerson should re-list North Korea because —
1. North Korea has repeatedly sponsored acts of international terrorism, and the American people have an interest in having a government that tells them the truth.
2. To begin restoring the State Department’s badly damaged credibility in Congress, which suffers every time State refuses to re-list Pyongyang. In last week’s post, I cited a number of op-eds and a letter from several members of the House of Representatives calling for Pyongyang’s re-listing. I neglected to link to this letter, signed by 12 U.S. senators of both parties.
3. To send a message of support to dissidents in exile like Kim Han-sol, Thae Yong-ho, Park Sang-hak, Lee Hyeon-seo, and others.
4. To send a message to Pyongyang that we are not afraid to attach, and are determined to attach, consequences to its crimes.
5. To further tighten existing sanctions. In addition to the potential civil liability and securities law consequences I wrote about last week, there’s another important point I forgot to mention. Re-designating Pyongyang would close a loophole in our sanctions by unlocking the stricter sanctions regulations in 31 C.F.R. Part 596. That regulation unambiguously requires an OFAC license for any dollar transactions or transactions by U.S. persons with a government that’s listed as a state sponsor of terrorism.
Why does that matter? Because the existing North Korea Sanctions Regulation (NKSR) at 31 C.F.R. 510, in my view, does not do that. It hasn’t been updated since 2011 — two statutes and three executive orders ago. Instead, the NKSR prohibits “[a]ll transactions prohibited pursuant to Executive Order 13466,” 13551 (which potentially applies to anyone involved in Pyongyang’s arms trafficking, proliferation, and money laundering, but in reality only applies to a few people who’ve been designated under this EO), 13570 (which requires a license for most imports from and exports to North Korea).
But to see how vague, circular, and Kafkaesque this regulation really is, you have to see what 13466 covers: any property that was already blocked until 2008, when President Bush took North Korea off the terror list and canceled Trading With the Enemy Act sanctions. That appears to include only property that was blocked in 2008. Maybe Treasury would disagree. Then again, maybe if it tried to sanction or prosecute anyone for violating the NKSR — and with a single exception, it never has — a competent defense attorney would argue that the regulation is ambiguous on its face, and that under the rule of lenity, the court should construe any ambiguity in favor of the accused. The courts will not give Chevron deference to an agency’s interpretation of a regulation for purposes of imposing a criminal punishment. Part 510 is so vague in its wording, circular in its reasoning, and outdated in its incorporation of authorities that not even I could tell you what it really means, and reporters and government officials routinely ask me what these laws and regulations mean. Why wouldn’t a banker or trading company official in Dandong be able to make the same argument?
If our government is serious about “maximum pressure,” some clarity would be useful.
The State Department worries about how Pyongyang would react to a re-listing. There will be tantrums, paroxysms, and provocations, of course. That’s derigeur for Pyongyang, but provocations are inevitable, for one excuse or another, regardless of what Tillerson decides. What Tillerson can better control is whether he will also face a tantrum from Congress. Regardless of which convenient excuse it may seize on, Pyongyang engages in provocations to achieve political and diplomatic aims, and tests weapons to advance technical capabilities. Our objective should be to demonstrate to Pyongyang that attacks on our interests carry real consequences. An SSOT re-listing will carry both financial and symbolic consequences.
~ ~ ~
* Previously said “attempt.” Since corrected.
~ ~ ~
A reader’s question causes me to clarify a few points. First, Treasury’s FAQs say that financial transactions through the U.S. with North Korea require a license. Second, EO 13570, which is appended to the NKSR en toto, bans the export of “services” to North Korea, and the case law supports the position that clearing dollar transactions through the U.S. is an export of services. EO 13722, which is not appended to the most recent version of the NKSR published by the Government Printing Office online, also contains similar language.
But that’s far from intuitive or unambiguous enough for many of the persons who might consider dealing with North Korea. Even a briefreviewof whatfinancialflows the Justice Department and the U.N. Panel of Experts have exposed in recent months shows that we haven’t made this nearly clear enough to the financial industry. Perceptions can become realities. EO 13810 made it much clearer, of course, but why not make the text of the regulation itself clear? Heck, we have four sets of sanctions regulations for Iran. You’d think having one set of clear sanctions regulations for North Korea isn’t too much to ask. The relative attraction of Part 596 is that at least it’s clear to everyone. Sorry for the wonky tangent.
~ ~ ~
Update, Nov. 4: The original Joongang Ilbo report is now available in English. It cites an unnamed source. The South Korean National Intelligence service officially says that it has no knowledge of the plot. Separately, it told KBS that Kim Jong-nam is safe in a third country and questioned the veracity of the Joongang Ilbo’s report on the basis that Kim Han-sol isn’t in China. The NIS may have sound reasons to doubt this anonymous report. It may also be under political pressure from Moon Jae-in’s cabinet to avoid implicating Pyongyang in its latest attempted act of terrorism. But the fact that Kim Han-sol isn’t in China — assuming that’s true — is probative of nothing. Regardless of where Han-sol is living, one naturally would expect the North Korean agents to transit through China. After all, most flights out of Pyongyang transit through there, many of its agents reside there, and so does most of its cash.
Namibia (or as some refer to it locally, Nambia) has long been one of Africa’s worst violators of UN sanctions against North Korea, including by hosting an arms factory run by Mansudae Overseas Projects Group, in violation of an arms embargo that has been in effect since the adoption of UNSCR 1718 in 2006. It has also been a major consumer of North Korean slave labor (the export of which was only recently truncated by UNSCR 2375) and statues (also a recent ban, under UNSCR 2321). Mansudae itself was subsequently designated in UNSCR 2371. Because this commerce invariably caused dollars to change hands, this also meant that North Korean money launderers based in South Africa transited to and from Windhoek and made use of Namibian banks and a South African insurance company.
To add to the corruption of cherished institutions, I was even distressed to see some of Mansudae’s construction make a brief cameo in an episode of “The Grand Tour.”
The exposure of these illicit relationships began with the U.N. Panel of Experts’ report in March 2016. Because Namibia is functionally a one-party state that nonetheless has a vigorously free press, my own first post on its violations of the sanctions and potential consequences under U.S. law went viral in Namibia (see update). This was followed by some outstanding investigative reporting by Namibian journalist John Grobler for NK News, and sharp criticism in the Namibian press. The Namibian government initially pretended as if it was winding up those relationships, but in retrospect, it was probably just stalling for time until things settled down.
Now, CNN has added its own outstanding investigation to our information about North Korea and Namibia. Click the image to watch its video report.
One interesting detail in CNN’s report is that Namibia is a recipient of U.S. foreign assistance. Unfortunately for Namibia, under section 203 of the NKSPEA, as amended by section 313 of the KIMS Act, it now becomes ineligible for certain categories of U.S. assistance. Second and more acutely, now that there can be no doubt that its violations were knowing, continued violations subject the Namibian Defense Ministry to the mandatory asset freezes of NKSPEA section 104(a)(9).
The Namibian government clearly wants us to believe that it has terminated its relationships with North Korea. The speedy disappearance of the North Korean workers and its claims to CNN are unconvincing in this regard. They are also unconvincing to Hugh Griffiths of the U.N. Panel, who takes the extraordinary step of appearing in CNN’s broadcast to say so. U.N. sanctions don’t enforce themselves. It’s time for Namibia to come clean with the U.N. Panel, or to be made an example of.
Previously, I’ve written about the C4ADS investigation that exposed the Sun Sidong network, and that network’s role in money laundering and arms smuggling for North Korea, most notably the seizure of the Jie Shun arms shipment in Egypt. Shortly after the release of C4ADS’s report, Treasury froze the assets of one of Sun’s companies, Dandong Zhicheng Metallic Materials, and the Justice Department filed a civil forfeiture suit against $4 million of its assets. Now, the Wall Street Journal reports that Sun is under FBI investigation:
The FBI has been looking into Mr. Sun’s U.S. connections to potentially illegal transactions with North Korea, according to one person familiar with the investigation. Another person said the FBI has inquired about a personal U.S. real estate deal involving Mr. Sun, and a third person said Mr. Sun was on the FBI’s radar. Neither Mr. Sun nor his businesses are officially sanctioned by the U.S. [WSJ]
One of Mr. Sun’s companies and a company owned by his sister, Sun Sihong, have each been listed as owners of a cargo ship, the Jie Shun, that the United Nations said was seized off Egypt’s coast last year and found to be hiding 30,000 rocket-propelled grenades under piles of iron ore.
At the time of the seizure, the ship was owned by Ms. Sun’s Hong Kong-based company, Vast Win Shipping, and it had been previously owned by Mr. Sun’s Hong Kong-based company, Jie Shun Shipping Co., according to the Equasis shipping database and Hong Kong corporate records. Ms. Sun declined to comment. [WSJ]
In related news, Vietnam recently expelled the local Vast Win representative, describing it as a subsidiary of North Korean shipper Ocean Maritime Management, which was designated by the UN and the US over a 2013 arms shipment, also in violation of the UN embargo. Vietnam also denied visas to 20 North Korean “IT workers.”
Anyway, so much for the theory (or guess) advanced by “experts” that North Korea’s Chinese enablers were shadowy, isolated, inscrutable, and sanctions-proof.
Mr. Sun has had assets in the U.S. as well—he sold a four-bedroom house in Great Neck, N.Y., in August for $1.1. million, according to real-estate records and people involved in the transaction.
By C4ADS’s reckoning, Sun’s network may have been Pyongyang’s most important portal into the Chinese (and thus, the global) economy. I don’t expect most of these enablers to have physical assets in the U.S. like Sun had, but I do expect all of the major ones to require access to the dollar system.
Mr. Sun is linked in Chinese corporate records to several other firms registered in Hong Kong and mainland China. He also is listed in U.S. public records as the chief executive of Dongyuan Enterprise, a Flushing, N.Y.-based firm. That company successfully applied for a U.S. work visa last year for another Chinese national, its director, according to Labor Department records. Dongyuan Enterprise didn’t respond to repeated requests for comment.
Dongyuan Enterprise shipped 42,000 pounds of apples from South Korea to the U.S. in January, according to Descartes Datamyne, an international trade-data provider. It also shipped $35,000 worth of “used furniture” from one of Mr. Sun’s Chinese firms to the U.S., in March.
Mr. Sun’s U.S. business might allow him to do transactions around the world without any obvious ties to his China-based, North Korea-focused dealings, said C4ADS’s research chief, David Lynch. It could also provide him with the ability to register for business services within the U.S., including bank accounts to transfer funds internationally and overseas trade, Mr. Lynch said. [WSJ]
I don’t know anything more about this investigation against Sun than you do, but the conduct described here suggests an investigation for money laundering and violations of the International Emergency Economic Powers Act. I suppose we’ll also see a forfeiture action of some kind, listing the real property or proceeds of the sale as “proceeds” of criminal activity. If Sun Sidong runs back to China and the authorities there won’t extradite him, that may be the only way to impose any meaningful accountability on him.
As I’ve mentioned previously, this has been a busy month for me, and a difficult one for keeping up with the many developments in North Korea sanctions enforcement. Over the last months, I’ve been keeping a tally of how those efforts are taking shape. The accumulating evidence now gives reason for guarded optimism that at last, the sanctions are starting to show significant effects.
Financial. Treasury Undersecretary Sigal Mandelker sent the right message to the financial industry in her recent testimony before the Senate Banking Committee:
Banks worldwide should take note that we are acting to protect the U.S. financial system from North Korean illicit financial activity.The new authorities granted to the Treasury Department by the Executive order issued last week give us even greater ability and leverage to target foreign banks that support the Kim regime.We now have the ability to suspend correspondent account access to, or designate and freeze the assets of, any foreign financial institution that knowingly conducts significant transactions in connection with any trade with North Korea or on behalf of any North Korea-related designated person.These new financial sanctions will be forward looking, and will apply to behavior that occurs following the date of the Executive order.These types of sanctions were used to great effect in the Iran context, and present a stark choice to banks around the world.
Treasury took an important step late last month when it designated most of the remaining active North Korean banks (see the list in this post for reference). The designation of North Korea’s Central Bank, which issues its currency and has historically sold gold overseas, could be the most significant. But the designation of 26 individual North Korean bankers, trade representatives, and diplomats (read: money launderers and arms dealers) also matters, because banks everywhere now have a legal duty to close and/or freeze their accounts. Targeting these operatives in larger numbers makes it harder for the regime to react and shift funds to other operatives. The regime probably can’t replace these operatives and their valuable contacts faster than we’re designating them now.
Financial sanctions are also having second-order effects. The decision by China National Petroleum to stop selling fuel to North Korea reflects a concern that Pyongyang can’t pay for it, although Beijing has historically supplied fuel to Pyongyang through a cross-border pipeline, free of charge, and without reporting it in its official trade statistics.Last month, I noted that banks in China were freezing or closing North Koreans’ accounts.
In late September, China reportedlyordered joint ventures with North Korea to shut down. Since then, other reports have suggested that NorthKoreanworkers are returning from China in large numbers — despite the fact that U.N. sanctions allow those workers to complete their three-year contracts — and multiplereportssuggest that Chinese businesses that relied on the cross-border trade have been hurt or idled. In Russia, too, North Korean money launderers are having trouble remitting funds.
Although most press reports have assumed that these developments were the result of Beijing ordering Chinese firms to comply with U.N. sanctions, I’ve theorized that the actual reason for these changes may be, as one Chinese trader put it, that their North Korean partners “can’t pay us.” That is most likely a consequence of Chinese banks’ fear of losing their access to the dollar system. Chinese firms may also be concerned that products made with North Korean labor or materials will lose their access to U.S. markets, or that millions in profits may be frozen in correspondent accounts.
Historically, actions by Beijing have tended to generate optimistic headlines until, a few weeks later, we’d learn that its actions weren’t being enforced. It’s too early to conclude that this trend will continue, but it bears watching.
Lawmakers like Senator Cory Gardner (R, CO) and Ed Markey (D, MA) recently introduced new legislation to toughen the sanctions even more, and to emphasize human rights — a key component that has been missing from our diplomatic efforts to build a global coalition. It’s good that they’re keeping the pressure on, and offering this useful course correction. Legislation is one way to do that, but another is to demand regular classified briefings, which means that congressional committee staffs need more staffers with the right clearance levels.
Diplomatic.A month ago, I aggregated the evidence that State’s efforts to isolate North Korea diplomatically — efforts that only began in the final weeks of the Obama administration, and that began to increase last spring — were starting to pay off. Spain, Mexico, Italy, Kuwait, and Peru all cut diplomatic relations with North Korea. Poland, the Philippines, Malaysia, India, the Sudan, Taiwan, Vietnam, and Egypt all announced that they would reduce trade relations with North Korea, or expel North Korean money launderers, slave laborers, or arms dealers.
Since the publication of that post, Portugaland the United Arab Emirates have also announced that they would sever relations with Pyongyang. The UAE also joins Kuwait in ending its acceptance of North Korean workers. Treasury’s removal of a number of Sudan designations suggests that the administration believes that Khartoum has also stopped buying North Korean weapons. Malaysia has banned travel to North Korea, and will not be replacing its withdrawn ambassador, in the wake of a brief hostage crisis early this year following the assassination of Kim Jong-nam. The EU has imposed new sanctions that ban oil and gas exports, textile imports, joint ventures and investments, and new work authorizations for North Korean laborers.
Finally, sanctions are, if slowly, taking their toll on the North Korean embassies that remain to sell its weapons and launder its money, by requiring national governments to freeze payments and shut down the businesses the embassies use to fund their salaries and operations. These developments represent not just a loss of multiple revenue sources, but also nodes within a global, interdependent money-laundering network.
Domestic. As state industries have increasingly struggled to meet their quotas, the regime has turned increasingly to the taxation of domestic industry, including small businesses, for its revenue. A new yuan-denominated tax on license plates suggests that even the state may be losing confidence in the North Korean won. That’s not entirely a bad thing, as one consequence of it is that more people gain a greater degree of economic independence from the state, people have more access to the things they need, there are more opportunities for corruption to siphon off more of this revenue, and the tax collection process puts more citizens into conflict with the state and its corrupt petty despots.
Personnel changes within the regime suggest that it may be under financial strain. An unconfirmed South Korean report says that Pyongyang may have replaced the head of Bureau 39. And whereas until recently, people associated with Jang Song-thaek were under suspicion, some are now being promoted. Jang’s network of operatives in China was Pyongyang’s financial root system. Their restoration might — I stress, might — mean that in its financial desperation, the regime is now (at least, temporarily) prioritizing money over loyalty.
Domestically, the regime is increasingly coming into conflict with its people as the regime squeezes them to make up for the loss of revenue, but the regime can only squeeze them so much: first, there is hardly anything left to steal from them; and second, as with the Great Confiscation of 2009, the regime knows that it has historically been economic conflicts with the state that have caused North Koreans to resist it. In the last six months, prices of fuel and othercommodities have risen. South Korea’s National Intelligence Service believes that North Koreans are already disgruntled over the economic effects of sanctions, and that the regime is “conducting a large-scale campaign” to suppress that disgruntlement. None of these developments is irreversible, but for the first time since 2007, there are clear signs that sanctions are starting to take a toll on Pyongyang’s access to the global economy.
Long-time readers know that I’ve had many uncomplimentary things to say about the Associated Press’s North Korea coverage. Its still-undisclosed agreements with the North Korean government to open a bureau in Pyongyang sacrificed journalistic ethics for a dubious dividend of access. Since opening its bureau in 2012, AP and its state-supplied North Korean stringers have reported a great deal of North Korean government propaganda and almost no actual news, while ignoring major news stories (to include a hotel fire, a building collapse, the taking of at least a dozen foreign hostages, and multiple purge rumors).
Careful readers also know that I’ve singled out AP reporter Tim Sullivan as a bright spot in this dreary picture. Like most foreign reporters, Sullivan, who is not a part of AP’s Pyongyang bureau, does his best reporting from outside North Korea. The latest example is his outstanding investigative reporting, along with Seoul-based Hyung-Jin Kim and half a dozen others, finding evidence that Chinese fisheries are smuggling seafood packed by North Korean laborers into U.S. markets.
Through dozens of interviews, observation, trade records and other public and confidential documents, AP identified three seafood processors that employ North Koreans and export to the U.S.: Joint venture Hunchun Dongyang Seafood Industry & Trade Co. Ltd. & Hunchun Pagoda Industry Co. Ltd. distributed globally by Ocean One Enterprise; Yantai Dachen Hunchun Seafood Products, and Yanbian Shenghai Industry & Trade Co. Ltd.
They’re getting their seafood from China, Russia and, in some cases like snow crab, Alaska. Although AP saw North Korean workers at Hunchun Dongyang, manager Zhu Qizhen said they don’t hire North Korean workers any more and refused to give details. The other Chinese companies didn’t respond to repeated requests for comment.
Shipping records seen by the AP show more than 100 cargo containers of seafood, more than 2,000 tons, were sent to the U.S. and Canada this year from the factories where North Koreans were working in China.
Packages of snow crab, salmon fillets, squid rings and more were imported by American distributors, including Sea-Trek Enterprises in Rhode Island, and The Fishin’ Company in Pennsylvania. Sea-Trek exports seafood to Europe, Australia, Asia, Central America and the Caribbean. The Fishin’ Company supplies retailers and food service companies, as well as supermarkets.
American importers and retailers are already cutting their ties with these Chinese suppliers, which may be one reason why Chinese factories are sendingtheirNorth Korean laborers home, despite the fact that new U.N. sanctions (see paragraph 17) allow the workers to serve out their (typically, three-year) contracts.
Often the seafood arrives in generic packaging, but some was already branded in China with familiar names like Walmart or Sea Queen, a seafood brand sold exclusively at ALDI supermarkets, which has 1,600 stores across 35 states. There’s no way to say where a particular package ends up, nor what percentage of the factories’ products wind up in the U.S.
Walmart spokeswoman Marilee McInnis said company officials learned in an audit a year ago that there were potential labor problems at a Hunchun factory, and that they had banned their suppliers, including The Fishin’ Company, from getting seafood processed there. She said The Fishin’ Company had “responded constructively” but did not specify how.
Some U.S. brands and companies had indirect ties to the North Korean laborers in Hunchun, including Chicken of the Sea, owned by Thai Union. Trade records show shipments came from a sister company of the Hunchun factory in another part of China, where Thai Union spokeswoman Whitney Small says labor standards are being met and the employees are all Chinese. Small said the sister companies should not be penalized.
Shipments also went to two Canadian importers, Morgan Foods and Alliance Seafood, which did not respond to requests for comment.
Boxes at the factories had markings from several major German supermarket chains and brands — All-Fish distributors, REWE and Penny grocers and Icewind brand. REWE Group, which also owns the Penny chain, said that they used to do business with Hunchun Dongyang but the contract has expired. All the companies that responded said their suppliers were forbidden to use forced labor. [AP]
The report is long and detailed, and well worth reading in full. The moral and national security hazards should be clear enough, so I’ll devote most of this post to the legal hazards for the companies involved in this trade. Let’s start with this one:
At a time when North Korea faces sanctions on many exports, the government is sending tens of thousands of workers worldwide, bringing in revenue estimated at anywhere from $200 million to $500 million a year. That could account for a sizable portion of North Korea’s nuclear weapons and missile programs, which South Korea says have cost more than $1 billion. [AP]
Of course, there is no direct evidence that the world’s most financially opaque regime is using its slave labor revenues to fund its nuclear program. As with the Kaesong Industrial Complex, however, the importer’s duty under UNSCR 1718, paragraph 8(d), is to know where its money goes, and to “ensure” that Pyongyang is not using it for nukes. Ignorance is no defense, and cash is fungible. A dollar in Pyongyang’s bank accounts can just as well be used for centrifuge parts, barbed wire, cognac, or cell phone trackers.
Second, the U.N. Security Council has recently banned North Korean exports of seafood, and the KIMS Act authorizes sanctions against transactions in North Korean food exports or fishing rights. Transactions in North Korean forced labor are subject to mandatory sanctions under the NKSPEA, as “severe human rights abuses.” By exposing this latest example of China violating U.N. sanctions, the legal and diplomatic pressure on Beijing to enforce the sanctions it voted for increases.
Third, although these authorities are relatively recent, smuggling any North Korean products into the United States has long been a felony. Executive Order 13570, signed by President Obama in 2011, banned all imports of products made with North Korean goods, services, or technology. Because the authority for this executive order is the International Emergency Economic Powers Act, violations of this order are punishable by 20 years in prison, a $1 million fine, a $250,000 civil penalty, and even the forfeiture of any property “involved in” that transaction. The exporter also faces the risk of designation by the Treasury Department, which would freeze any assets that enter or transit the United States.
Fourth, Chinese fisheries that use North Korean laborers may face additional sanctions under the Trafficking Victims Protection Act.
The workers wake up each morning on metal bunk beds in fluorescent-lit Chinese dormitories, North Koreans outsourced by their government to process seafood that ends up in American stores and homes.
Privacy is forbidden. They cannot leave their compounds without permission. They must take the few steps to the factories in pairs or groups, with North Korean minders ensuring no one strays. They have no access to telephones or email. And they are paid a fraction of their salaries, while the rest — as much as 70 percent — is taken by North Korea’s government.
This use of North Korean labor also puts a powerful sanction in the hands of the U.S. fishing industry. Recall that in this post, I wrote about the similar problem of Chinese textile factories smuggling clothing made by North Korean workers, or using North Korean materials, into the United States, and noted how U.S. textile manufacturers have taken advantage of an obscure Customs regulation to bar Uzbek cotton* exports from entering U.S. commerce if those products may be made by convict or forced labor.
It’s unknown what conditions are like in all factories in the region, but AP reporters saw North Koreans living and working in several of the Hunchun facilities under the watchful eye of their overseers. The workers are not allowed to speak to reporters. However, the AP identified them as North Korean in numerous ways: the portraits of North Korea’s late leaders they have in their rooms, their distinctive accents, interviews with multiple Hunchun businesspeople. The AP also reviewed North Korean laborer documents, including copies of a North Korean passport, a Chinese work permit and a contract with a Hunchun company.
When a reporter approached a group of North Koreans — women in tight, bright polyester clothes preparing their food at a Hunchun garment factory — one confirmed that she and some others were from Pyongyang, the North Korean capital. Then a minder arrived, ordering the workers to be silent: “Don’t talk to him!” [AP]
Under section 321 of the KIMS Act, products made with North Korean labor now face a rebuttable presumption that they are made with forced labor, which means that Chinese seafood exports made with North Korean labor (whether inside or outside North Korea) could end up spoiling in warehouses or running up storage charges while the petition process runs its course. That, in turn, will incentivize bankers and insurers to do due diligence to ensure that Chinese exporters cleanse their supply chains of North Korean labor.
The reputational cost of using North Korea labor or materials may be just as effective as any legal sanction.
Every Western company involved that responded to AP’s requests for comment said forced labor and potential support for North Korea’s weapons program were unacceptable in their supply chains. Many said they were going to investigate, and some said they had already cut off ties with suppliers.
John Connelly, president of the National Fisheries Institute, the largest seafood trade association in the U.S., said his group was urging all of its companies to immediately re-examine their supply chains “to ensure that wages go to the workers, and are not siphoned off to support a dangerous dictator.”
“While we understand that hiring North Korean workers may be legal in China,” said Connelly, “we are deeply concerned that any seafood companies could be inadvertently propping up the despotic regime.” [AP]
And lastly, lest this point be missed amid the other reasons to be outraged, North Korea’s poor have a severe protein deficiency in their diet. Why is Pyongyang allowed to export its main source of protein for cash while most of its people are malnourished?
~ ~ ~
* Previously said “Chinese seafood.” Since corrected.
Donald Trump hit Kim Jong-un with his first sanctions executive order today. (Update: Its official number is Executive Order 13810.) The new EO partially implements UNSCR 2371, UNSCR 2375, and the KIMS Act, which the President signed in August. As a strictly legal matter, this EO will not affect anyone’s interests immediately because Treasury didn’t announce any new designations. As a practical matter, however, we may already be seeing the effects of the clear seriousness of purpose that Trump hasalreadyshown. You can read the full text here and a White House fact sheet here.
The New Authorities: A Summary
The new provisions broaden the administration’s authority to designate (and thus, freeze any assets within U.S. jurisdiction of) entities that engage in the conduct described below:
(i) Sectoral sanctions against anyone determined “to operate in the construction, energy, financial services, fishing, information technology, manufacturing, medical, mining, textiles, or transportation industries in North Korea.”
Treasury previously authorized sectoral sanctions against anyone operating in North Korea’s the mining, energy, transportation, and financial services industries. The newly designated industries include those sanctioned under the new U.N. resolutions and the KIMS Act. Sanctions on the medical industry are a notable exception. This will draw gasps of horror from some, but remember, there’s still a humanitarian general license that exempts “medicine distribution” and “the provision of health services.” Section 7 of the EO exempts UN operations entirely. So why say “medical” at all? The feds may suspect Pyongyang of hiding behind “medical” uses to make biological weapons, but that’s only a guess.
(ii) Shipping sanctions against anyone who owns, controls, or operates any seaport, airport, or land port of entry in North Korea.
(iii) Import-Export: “to have engaged in at least one significant importation from or exportation to North Korea of any goods, services, or technology.”
Executive Order 13570 previously banned unlicensed imports and exports between the United States and North Korea. This provision, by contrast, bans any transactions through the U.S. financial system, or by U.S. persons, that facilitate imports to or exports from North Korea by anyone, to or from any country. In effect, if you trade with North Korea now, you have to use a non-dollar currency or get an OFAC license.
(iv) Status-based: “to be a North Korean person, including a North Korean person that has engaged in commercial activity that generates revenue for the Government of North Korea or the Workers’ Party of Korea.”
This effectively cuts the Gordian Knot around the spurious claims of China (or this one, by Tanzania) that the North Koreans they’re dealing with aren’t representatives of the North Korean government. Hopefully, Treasury will now start mining names out of the U.N. Panel of Experts reports and designating the members of Pyongyang’s overseas proliferation and money laundering networks, thus putting the banking industry on notice to freeze their accounts.
I’m glad Treasury exempted North Koreans (including refugees) who are legally in the United States. I would have preferred that Treasury had clarified that North Korean refugees in Europe and South Korea are also exempt. I realize that Treasury has no intention of enforcing sanctions against refugees in England or South Korea — and I hope the banks realize this, too. Some clarifying guidance from Treasury might be useful. Refugees in South Korea, in particular, often keep their family members alive by remitting money to them. As I’veargued before, remittances might be a rare case of financial interaction with North Korea that actually does drive reform, by helping the poor start businesses and achieve financial independence from the state. Thankfully, a general license covers noncommercial, personal remittances.
Things start to get more interesting in Section 2, which provides for a secondary boycott on ships and aircraft. Under the EO, any ships or aircraft that have been in North Korea in the last 180 days can’t land in the United States. This both overlaps with and complements section 315 of the KIMS Act. It is also the same concept that Japan and South Korea had previously applied to North Korean ships, meaning that ships that visit North Korea will now incur a six-month ban from the waters of China’s three largest trading partners. Furthermore, any ship that has done a ship-to-ship transfer with a ship that has been in North Korea in the last 180 days also gets banned from U.S. ports for 180 days. Shipping trackers suggest that a fair number of these transfers are happening off the Chinese coast. A concern, however, is that the existing humanitarian general license may not cover shipments of commercial food imports (which we should want to encourage).
Section 3 contains some very tough secondary financial sanctions. Section 3(a) freezes any funds controlled by a “North Korean person,” or in which a North Korean person as an interest. This is very powerful — much like its ancestor, section 104(c) the NKSPEA, which blocks all property of the “Government of North Korea,” a term that the NKSPEA defines in roughly similar terms to this EO’s definition of “North Korean person.” The EO also extends the blocking to any person who finances, approves, facilitates, or guarantees a transaction that would be frozen under this paragraph.
Section 4 contains some additional penalties that are tailored to the financial industry. Any person who knowingly conducts or facilitates a transaction in property blocked under a North Korea-related executive order, or who knowingly conducts or facilitates a significant transaction in trade with North Korea, can lose access to the U.S. financial system. That potentially means no correspondent accounts, or the freezing of all of the bank’s assets in the United States. This amounts to a mini Patriot Act section 311 just for North Korea. And of course, banks that knowingly deal with Pyongyang could also face prosecution for money laundering, criminal or civil forfeitures, or the kind of civil penalties that were applied to BNP Paribas for violating Iran sanctions.
Which is to say, this section mostly does what section 104(b) of the NKSPEA does, now that President Trump has signed the KIMS Act section 311 amendments into law.
We sound like we really mean it this time.
The effects of previous, strong-on-paper EOs fell short of their potential because President Obama never showed the world that he was serious about enforcing them (or rather, until the very end of his administration, he showedthe world that he wasn’t serious about enforcing them at all). Let no one accuse Donald Trump of indecision or paralysis.
“A new executive order will cut off sources of revenue that fund North Korea’s efforts to develop the deadliest weapons known to humankind,” Trump said at the start of a trilateral luncheon meeting with South Korean President Moon Jae-in and Japanese Prime Minister Shinzo Abe in New York….
Trump said China’s central bank had just told the country’s other banks to “immediately” stop doing business with North Korea, and thanked Chinese President Xi Jinping for that “unexpected” decision.
“For much too long North Korea has been allowed to abuse the international financial system to facilitate funding for its nuclear weapons and missile programs,” he said. [Yonhap]
Take note, humanity: Donald Trump just said the right thing in the right tone, and it all appears to be true, right down to “unexpectedly.” Then, Treasury Secretary Steven Mnuchin said this at the U.N., just to be sure the whole world heard him:
For far too long, North Korea has evaded sanctions and used the international financial system to facilitate funding for its weapons of mass destruction and ballistic missile programs. No bank – in any country – should be used to facilitate Kim Jong-un’s destructive behavior.
This new Executive Order will authorize Treasury to impose a range of sanctions, such as suspending U.S. correspondent account access to any foreign bank that knowingly conducts or facilitates significant transactions tied to trade with North Korea or certain designated persons.…Foreign financial institutions are now on notice that, going forward, they can choose to do business with the United States or with North Korea, but not both….
We call on countries around the world to join us by cutting all trade and financial ties with North Korea in order to achieve a denuclearized Korean peninsula. [link]
Finally, in a conference call this afternoon, a senior National Security Council official and a senior Treasury Department official (whom we weren’t allowed to name) emphasized the administration’s seriousness. Some key points:
This EO goes further than any other sanctions EO — implicitly, including even Iran. He might be right. I might have to shelve my “not the most sanctioned” refrain, assuming the administration enforces this.
Treasury will unravel the front companies and shell companies to get to any shipping company that smuggles to or from North Korea in violation of this EO.
Treasury is investigating financial institutions that have been involved in facilitating trade with North Korea, and will start enforcing this EO in the near term.
Treasury won’t only enforce the EO against Chinese banks. Before the President signed the EO, the administration discussed it with EU, Japanese, and South Korean officials. Oh, and Treasury would really like the South Koreans to use the full extent of their legal authority to publish their equivalent of SDN designations of North Korean enablers.
Also, it welcomes the investigative work of NGOs, specifically C4ADS (which single-handedly exposed much of Pyongyang’s money laundering network in China). I hope that means the government will offer them grant funding or rewards, as authorized in section 323 of the KIMS Act. (Leo Byrne and The Beard of Knowledge also received well-deserved praise.)
Today, Reuters reports that the Chinese government has directed its banks to stop dealing with North Koreans entirely, to include winding down loans with existing customers. If that’s true — and if it lasts — that will be fatal. The timing is curious. One of the “senior administration officials” said that President Trump had only notified President Xi about this EO today, yet the reports of the alleged Central Bank order — the bankers say they received it Monday — come a week after multiple press reports of Chinese banks closing North Korean-controlled accounts. Could Beijing be making a virtue of necessity by ordering banks to do what they’re already doing for their own sake? As I’ve said before, there isn’t just one “China.” Various ministries and industries have diverse and conflicting interests.
This week, President Trump acted strongly, decisively, publicly, and with a deliberate seriousness of purpose. Banks and governments around the world will disregard his words at their peril (meaning, very few of them will). His misbegotten threats against North Korea (as opposed to its regime) shouldn’t distract us from what he did right, if only because his predecessors could not do it right. His words and actions, and in tandem with other governments’ actions to cut their trade and diplomatic ties to North Korea, should be difficult for Pyongyang to withstand for long. We may soon conclude the sanctions-never-work portion of our narrative and enter the sanctions-are-starving-North-Korean-babies portion of our narrative fairly soon. In fact, it looks like we alreadyhave.
The reviews of Rex Tillerson are in, and most of them aren’t good. We could have predicted this ten months ago; after all, most of the commentariat harbors center-left or pro-“engagement” views and it wasn’t going to agree with Trump’s policies anyway. Still, it’s hard for me to accept at face value the criticisms of those who have defended, to varying degrees, the self-evidently disastrous North Korea policies of Barack Obama and second-term G.W. Bush — policies that have more similarities than differences. It’s an additional challenge to separate one’s views of this President and his Twitter habits from an assessment of his North Korea policies, or how competently his administration has executed them. Still, one can agree with Trump’s decision to break from the failed policies of his predecessors, which brought us to this crisis, and still acknowledge that some of the criticism has merit. Overall, this administration is getting more things right than its predecessors did, but let’s start with the areas that need improvement.
~ ~ ~
First, an effective Secretary of State speaks articulately for his country. Tillerson isn’t a vocal or charismatic advocate of our interests or of the values that serve those interests. I can understand why Tillerson might be more concerned than his predecessors about upstaging his boss, or about saying something his boss might contradict later on Twitter. Maybe the recent diminution of the nationalist wing in the White House will liberate Tillerson, but his reticent personality may also be part of the problem.
The State Department’s hiring freeze, which continues months after it was lifted for the rest of the government, retards the pace at which State can review and approve sanctions designation packages and dispatch envoys to persuade other nations to cut their ties to Pyongyang. I don’t yield to anyone as a critic of the State Department’s performance on North Korea policy or in agreeing that State needs some profound cultural and personnel changes. Agreed Frameworks I and II and the Leap Day Agreement have justly cost it credibility it may never regain. Even so, the President needs a strong diplomatic corps to build a global coalition against Pyongyang and, when the time is right, to know how to leverage that pressure to achieve our core interests in negotiations with our frenemies and our foes. We need good diplomats for both tasks.
Tillerson has also sent mixed signals on its willingness to negotiate with Pyongyang. His recent statement complimenting North Korea for not launching a missile against Guam resulted in a predictable embarrassment — he might as well have dared Kim Jong-un to test a nuke.
Tillerson’s greatest error on North Korea policy, however, has been to overlook the importance of human rights as a key element of U.S. policy, and as an argument for a global coalition against Pyongyang (for more on that point, see this by the Heritage Foundation, no less). Tillerson himself referred to the “moral dimension” of isolating Pyongyang, saying, “These first steps toward a more hopeful future will happen most quickly if other stakeholders in the region and the global security (sic) join us.”
Yet by merging the duties of the Special Envoy for human rights into another full-time position, and by explicitly disavowing any efforts to destabilize the regime, Tillerson is throwing away the very leverage he imagines he’s clinging to when he says, “All options are on the table.” Pyongyang dismisses this as a bluff, but friends whose support we’ll need don’t. It’s our talk about human rights that really terrifies Pyongyang. What Kim Jong-un and his generals see in their nightmares is a day when they’ve lost control of the minds of the North Korean people, and can’t afford to pay, equip, or maintain the security forces to suppress 70 years of grievances from those they’ve cheated, abused, and bereaved.
By ceding human rights, Tillerson is missing an opportunity to build a global coalition around the principles articulated in the U.N. Charter. And no one has a greater need of a persuasive public advocate than a Secretary of State who isn’t one himself. Also, Pyongyang thinks we’re trying to overthrow it anyway. If anyone asks us if we’re encouraging the North Korean people to overthrow His Porcine Majesty, we shouldn’t say we are or that we aren’t. We should just be vague.* Let our frenemies and foes use their imaginations and be afraid of what we’ll do if diplomacy fails.
~ ~ ~
Still, let’s give Tillerson credit where it’s due. He can boast of some successes here that build on the significant gains that Yun Byung-se achieved before Park Geun-hye’s impeachment. He probably deserves some credit for getting two useful resolutions (2371 and 2375) through the U.N. Security Council, although Ambassador Haley and the USUN staff probably deserve most of it. Liberals tend to overestimate the moral authority of U.N. resolutions, while conservatives tend to underestimate their utility in getting wavering, reputation-conscious states to put economic and diplomatic pressure on Pyongyang. In fact, U.N. and U.S. national sanctions are mutually complementary. Neither works very well without the other.
There has also been significant progress toward isolating Pyongyang internationally, consistent with what Tillerson called for in this April 28th speech to the U.N.: first, to implement existing U.N. Security Council resolutions; to suspend or downgrade diplomatic relations with North Korea; and third, to isolate North Korea financially — a request Tillerson delivered with an explicit threat of secondary sanctions.
Recently, State’s efforts to disconnect North Korea’s diplomatic and trade links to the global economy have gained momentum. Start with this post from February and this one from June on Tillerson’s slow start. This post from August documents the first public signs of the administration’s efforts, through the spring and summer, to get southeast Asian nations to cut their ties with Pyongyang. Although State Department people say that much of this work is being done quietly and without publicity, in recent weeks, there have been more public reports that those efforts are starting to pay off — in some cases, because we’re backing them with threats.
8/31: Spain says it will reduce the number of North Korean diplomats in its country.
9/7: Mexico expels North Korea’s ambassador over its latest nuclear test.
9/8: The Philippines’ Foreign Secretary says his country, which had recently become one of Pyongyang’s largest trading partners and a haven for drug dealing and money laundering — including the proceeds of the Bangladesh Bank/SWIFT hack — will end all trade with North Korea.
9/9: Trump and Abe ask the President of France to increase pressure on North Korea.
9/10: Japan’s Foreign Minister asks Qatar to stop using North Korean slave labor, before visiting Saudi Arabia and Egypt.
9/11: Peru announces that it will expel the North Korean ambassador.
9/11: Japan’s Foreign Minister, having failed to extract commitments from Saudi Arabia and Qatar to stop buying slave labor from North Korea, takes his appeal to the Arab League.
9/12: President Trump meets with the Prime Minister of Malaysia, a haven for North Korean money laundering, and says (for what it’s worth) that Malaysia had agreed to stop doing business with Pyongyang.
9/12: Egypt, a major and long-standing North Korean arms client, says it will cut its military ties to Pyongyang after the U.S. withholds an aid payment (more here).
9/18: Vietnam expels another representative of the U.N.-designated Tanchon Commercial Bank.
9/18: Kuwait says it will expel North Korea’s ambassador and reduce the size of its embassy staff from nine to four.
9/28: Poland halts temporary residence and work permits for North Koreans, Sri Lanka restricts visas for North Koreans, Malaysia bans most travel to North Korea.
Reducing North Korea’s diplomatic presence abroad is essential to any campaign of diplomatic pressure, because North Korea’s diplomats do double-duty as arms dealers and money launderers. Of course, some important caveats apply. First, take any government’s promise to cut ties with North Korea with several grains of salt. For example, last November, Sudansaid it would cut its military ties to North Korea, but as of July, the U.S. was still urging Khartoum to keep its promise and threatening to cut aid. Namibia promised to cut its military ties to North Korea, but we later learned that this wasn’t true, either. Second, Rex Tillerson cannot take full credit for this strategy, merely for his part in executing it. In the final months of the Obama administration, State Department official Danny Russel said that the U.S. has asked governments around to “downgrade or sever” their diplomatic relations with North Korea.
I’ve long argued that diplomacy would play a critical role in addressing the collection of crimes and crises collectively known as “North Korea.”The theory I’ve advanced is what I call “progressive diplomacy,” which means that we should build coalitions with friendly and persuadable nations before we attempt to negotiate with hostile ones. Our objective should be to isolate Pyongyang and its allies until we have sufficient leverage for negotiations to have a chance of achieving our interests. Rather than approach Pyongyang now, while its leverage exceeds our own, we should approach friendly states (South Korea, Japan, Canada, the UK, the EU, Singapore, Panama) first and ask them to cut their economic and diplomatic ties to Pyongyang. Our next targets should be wavering states (Malaysia, Zambia, Namibia), then Pyongyang’s more willful enablers (China, Russia) and finally, Pyongyang itself. That sequence maximizes our leverage at each stage of this diplomatic process by approaching hostile states only after they are relatively isolated.
For the last 20 years, we’ve had that sequence entirely wrong. Give Rex Tillerson credit for getting it right, and for what he has done in the last several months to translate that strategy into policy. If the unplugging of Pyongyang’s diplomatic and financial links to the world is starting to cause it pain, and there are growing signs that it may be, I would expect Pyongyang’s provocations to escalate. Contra the pro-engagement critics who characterize each new nuclear and missile test as proof that sanctions aren’t working, it’s at least as likely that those escalating provocations are signs that they are.
~ ~ ~
* I don’t advocate a declared policy of “regime change.” First, what those words mean to most people (as in, invasion) would be disastrous for Korea. Second, it’s no use proclaiming a policy that can’t be explained or defended publicly, and a subversion project would necessarily include overt, covert, and clandestine elements. Our public position should be that nations are obliged to consider what their trade is supporting, that our financial system is closed to those who aid and abet crimes against humanity, that we will prioritize giving the North Korean people freedom of information, and that it is for the North Korean people to decide how they will use that information.
~ ~ ~
7/19: Spain says it will expel the North Korean ambassador.
7/19: Kuwait and Qatar both say they will stop issuing visas to North Korean workers. Qatar reportedly hosts 1,000 workers whose contracts will expire in 2018. Kuwait hosts 3,000 more.
7/19: Taiwan says it will halt oil and LNG exports to North Korea, and will also halt textile imports (as required by UNSCR 2375).
7/22: Taiwan adds that it will end all trade with North Korea. Taiwanese suppliers have previously exported dual-use machine tools to North Korea.
Several news sources are reporting that Chinese banks, particularly in China’s northeast, have started to freeze or close accounts held by North Korean individuals and businesses. The Daily NK, citing unnamed local sources, was the first to report this potentially important development. It says both large state-owned banks (such as the China Construction Bank) and regional banks (such as Pudong Bank) recently banned all North Koreans from opening new accounts and ordered the closure of existing accounts. It also quotes a March 2017 report by Radio Free Asia that “[p]rivate Chinese banks are beginning to close bank accounts held by North Korean nationals” and that “North Korean laborers earning foreign currency in China have been issued an emergency alert.”
Kyodo News, citing “sources familiar with the situation,” says that the new measures have made it “nearly impossible to do business between the two countries.” It reports that the Bank of China, the China Construction Bank, and the Agricultural Bank of China branches in Yanji, have all banned North Koreans from opening accounts. The banks have not yet frozen the accounts, meaning that the North Koreans can still withdraw cash, but they can’t make deposits or remittances. According to an unnamed employee of one of the banks, “This is being influenced by international sanctions against North Korea.”
Kyodo speculates that either “China may have become more serious about curbing its nuclear ambitions,” or that the measures were “intended to help major Chinese banks avoid being hit by sanctions imposed by the United States and other countries,” like the Bank of Dandong was. Interestingly, it also attributes a 75 percent decline in North Korea’s imports of refined petroleum products over three months, and a corresponding rise in fuel prices inside North Korea, to the fact that “North Koreans were having difficulty paying for petroleum product imports because of the banking restrictions.”
Reuters, citing a bank teller in Liaoning, reports that the China Construction Bank “completely prohibited business with North Korea” starting on August 28th. A customer service representative for the Industrial and Commercial Bank of China also told Reuters that the bank “had stopped opening accounts for North Koreans” and (for good measure) Iranians on July 16th, but didn’t explain further. Those dates closely follow a series of forfeiture complaints, seizures, and designations by the Justice and Treasury Departments, most of them targeting financial flows through Chinese banks, involving North Korean front companies, which turn out to be less well hidden than many “experts” had assumed.
The Bank of China, which became a bête noire for Congress much earlier than other Chinese banks over revelations that its Singapore branch willfully helped Chinpo Shipping facilitate money laundering (and indirectly, arms smuggling) for His Porcine Majesty, stopped allowing North Koreans to open accounts at the end of last year. Or so says an unnamed teller at the BoC’s Dandong branch, who adds that the BoC also froze existing North Korean accounts. A teller at the Agricultural Bank of China branch in Dandong also said that BoC was refusing to open new accounts for North Koreans.
The Financial Times also reports that “multiple bank branches,” including those of China’s big five banks, “had imposed a freeze on new accounts” for North Korean individuals and companies, and that some of the banks were also “cleaning out” existing North Korean accounts and banning North Koreans from making new deposits. Officials at all of the banks refused to comment.
Both the FT and the Daily NK note that the banks’ new measures exceed what new U.N. sanctions require, but all of the reports fail to note that these actions would be completely consistent with stricter U.S. financial regulation on North Korean money laundering, along with the aforementioned recent actions by the Treasury and Justice departments, showing that the feds can trace North Korean transactions through specific Chinese banks — including those named in these reports — and are willing to take legal action against them. Some sources told the FT that corporate told them to freeze North Korean accounts in August; others said they were told in January.
Unfortunately, the Daily NK reports that North Koreans affected include not only “consular officials” and state trading companies, but also “laborers,” who may be either illegal (and increasingly scarce) migrant workers or state-contracted slave laborers (the report didn’t specify). Either way, that’s an unfortunate and unavoidable consequence of what would be an extremely important development — if it lasts. The FT quotes a Chinese professor of North Korea studies, who puts a brave face on the actions, saying that the actions benefit China, and that “China takes sanctions very seriously.” Stop laughing, dammit — this is a serious, adult conversation about banking regulation.
~ ~ ~
The FT calls this “unprecedented,” but it really isn’t (of the five news sources I cite here, only the Daily NK gets this). There is, of course, the example of Banco Delta Asia and what we too easily forget — the Bush administration’s global campaign of financial diplomacy that persuaded banks around the world to close North Korean accounts. We now know that that strategy put Kim Jong-Il’s regime under severefinancialstrain, until Bush lost his nerve, lifted the pressure, and exchanged invaluable sanctions relief for a handful of worthless North Korean promises.
Then, in 2013, after Pyongyang’s third nuclear test, after Treasury sanctioned the DPRK Foreign Trade Bank, and after Ed Royce first introduced the bill that would later become the NKSPEA, which mandates secondary sanctions, big Chinese banks began to freeze and close North Korean accounts. It didn’t last, because the banks soon saw that Xi Jinping wanted those accounts open more than Barack Obama wanted them closed. The same pattern repeated itself in early 2016, and again (as Justice Department filings later showed) it was right back to business as usual a few month later, again because the Obama administration wasn’t willing to back its sanctions with enforcement actions.
Is this time any different? The answer depends on why the banks are doing this. As noted, what the banks are doing here doesn’t exactly align with what the U.N. resolutions require, but it aligns perfectly with what I’d expect inexperienced Chinese compliance officers to do to protect their banks from rising legal risks under U.S. banking and sanctions laws. In this post, I explained the importance of distinguishing the interests and actions of the Chinese government from those of individual Chinese banks, which are actually global corporations with global exposure. In other words, “Chinese” banks may be bending to Treasury’s will for the same basic reason that U.S. tech companies have collaborated with Chinese censors. My belief that the Chinese security establishment is fundamentally hostile to U.S. interests and thus willfully weaponizing North Korea remains unmoved. On balance, it seems more likely that the banks are doing this to protect their own reputations, credit ratings, and share prices — just as the Chinese Finance Ministry wants them to, and just as the Defense and Foreign ministries don’t.
Also, when is the last time an American Secretary of the Treasury said anything like this?
“If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system — and that’s quite meaningful,” Mnuchin said during an event at CNBC’s Delivering Alpha conference in New York on Tuesday. [….]
“North Korea economic warfare works,” Mnuchin said. “We sent a message that anybody that wanted to trade with North Korea — we would consider them not trading with us.” [Bloomberg]
Next, read this excerpt from the written testimony of Assistant Secretary of the Treasury Marshall Billingslea before the House Foreign Affairs Committee yesterday. Billingslea first explains that Treasury works closely with U.S. allies, the intelligence community, and the State Department to “conduct detailed forensic investigation and analysis” to “deny North Korea its current, principal source of funds.” He goes on to say that while we prefer to have Beijing’s voluntary cooperation, we’re also perfectly willing to hit Chinese targets we don’t get it.
For instance, on August 22, we struck at the heart of North Korea’s illegal coal trade with China.Treasury designated 16 individuals and entities, including three Chinese companies that are among the largest importers of North Korean coal.We estimate that collectively these companies were responsible for importing nearly half a billion dollars’ worth of North Korean coal between 2013 and 2016.These funds are used to support the Government of North Korea and the Workers’ Party of Korea, including its nuclear and ballistic missile programs.On top of that, we know that some of these companies were also buying luxury items and sending an array of products back to the North Korean regime.On August 22 we sent two clear messages.The first was to North Korea: we intend to deny the regime its last remaining sources of revenue, unless and until it reverses course and denuclearizes.The second message was to China.We are capable of tracking North Korea’s trade in banned goods, such as coal, despite elaborate evasion schemes, and we will act even if the Chinese government will not. [….]
China is even more central to a successful resolution of the crisis caused by Kim Jong-Un.China accounts for at least 90 percent of North Korea’s exports.North Korea is overwhelmingly dependent upon China for both trade and access to the international financial system.China’s full and effective enforcement of UN sanctions is therefore essential.Unfortunately, I cannot assure the Committee today that we have seen sufficient evidence of China’s willingness to truly shut down North Korean revenue flows, expunge the North Korean illicit actors from its banking system, and expel the North Korean middlemen and brokers who are establishing webs of front companies.We will continue to work with the Chinese to maximize economic pressure on North Korea, but we will not hesitate to act unilaterally.If China wishes to avoid future measures, such as those imposed on Bank of Dandong or the various companies sanctioned for illegal trade practices, then it urgently needs to take demonstrable public steps to eliminate North Korea’s trade and financial access. [Treasury Dep’t]
Mr. Billingslea shows great promise. Let’s hope we have the next Stuart Levey or Juan Zarate on our hands, because we’ve never needed one more than we do now.
Of course, it’s The Boss, House Foreign Affairs Committee Chairman Ed Royce, who has been pushing for this strategy for years. Two laws, one presidential election, and three nuclear tests later, Royce looks to have finally gotten his way. Speaking at a hearing of his Committee yesterday, Royce called on the feds to “target major Chinese banks, including Agricultural Bank of China Ltd. and China Merchants Bank Co., for aiding Kim’s regime.” Royce was referring to a letter he sent to Mnuchin listing some of the banks that keep showing up in Justice Department indictments, forfeiture complaints, and seizure warrants as having effectively provided sanctioned North Korean banks with indirect correspondent account services in violation of this Treasury Department regulation, and asked the Treasury Department to sanction them.
Personally, I don’t expect Treasury to do anything as blunt or binary as a total asset freeze or a 311 action to most of those banks (on that point, Billingslea told the Committee that the 311 action on the Bank of Dandong had “a very clear effect” on its operations, but didn’t elaborate). Instead, I expect Treasury to start auditing the big banks and their correspondents for compliance with its new North Korea-specific regulation, with an eye toward civil penalties and fineslikethose imposed against European banks that skimped or cheated on anti-money laundering compliance on behalf of Iran and other sanctioned countries. Those fines often amounted to hundreds of millions of dollars (or, in the case of BNP Paribas, $9 billion). There may be such a thing as “too big to fail,” but there is no such thing as “too big to fine.”
~ ~ ~
The Daily NK reports that small traders are already adapting to the new measures by going to a cash-based business model. Reporters are fond of saying that Pyongyang can easily evade financial sanctions by carrying around briefcases full of cash, but that’s mistaken on several levels. First, a typical briefcase only holds just over $2 million, which is enough to fuel the sort of cross-border trade in food and consumers goods that we shouldn’t want to stop, but hardly an efficient way for a Syrian arms client or Burmese middleman to pay a KOMID dealer for a shipment of machine tools or vacuum dryers. Needless to say, it’s not nearly enough to feed a million-man army or sustain an entire government. After all, China may not really care about policing bulk cash smuggling — notwithstanding its occasional, short-livedpretenses to the contrary — but countries like Bangladesh and Sri Lanka do.
That is to say, one potential outcome of these restrictions could be to break up larger, regime-controlled trading blocs in favor of smaller traders whose wares are more likely to end up in the homes and bellies of the poor. That would be a largely positive development. Our goal should not be a complete embargo of North Korea, which is why I was actually relieved that the U.N. didn’t impose a total fuel ban in its latest sanctions resolution. Our goals ought to be to expose and destroy Pyongyang’s state-controlled overseas trading networks, to freeze its cash reserves (which sit in Chinese banks, and which Pyongyang may be depleting rapidly), to de-fund its military and security forces to give the North Korean people a little breathing space and freedom from fear, and to create the “death spiral” that will cause money launderers who can’t make their kick-up payments to defect and bring us yet more valuable financial intelligence, which will help us find and freeze yet more assets.
If journalism can be reduced to its most fundamental purpose, that purpose is to tell the reader important things he does not know. Be mindful of this purpose as we review one example of the slapdash reporting one tends to see whenever North Korea intrudes into the headlines.
As the Trump administration scrambles to respond to North Korea’s nuclear ambitions, it is trying to coax the country’s smaller trading partners, from Sudan to the Philippines, to ramp up the pressure on Kim Jong Un’s regime. Last week, the Trump administration announced that it would cut $96 million in aid and delay $195 million in military funding to Egypt, citing human rights concerns — and, according to reports, over the country’s robust relationship with North Korea.
One of the largest recipients of US aid, Egypt has also had a longstanding relationship with the isolated regime in Pyongyang, particularly trading in weapons. It’s unclear, though, what aspects of Egypt-North Korea relations the administration is displeased with, and whether it includes commerce not prohibited by sanctions. [Buzzfeed, Megha Rajagopalan & Maged Atef]
Not clear which aspect, you wonder? Might Buzzfeed have found some relevance in Pyongyang’s history of selling ballistic missiles to Egypt, no doubt to fund other missile programs that threaten the U.S. directly? Or that in 2015, the Obama administration sanctioned an Egyptian trading company for its ties to KOMID, North Korea’s principal arms exporter?
Buzzfeed’s reporters do finally get around to mentioning — near the very bottom of their piece, by which time wiser readers will have moved on — that “North Korea has even helped Egyptian scientists develop missile systems.” They do not mention that this is a long and ongoing relationship, that it flagrantly violates a U.N. arms embargo that has been in place for eleven years, that this embargo has been reaffirmed and strengthened by at least half a dozen resolutions since then, or that Egypt’s violation of it has been mentioned repeatedly by the U.N. Panel of Experts. Given the reporters’ emission of an inky cloud of confusion about what commerce is or isn’t prohibited by sanctions, wouldn’t more competent journalism have taken a moment to find the resolutions, read them, and explain them to its readers?
“The question is, if this North Korean issue is so important for the US, why didn’t they ever mention it with us before?” said Emad Gad, a member of the Egyptian parliament’s foreign affairs committee. “The Egypt-North Korea relationship is an old one, so why are we suddenly hearing they have problems with our relations with North Korea?”
Hey, I’m no human polygraph, but I know what bullshit smells like. A 30-second Google search yields thisNew York Times article (I know) noting that “[s]uccessive American administrations have privately raised the issue of North Korea in talks with Cairo, but with little success.” Suddenly?
Egypt makes up a very small part of the value of North Korea’s total trade — but it attracted headlines in 2008 when Orascom, an Egyptian telecom firm, set up the first North Korean 3G network. And Egypt is a well-known buyer of North Korean missiles and other weapons.
Again, Buzzfeed is out of its depth, leaving out revelations by better reporters that Orascom’s venture in North Korea was a likely violation of U.S. law, a fiasco for its shareholders, and a career-discriminating event for its CEO, Naguib Sawiris. All of which also goes unmentioned.
In Cairo, the development was met with confusion, and in some quarters, frustration.
“The North Korean-American issue is a conflict between the US and its allies against North Korea — not the whole world against North Korea,” said Gen. Hamdi Bakhit, a member of parliament who sits on the powerful Defense and National Security Committee. “China, for example, has a balanced relationship with both the US and North Korea … America is just fishing for a mistake to pressure Egypt.”
All of which Buzzfeed takes at face value, uncritically, without further inquiry or elucidation of its readers that a government’s mouthpiece has just lied to them like Anthony Weiner talking to a vice squad detective. Yes, we are but a simple junta leading a government that rules over almost 100 million people! We sing, we dance, we smoke our hookahs, and we craftily expunge all traces of shadowy extremist sects from every slum in Cairo, and that is all! We cannot be bothered to read U.N. Security Council resolutions or U.N. Panel of Experts’ reports, or file an implementation report that even fills a single sheet of paper.
Meaning, the Egyptian government knows damn well where to find these resolutions, what they mean, and what they prohibit. Which is more than I can say for Buzzfeed’s reporters.
Look, I understand that many journalists despise Donald Trump. I can understand why. It isn’t hard to find conservative pundits who share that sentiment. It isn’t hard to find journalists who would clearly despise a President Kasich almost as much for the sole reason that he’s a Republican. But something is terribly wrong with anyone whose moral lens is so monochromatic that she defaults to a certain sympathy for anyone whom Trump is against, even when that anyone is a sanctions-busting military junta. Or Kim Jong-Un.
The U.N. Security Council is reportedly considering a variety of new sanctions against North Korea over its latest missile test, and according to Reuters, a ban on textile exports is among the sanctions under consideration. For a few years, we’ve known that the export of textiles (or textile workers, who labor under sweatshop conditions for little or no pay) is increasingly lucrative for Pyongyang. I don’t need to explain that historically, textile work has lent itself to particularly exploitative labor arrangements.
As always with North Korea sanctions, enforcement is the rub. We can expect North Korean exporters to continue sewing “made in China” labels on their wares and sneaking them into foreign markets — including the United States — to defraud customs officials to get lower tariff rates, and to defraud consumers who would boycott North Korean products and the stores that sell them. In case you’re wondering, yes, we have a law against country-of-origin fraud, and yes, President Obama did sign an executive order prohibiting imports of goods made with North Korean goods, services, or technology (so that’s two felonies, in case you’re keeping count).
It’s entirely possible, of course, that retailers may be selling North Korean-made textiles without knowing it. This recent New York Times story, for example, claims that North Korean sweatshops sew “made in China” labels on their products. That’s consistent with otherreports I’ve bookmarked over the years that Chinese exporters are conspiring to commit country-of-origin fraud. Way back in 2004, in the earliest days of this venerable blog, the Korea Times reported that JC Penney was importing and selling North Korean-made textiles in its stores. At the time, I wrote to JC Penney to inquire about the story. JC Penney wrote back promptly and strongly denied having ever imported or sold North Korean-made goods in its stores.
In other cases, manufacturers knowingly use North Korean labor while hoping we won’t find out about it. RipCurlSportswear and Woolen Mills clothing both became objects of controversy recently for using North Korean labor. And of course, textiles were among the main products manufactured in the Kaesong Industrial Complex. Textile export sanctions would be yet another blow to Moon Jae-In’s plans to revive Kaesong.
As with other facets of the North Korea problem, there isn’t just one answer to this problem. Part of the answer lies in better due diligence by merchants about their supply chains. Next, suspend your sense of historical irony and learn a lesson from the Americancottonindustry, which has waged an effective anti-slavery campaign against cheap imports made with Uzbek cotton. The cotton industry collected evidence that this cotton is often harvested with forced labor, and then joined forces with human rights NGOs to mount an effective public and political pressure campaign. It also made good use of this regulation to petition Customs and Border Protection to exclude the imports from U.S. commerce.
Finally, when NGOs, industry groups, and investigators discover evidence of fraudulent or illegal North Korean exports within U.S. jurisdiction — either because the transactions were cleared through U.S. banks, because a U.S. person was involved in a transaction facilitating the exports, or because the wares entered U.S. commerce — the U.S. government has several tools it can use to prosecute offenders, and to freeze or forfeit their assets. These include the prohibition against country-of-origin customs fraud, Executive Order 13570 , the new discretionary textile export sanctions authority in section 104(b)(1)(E) of the NKSPEA (as amended here), and the new sanctions against users of North Korean forced labor, which blacklist not only the manufacturers that use North Korean labor, but also the governments that tolerate it.