Archive for Counterfeiting

Review: Treasury’s War, by Juan Zarate

Let me begin with an apology for the lack of posting lately. While tossing a football around with some friends, I took a direct head-on hit to that finger you need for typing words that contain the letters “l” or an “o,” which turn out to be less dispensable than you might think. The time I didn’t spend typing, I spent reading instead:

Treasury's War cover

[clicking the image takes you to Amazon]

If you want to understand why the Banco Delta Asia action worked so well, how financial sanctions bankrupted al Qaeda, and how they’re bankrupting Iran today, you have to read this book. If you’re reading this site, however, the odds are you’re interested in what Zarate has to say in chapters 9 and 10, where he writes about North Korea, Banco Delta Asia, and Chris Hill.

Zarate, who is usually effusive in his praise for the people he worked with in government, clearly has no use for Hill. Hill comes off looking like a boorish, incompetent asshole who, despite repeated explanations of how Section 311 worked, either didn’t grasp the concept or didn’t care. According to Zarate, Hill’s minions reduced Daniel Glaser to tears by bullying him into simply switching off the section 311 action–and its downstream effects–almost instantly, which is a lot like asking Treasury to instantly give North Korea a new reputation for honest financial dealings with a banking “ecosystem” that’s extremely concerned about reputations and access to correspondent accounts in U.S. banks and dollar-clearing through New York.

Readers of this site already know that I’m no fan of Chris Hill. I’ve written extensively about how Hill played fast and loose with the truth when he sold his deal to Congress in 2007. Two years later, after his deal with Kim Jong Il had collapsed under the weight of its own suspended disbelief, Hill was eventually confirmed as U.S. Ambassador to Iraq, but only after a bitter confirmation fight. After just 16 months in office, Hill retired, having failed to broker a new Iraqi government or to negotiate a suitable status of forces agreement (and you’d think a guy like Hill could have closed a deal if he wanted one badly enough), and with his relations with U.S. military commanders strained.

I’ve already told you that Zarate’s book is indispensable (it’s also a fun read) but I do have two criticisms. First, his treatment of the SWIFT network as sacrosanct, and his implicit criticism of Section 220 of the Iran Threat Reduction and Syria Human Rights Act of 2012 reads like a set of SWIFT talking points. Zarate worries about U.S. laws and EU regulations that forced SWIFT to cut off certain Iranian banks, and wonders how far down this slippery slope we’d go to sanction other countries.

I agree that SWIFT should be commended for helping Treasury after 9/11, and that The New York Times shouldn’t have outed SWIFT for doing it. But SWIFT has significant business operations located in the United States, and it derives significant benefits from the security of our country and the health of our financial system. By Zarate’s admission, SWIFT took the actions it took in 2001 because it knew it would not prevail if Treasury served it with subpoenas for financial information. Should SWIFT be forced to stop financial messaging services to every country that gets low marks for human trafficking or anti-money laundering countermeasures? Clearly not. But when some supranational authority demands countermeasures against specific banks known to be involved in proliferation or money laundering, SWIFT shouldn’t be exempt, either, particularly given that by its nature, SWIFT doesn’t know the purpose of the transactions it facilitates. Here’s paragraph 11, from UNSCR 2094:

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

Zarate is otherwise pretty big on enforcing international norms and standards, and to be fair, Zarate’s manuscript was probably already with the publisher when this resolution passed. It’s hard to argue today that North Korean banks that have been specifically sanctioned by the U.N. itself, the EU, or the United States because of “credible information” about their proliferation should continue to receive messaging services without interruption. Maybe Zarate wouldn’t argue that now. I hope he wouldn’t. But even before that, we’d seen a long services of messages about the need for “countermeasures” against North Korea from the Financial Action Task Force.

My second criticism is of the opportunity Zarate misses at the end of his book when he calls for the government to help preserve and enhance our economic power. That’s especially unfortunate when Zarate’s explanation of that power and its importance were so effective. His last chapter and his epilogue introduce a series of important concepts concepts about trade, protectionism, technology, foreign investment, and the strength of the dollar, but unfortunately, and perhaps because of the editing process, those concepts aren’t explained or illustrated well, and I finished the book without understanding how more government intrusion would advance, rather than inhibit, our economic competitiveness. I hope that’s something Zarate will explain further, perhaps in a future edition.

(This chapter still stimulated much thought about other key networks, aside from the financial system, that run through the United States. Could the free flow of information through U.S.-based servers, or a cloud network, be another future power source? How about restricting the access to U.S. ports of cargoes originating from ports that fail to take their counter-proliferation or counter-terrorism responsibilities seriously?)

Treasury’s War won’t win any literary awards, but its simple and clear writing style is probably best for a topic this complex. The information, clear explanations, and illustrative examples make it required reading for any student of economics or foreign policy in this age. If you’re a North Korea watcher or congressional staffer who wants to understand how H.R. 1771 would work, and why its strategy is nothing at all like the old fashioned sanctions used against Saddam Hussein, read Zarate’s book (it’s also available on e-book).

Over at Foreign Policy …

Professor Sung Yoon Lee and I have a piece up discussing the world’s next, almost-certain-to-be-lost opportunity to respond to North Korea more effectively than having Susan Rice continue to beat her cranium against the Great Wall of China at the Security Council.  It’s a blend of Professor Lee’s prognostications about what the North will do next, and some of the financial constriction ideas I’ve been pushing as one of those Three C’s.

I’ll say this about FP — it’s certainly a great place to find an audience that isn’t, erm, accustomed to reading that sort of proposal, which makes me all the more appreciative that they decided to publish it.  I’m sure the comments will be just … fascinating.

I want to offer my sincere thanks to Professor Lee for his co-authorship, without which I doubt FP would have given this serious consideration.  Admittedly, there are many people who share his linguistic head start toward understanding the pathology of North Korea; very few who are his equal in judgment, intellect, and knowledge; and none who can communicate that understanding so cogently to those of us who aren’t Korean.  Honestly, I think his English is actually several levels better than mine.  That’s what makes him such a unique resource.

Update:  Here’s Prof. Lee saying many of the same things in 2009.

End of Bureau 39 Wouldn’t Mean the End of N. Korea’s Criminal Enterprises

Reports last week claimed that, according to “sources familiar with North Korean affairs,” North Korea had shut down Bureau 39 of the Workers’ Party — responsible for obtaining hard currency by any means necessary, including illicit activities — and Bureau 38, responsible for managing the regime’s overseas funds.

Are any of the reports true?  My default position about any “insider” reports from Pyongyang is skepticism, and a quick Google search reveals that we’ve heard many versions of this story before.  For example, Office 38 has variously been reported to have been merged into Bureau 39 as early as 2009 (Yonhap), restored in June 2010 (Chosun Ilbo) and February 2011 (Reuters), and then merged into the Moranbang Bureau, another government entity in October of this year (Kyodo).  At the very least, it’s hard to believe these reports could all be true, and kremlinologist Ken Gause correctly cautions against taking even the most recent ones at face value.  Changing the names of the organizations may be nothing more than a superficial way to dodge Treasury Department sanctions, most recently reaffirmed in Executive Order 13,551.

Even if North Korea really did merge, split, and rename these organizations so many times, it seems unlikely in the extreme that it would cease its counterfeiting, drug dealing, money laundering, or other illicit activities.  This recent report from the Carnegie Endowment, and these from the Financial Action Task Force — one of those truly effective international organizations you seldom hear about — suggest that North Korea continued with its illicit activities and the laundering of their proceeds right up to last week.  Current reports suggest that the regime is under severe financial stress and needs those sources of hard currency more than ever.  The reorganizations could also be part of some internecine power play, consolidating all-important sources of income in the hands of a dominant faction.  Either way, if the mergers and revivals of the last two years didn’t affect North Korea’s illicit intent, this year’s changes (assuming there are any) probably won’t, either.

There is another reason to question the veracity of the reports:  their source, Kyodo News.  Kyodo recently sent a delegation to Pyongyang, which performed a ritual prostration before the statues of North Korea’s dead dictators and then met with Kim Yong Nam.  This suggests that Kyodo is interested in opening its own AP-style bureau in Pyongyang, and also that Kyodo sees itself as having an inside track with the sort of “exclusive” North Korean sources that would arouse suspicion in more sober minds.

At Last, Plan B

This afternoon, the Treasury Department finally announced its long anticipated sanctions against North Korea, in the form of a sweeping new executive order. The order, pursuant to the International Emergency Economic Powers Act, authorizes the blocking of assets of “any person” providing what Treasury calls “material support” for North Korea’s WMD proliferation, money laundering, counterfeiting, trade in luxury goods, bulk cash smuggling, and pretty much everything North Korea does that violates UNSCR 1718 or 1874, or the U.S. Criminal Code.

In addition to the new order, Treasury also imposed new sanctions against several North Korean entities under the existing Executive Order 13382. Below the fold, I’ve pasted the text of the Executive Order, President Obama’s letter forwarding the EO to the Speaker of the House, two Treasury press releases, and some remarks by OFK favorite Stuart Levey, all of which I’ve archived here to aid your research and mine.

My initial reaction is that the new EO gets it just right. It’s narrowly targeted at North Korea’s illicit activities, but it’s also broad enough to cover the main ones — arms and drug trafficking, money laundering, currency and pharmaceutical counterfeiting, and the squandering of its resources on luxury goods while North Korean children starve in the streets. This is a tough-yet-refined version of the Plan B I’ve been advocating since its earliest draft in 2006.

Here is the key language:

All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, including any overseas branch, of the following persons are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in:

(i) the persons listed in the Annex to this order; and

(ii) any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:

The EO then goes on to describe a wide range of activities, assistance, and financial activities that could support North Korea’s illicit activities, including the assets of any entity held by a U.S. person, or within U.S. jurisdiction. This means that if a Chinese entity is involved in helping a blacklisted North Korean entity acquire missile components, Treasury could freeze the Chinese entity’s tainted assets based in the U.S., assets of its U.S. subsidiaries, its assets in U.S. banks, or potentially, the entity’s foreign bank’s correspondent accounts in U.S. banks. This is all we could ask, and — if applied vigorously — it will be enough to force international businesses to choose between the use of the global financial system and their business ties with North Korea. Yes, North Korea could try to conceal, blur, obfuscate, and obscure which companies are connected to its illicit activities, but Treasury’s answer to this is that its effect will be to spread suspicion to all North Korean entities, even those that claim to be legit. This could be a severe blow to North Korea’s ability to comingle illicit and legitimate finance (the essence of money laundering) and will terrify investors and cause capital flight from the Palace Economy just as the Kim Dynasty is trying to engineer a smooth succession.

For Senator Sam Brownback, it is also a rightful claim to an important legacy when he leaves the Senate to become, almost assuredly, the next Governor of Kansas. In recent months, as North Korea’s behavior changed thinking in the Obama Administration, Brownback effectively lobbied State for tougher economic sanctions, and skillfully parlayed the stayed threat of nomination holds to build friendships with State Department officials with whom he found common ground. In the absence of strong conservative thinkers on the Senate Foreign Relations Committee, Brownback filled the void, seized the opportunity to build relationships in the Treasury Department, and encouraged it to press for tougher enforcement. The question now turns to the Administration’s determination to use this tool aggressively, and follow the money to the very ash heap of the Kim Dynasty if necessary.

Who is targeted? A lot of entities that were already on Treasury’s list of specially designated nationals, but also, two key additions: Bureau 39 of the Korean Workers’ Party, and the notorious Reconnaissance Bureau, the prime suspect in the recent attempt to assassinate Hwang Jang Yop. Also sanctioned was a North Korean state enterprise responsible for making and exporting submarines and torpedoes.

For the moment, senior State Department people like Robert Einhorn seem determined to use financial pressure to force a fundamental change in North Korea’s behavior, and talk of re-engaging with North Korea all seems very theoretical and conditional. I don’t think anything short of a coup will actually cause that fundamental change, and the real test will come when State and the Administration come to grips with this. For now, this is all we could have hoped for from this Administration.

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Plan B Watch

According to Yonhap, Treasury will roll out its new North Korea sanctions this week. I am giddy with anticipation. And on a related note, I hope the boys at Treasury are Daily NK readers (or better yet, sources):

The No.39 Department, which is responsible for the management of Kim Jong Il’s private funds, holds the bank account with the British Virgin Islands branch of FirstCaribbean International Bank (FCIB), a prominent bank in the Caribbean region.

According to an expert source familiar with China and North Korea, the No. 39 Department’s secret overseas account exists under the name “Hana Holdings”. It is apparently held with the Road Town branch of the bank, which is based in Barbados and has branches in 17 countries.

Explaining the importance to North Korea of the No.39 Department account, the source told Daily NK, “Due to recent UN Security Council sanctions, the No. 39 Department is experiencing considerable difficulties with its overseas financial trade. Currently, excluding Chinese banks, their only active overseas account is that held with FirstCaribbean International Bank.”

Also, he added, “The only bank through which the No. 39 Department can make overseas transfers is FirstCaribbean International Bank in the British Virgin Islands, since their other secret bank accounts are all blocked.”

As usual, there’s a Chinese connection. One of the Daily NK’s sources, Ken Kato, is a DC-based accountant and activist for the release of Japanese abductees I’ve met and corresponded with in the past. This would be a case of North Korea’s malice reaping severe and unintended consequences. Separately, the Daily NK reports that Bureau 39 has fallen on hard times.

Plan B Watch: Einhorn Goes to Tokyo, Pressure Builds on China

The latest reports in the Korean press tell us that the President will soon sign an over-arching executive order that will subsume the authorities of Executive Order 13,382 (see sidebars), and will also allow the blocking of assets used for proliferation, drug trafficking, and currency counterfeiting:

In a press briefing on Monday, Department spokesman Philip Crowley said, “We have no doubt that North Korea has engaged directly in counterfeit operations as a means of bringing currency into the country. This is a longstanding practice.” [Chosun Ilbo]

Several reports discuss plans by Treasury to blacklist specific individuals and institutions suspected of being involved in illegal activity and money laundering:

Observers say a financial services blacklist of individuals to be announced in the new sanctions will likely include O Kuk-ryol, vice head of North Korea’s National Defense Commission, which is led by Kim Jong-il and his family. O is known to be managing a company that tries to attract foreign investment to the North. [Joongang Ilbo]

It will be interesting to see whether the executive order will make findings that Bureau 39, or perhaps the North Korean government itself, is a primary concern for money laundering. That description has been applied to other states for much less — that is, a lackadaisical rather than intentionally criminal approach to the proceeds of illicit activity. If it weren’t for the State Department and its politics, Treasury would probably have designated North Korea years ago.

The United States is expected to blacklist three key North Korean finance officials believed to be taking care of leader Kim Jong-il’s secret funds as part of new sanctions against the communist nation, a government source said Wednesday.

One of the three finance officials is Kim Tong-myong, head of Tanchon Commercial Bank, the source said. “The U.S. is paying special attention to three people, including Kim Tong-myong, who operate North Korea’s secret funds abroad,” the source said on condition of anonymity. “If they are included in the new sanctions, it could deal a blow to North Korea’s leadership.”

The U.S. has also collected evidence that nine North Korean financial institutions operating overseas and as least two trading firms have been used for the regime’s illicit activities, such as trade in conventional arms, luxury goods and counterfeit money, the source said.

Overall, the U.S. is expected to add some 10-20 North Korean entities and individuals to its blacklist of those to be subject to sanctions, which include freezing their assets in the U.S. and banning them from dealing with American financial institutions. [Yonhap]

And given the lack of food or medical care in nominally socialist North Korea, you might be tempted to assume (or even mislead others to believe) that its government had no money to spend for such things. You would be wrong:

Data from the Bank for International Settlements released last month showed that North Korean deposits at banks around the world stood at $670 million as of the end of March. [Joongang Ilbo]

That sum represents just about enough to fund World Food Program operations in North Korea … for three years. Now explain to me again why North Koreans still starve.

Finally, the Daily NK’s Kim Yong Hun explains why Chinese banks will be forced to cooperate with the U.S. Treasury Department, whether the Chinese government wants them to or not. I won’t give you any quotes — just read the whole thing. Marcus Noland has more on this in via the Council on Foreign Relations:

China–which had been essentially unwilling to implement the sanctions on luxury goods–cooperated with the sanctions against BDA. The reason [for that cooperation] is it was not the Chinese foreign ministry or the customs administration, but rather the Chinese ministry of finance and central bank implementing these sanctions. Their concern was that they had much more at stake with respect to Chinese banks’ [access] to the lucrative U.S. market than they ever would have dealing with some small bank in Macao or possible financial transactions in North Korea. The lessons from this seem to be that financial sanctions–that play on banks’ desire to maintain a good reputation, stay within the increasingly stringent international rules on money laundering, and maintain a good relationship with the United States–play to our strengths in terms of the U.S. financial system and the increasingly well-defined and articulated set of international norms and agreements on money laundering. [Financial sanctions] will be more successful than the traditional trade sanctions that are oftentimes implemented less than rigorously.

I suspect Einhorn will have less difficulty securing the cooperation of the Japanese. Perhaps more surprisingly, Hong Kong also appears to be on an active hunt for dirty North Korean money.

One thing that I will say about this, however, is that we should be prepared for the Chinese government to look for ways to actively undermine Treasury’s efforts, such as shipping hard currency directly to North Korea in paper form, gold, or stored-value cards. This certainly isn’t a very efficient way to do things, but it might be just enough to keep the Kim Dynasty in power until the U.S. government decides to cave yet again for political reasons. As always, determination will be dispositive to whether this will work.

During the news conference held in Seoul, Monday, Einhorn played hardball with North Korea with regard to dialogue.

“We can’t repeat the kind of cycle that we’ve been through on a number of previous occasions where North Korea engages in talks, makes commitments, and then abandons those talks. We have to break that cycle,” he said.

“Before the six-party talks to be convened, it’s essential that North Korea demonstrate in an intangible way that it’s prepared this time to make commitments and to fulfill them. And there are some important commitments already existing such as September 2005 commitments. [Korea Times]

When we see the new executive order that will be used as the legal basis for this plan, we’ll probably find out that 80% of the Korean press reports about this are actually true. Recently, we’ve seen some on the American left call South Korea the tail that wags the dog. Frankly, I happen to agree with them on this, up to a point. One of the things that I continue to find simply staggering is the extent of South Korea’s influence on U.S. government policymaking. Clientitis, in its various forms, is rife within these circles, though many of these insiders still privately suspect that the National Intelligence Service frequently plants stories to manipulate press coverage.

Fine, but where were these same people when the tail was Roh Moo Hyun, and the wag was indirect U.S. financial support for Kim Jong Il, his atrocities toward his people, and his proliferation? By which I mean that as U.S. soldiers (me being one of them) ostensibly defended South Korea from North Korea and subsidized its defense, South Korea sent Kim Jong Il billions of dollars in tribute that it didn’t have to spend on its own defense. If you agree that perpetuating North Korea’s capacity to terrorize and proliferate is contrary to America’s interests, and that finally working with allies in the region to address and suppress that threat is in its interests, then the “tail wags dog” meme would have been far more suitable to the years between 1997 and 2008.

Plan B Watch: Robert Einhorn Visits Seoul; State Directs Strong Criticism at China

Robert Einhorn, President Obama’s special adviser for non-proliferation and arms control, is visiting Seoul and Tokyo this week. He is accompanied by Daniel Glaser, who works with Treasury’s Undersecretary for Terrorism and Financial Intelligence, and who was a key architect of the Banco Delta Asia sanctions in 2005 and 2006. At the risk of making a comparison that Glaser might not necessarily welcome, his presence in Seoul has far more deterrent value than parking an aircraft carrier off the coast of Nampo.

einhorn-in-seoul-july-2010.jpg

[Robert Einhorn and his South Korean counterparts. Photo: Korea Herald]

Einhorn and other U.S. officials have given more hints about what financial measures the government is like to take, and what they’re doing to secure international cooperation with them. What’s less clear is whether financial measures are a means to get North Korea to talk, to disarm, or to overthrow a regime determined to do neither. The answer probably depends on how North Korea responds to the pressure over the next year. I’ll predict now that once it begins to have an effect, North Korea will coo seductively about disarmament talks … if only we’d just lift the sanctions. That’s when the administration will be tested again.

Even so, a solid Plan B appears to be taking shape, just as I was about to give up on the Obama Administration. Even if the new policy reflects nothing more than new strength and gravitas about the relationship between pressure and diplomacy, this would be progress.

HOW WILL THE SANCTIONS WORK?

The precise form the measure will take still isn’t clear, but ought to be clearer later this week as Treasury and State add further detail to their plans. We do have some idea of the targeting and methods, however. Treasury will target “North Korea’s illicit transactions and activities regarding luxury goods and arms trade,” will allow for the public designation of “entities and individuals involved in” those activities, to include dollar counterfeiting, and will provide for the blocking of those entities’ assets and property. At least one report advises us to expect a new executive order to this effect:

Under the measure, the U.S. government will reportedly pinpoint North Korean businesses, authorities and individuals associated with illicit transaction or activities and then require U.S. financial institutions to take measures to block their activities and freeze their assets in the United States. [Korea Times]

“By publicly naming these entities, these measures can have the broader effect of isolating them from the international financial and commercial system,” he said. Einhorn was accompanied by Daniel Glaser, a senior Treasury official overseeing efforts to combat terrorist financing and financial crimes. [AFP]

It bears repeating that these criminal enterprises enrich the North Korean elite, but do nothing to feed the hungry:

“These measures are not directed at the North Korean people, but our objective is to put an end to [North Korea's] destabilizing proliferation activities, to halt illicit activities that help fund its nuclear missile programs and to discourage further provocative actions,” Einhorn told reporters, according to a copy of his prepared remarks. [....]

Einhorn said the aim of the sanctions is to go after North Korean sources of “hundreds of millions of dollars” in hard currency, including counterfeiting U.S. currency, narcotics smuggling and other illegal activities. U.S. officials have said that the illicit sale of cigarettes, liquor and exotic food helps provide funding for North Korea’s burgeoning nuclear program. [CNN]

GAINING INTERNATIONAL COOPERATION

I think it’s pretty obvious to everyone whose cooperation has been the most conspicuously lacking, and the statements from the Administration about China and North Korea this week are really something to behold. They’re more strident than anything I can recall seeing from any senior U.S. officials, quite possibly to include John Bolton, in the last two decades. They suggest a real readiness to impose real consequences on China’s economic and security interests.

Einhorn appealed to China, the North’s sole major ally and economic lifeline, to back the sanctions on both countries and not to take advantage of restraint by other countries.

“We want China to be a responsible stakeholder in the international system,” he said. “That means co-operating with the UN Security Council resolutions and it means not backfilling or not taking advantage of responsible self-restraint of other countries.” [AFP]

That’s a strikingly honest acknowledgment of what the economists have been telling us about China undermining UNSCR 1718, and would be a strong statement even if it had been off the record. It gets better:

“China is suffering the indignity of exercises close to its shores, and though they are not directed at China, the exercises are a direct result of China’s support for North Korea and unwillingness to denounce their aggression,” Deputy Secretary of State James Steinberg told a forum at the Nixon Center Tuesday, according to the center’s Web site. [....]

“China is also reflecting on the consequences of all parties’ inability to deter North Korean provocations,” Steinberg said. [....]

“The U.S. should exercise patience and send a message to Pyongyang that their old tactics will no longer work,” he said. “The administration’s strategy and policy should not be altered.” [Yonhap]

Steinberg’s tone, which appeals to Chinese government’s obsession with place and stature, is calculated to put its government under domestic pressure and show the Chinese people that its irresponsible shielding of North Korea has backfired.

State is also putting pressure on Burma to stop buying North Korean weapons.

The chocolate-making countries, which may hold up to $4 billion in North Korea’s infant formula fund personal assets of Kim Jong Il and/or Kim Jong-Eun, are promising to cooperate as well. That includes Switzerland, better known as the country that failed to see anything amiss about selling the North Koreans the same intaglio printing presses and optically variable ink used by the U.S. Bureau of Engraving and Printing:

RFA cited Roland Vock, a senior official of the Sanctions Unit at the Swiss State Secretariat for Economic Affair, as saying that Switzerland is complying with sanctions on Pyongyang applied under UN Security Council resolutions 1718 and 1874.

“Any financial assets that fall under the scope of the resolutions would have to be frozen,” Vock was quoted by RFA as saying. Vock told RFA that if they are provided specific information about illegal financial transactions by North Korea through even unlisted bank accounts, they will start an investigation. [Joongang Ilbo]

Am I reading too much into Vock’s comments to say that I detect an undercurrent of skepticism?

“Give me the information,” he said. “Which bank [of about 500 Swiss banks], what money talking about, where money is coming from, then I can pass information to” the Swiss intelligence agency so that it can begin its probe. He said he meets American officials “very regularly” to exchange information.

Earlier on, Luxembourg also said that under the UN and U.S. sanctions, the country is closely watching for any illegal activities by the North using accounts there and will take “appropriate legal steps” if it finds them.

North Korean leader Kim Jong-il’s slush funds in banks in Switzerland and Luxembourg are estimated at more than US$4 billion. [Chosun Ilbo]

More on Luxemburg’s assurances of cooperation here. North Korea is already reported to be trying to move large amounts out of some of its accounts there. The suggestion is that this is to bequeath them to Mini-Me, but one need not physically move a bank account to change its ownership or control. It seems more likely that any large movement of funds is designed to save those funds from being blocked, but it’s also plausible that as North Korea heads into the succession process and the September party conference, that it needs more goodies for its minions.

WILL IT WORK?

That depends on the objective, of course, but the objective still isn’t entirely clear. Here’s the official explanation:

State Department spokesman Philip Crowley said, “We don’t take a cookie-cutter approach here. Iran and North Korea are two different countries. Iran has resources, particularly in the energy sector. North Korea does not. So we will apply measured sanctions against North Korea as we have in the past, and tailored to help influence the thinking of the government and those who support the government.”

“Likewise, we are directing sanctions at Iran and it’s the agencies that are linked to the concerns that we have — proliferation, nuclear concerns… But they are different,” he added. [Chosun Ilbo]

The Chosun Ilbo’s correspondent seizes on plans for a new executive order and the lack of present plans for new legislation as “confirmation that Washington will not slap the same strong sanctions on the North that it has imposed against Iran,” but the latter doesn’t follow from the former. For months, my spies have told me that Treasury’s most enforcement-minded officials have said that the legal authorities needed to put real pressure on North Korea are already there. As I’ve said for years, this could all be done with a series of executive decisions. And because the Daily NK’s Chris Green reads this blog, he naturally does a superior job of informing his readers:

Over the weekend, some concerns were raised about rumors that the U.S. is planning to pursue sanctions through an executive order, thus bypassing domestic legislative processes, and that this somehow signified a weakening of the proposed sanctions. However, this was refuted by South Korean experts, who noted that an executive order may be better in terms of handing the U.S. government the ability to act quickly in the face of North Korean changes.

Kim Sung Han, a Professor of Institute of Foreign Affairs and National Security at Korea University, analyzed during the phone call conversation with The Daily NK, “The domestic law and administrative order is a matter of flexibility in the United States’ policy, not to distinguish the level of the sanctions. In order for the U.S. to take the initiative and respond to changes quickly, an administrative order, which is free from the unnecessary intervention of Congress, is better.” [Daily NK, Chris Green]

So I don’t take much from the fact that the administration isn’t asking for new legislation now, because I agree that it isn’t really needed yet. The comparison to Iran sanctions is off the mark. Iran, unlike North Korea, has strong trade relations with other countries and oil to sell that other countries — including this one — will continue to buy. Until we can learn to live without Iran’s oil, financial sanctions on Iran are far less likely to put its regime under real pressure. If the administration is asking for new legal authorities against Iran, it’s probably because it knows how much more difficult Iran’s financial links are to cut. But North Korea’s financial links to the Outer Earth are fragile and largely illicit. There is nothing that North Korea sells that anyone really needs.

Assuming, then, that the U.S. government is serious, exactly what is it serious about? There is some ambiguity here, if you believe this second report from the Daily NK, which relies in part on anonymous sources. It reports that the Cheonan Incident was “a turning point” in South Korea’s approach to the North, and has since been migrating in the direction of using sanctions to catalyze “fundamental changes in the country.” It reports that U.S. officials, despite their willingness to “target the North Korean leadership and their assets,” aren’t yet ready to support such an approach, but might be later if North Korea continues to refuse to “show its sincerity” about disarmament.

Those aligned with the Chinoy-Ahn axis are working overtime to mobilize opposition to the administration’s financial strategy. Their argument, offered with an unpersuasive amount of desperation, is that pressure won’t force North Korea to negotiate and will spoil the gemütlichkeit for talks. But if they really believe this, why the desperation? And more to the point, why did North Korea begin hinting at returning to the six-party talks just as press reports began to emerge that Washington would implement comprehensive financial sanctions? To its credit, the Obama Administration gets this, and openly questions the sincerity of North Korea’s belated expressions of interest in negotiations.

Critics of financial pressure could make a more accurate criticism if they were honest enough to make it: financial pressure still won’t “to convince Pyongyang to change course and pursue denuclearization.” For what little it’s worth, I believe we should remain open to the exceedingly unlikely possibility of a negotiated, verifiable, irreversible nuclear disarmament of North Korea, though this would require a fundamental transparency that the Kim Dynasty won’t ever accept.

By itself, the emerging Plan B probably won’t crumple the Kim Dynasty, either, though the succession of the grossly underqualified Kim Jong Eun increases the odds that it might. Mostly, financial pressure can gravely damage the regime’s capacity to proliferate, and inhibit its capacity to repress the latent dissent that will eventually destroy it.

Plan B Watch: A Shot Across China’s Bow?

Hey, did the State Department threaten the Bank of China and the Bank of Shanghai? Or to put the question more bluntly, did someone just grow a pair?

A diplomatic source here said the U.S. will blacklist more North Korean entities and individuals in the coming weeks so that international financial institutions would cut off ties with them.

Any foreign banks refusing to sever business ties with the North Korean entities and individuals in question will have U.S. financial institutions suspend ties with them, the source said. “Think of Citibank or Bank of America suspending business ties with Bank of China or Bank of Shanghai. That will be a great burden to China.”

What I wouldn’t give to see the case of the vapors Peter Lee must be having at this moment. Of course, I care little and know less about Lee’s background, but I wonder if the manic oscillation between contemptuous arrogance and resentful victimhood is a function of life in a society where destiny is so often imposed on the resentful by the arrogant. If it’s futile or worse for a Chinese citizen to curse the policies of his own government, there’s no less futility in cursing the policies of the American government.

Crowley said last week that the U.S. will not only use existing measures like the Patriot Act, but will also establish “new executive authorities” to blacklist more “entities and individuals supporting proliferation, subjecting them to an asset freeze; new efforts with key governments to stop DPRK trading companies engaged in illicit activities from operating in those countries and prevent their banks from facilitating these companies’ illicit transactions.” [Yonhap]

They certainly do sound very serious about this. And thorough:

Robert Einhorn told the Voice of America that the U.S. has tracked down every trading company and individual in North Korea doing illegal business activities overseas and will freeze their assets. It was the first interview Einhorn has given since being made the U.S. government’s special adviser for nonproliferation and arms control.

Einhorn said the legal basis for past sanctions, which he called “existing authorities,” will be more actively applied and used to freeze assets of North Korean organizations, trading companies and individuals involved in terror or nuclear proliferation activities.

The new sanctions, on the other hand, will be focused on restraining other illegal activities such as trade in conventional weapons, luxury goods, tobacco, counterfeit bills and drugs, he said. He said the U.S. is drafting “authorities” to control those non-terror or nuclear proliferation areas. He said once the new authorities are arranged, the ability of the U.S. to freeze those illegal activities by the North will be strengthened. The details of the new sanctions will be announced by next week, he said. [Joongang Ilbo]

All of this has the potential for some very interesting money laundering prosecutions in the courts. The measure to watch for, however, is whether Treasury will simply declare the entire country of North Korea to be a primary money laundering concern and deny its entities access to the U.S. financial system, something that my spies tell me key people in Treasury have seriously considered. This so-called Fifth Special Measure is to Plan B what the Public Option is to Obamacare. And it wouldn’t be unprecedented. We’ve done this to Nauru and the Ukraine, among other places.

It’s encouraging that the old partisan reflexes really aren’t very probative of how people in Washington see the issue of financial pressure. Most hard-liners agree that all kinds of pressure have to be applied in tandem with at least an offer to negotiate, in the unlikely event that North Korea is prepared to accept the kind of fundamental transparency that even most soft-liners now know it never will.

Plan B Watch: Treasury Targets 100 Suspicious N. Korean Accounts Worldwide

According to multiple newspaper reports published since late last week, the Obama Administration’s new asset-freezing campaign against North Korea began in earnest in June. The Treasury Department, having identified about 200 accounts worldwide suspected of storing the proceeds of banned weapons sales, currency counterfeiting, counterfeit cigarettes and Viagra, proliferation, drug trafficking, and other things that all sovereign nations to do pay for yachts for their despotic rulers.

Treasury focused on 100 accounts where its evidence was strongest and quietly persuaded the banks holding those accounts to freeze them. In contrast to the approach applied in the case of Banco Delta Asia, Treasury approached these banks quietly and got their more-or-less voluntary cooperation — and given the conspicuous example of BDA, who wouldn’t cooperate? (FYI to the Hankyoreh: the amount frozen in North Korea’s BDA accounts was $25 million, not $250 million. Not that the Hanky’s reporting on North Korea reveals much accuracy, insight, objectivity, or any of the other qualities one looks for in journalism.)

Reading between the lines of the stories, Treasury appears to be going after patterns of large cash deposits and withdrawals, of the sort that would require the filing of a Suspicious Activity Report if conducted in an American financial institution. A common example of a suspicious activity would be a low-level employee of a North Korean diplomatic mission making a large cash deposit, or purchasing, say, a quantity of Omega watches out of all proportion to his likely salary.

The banks in question are variously reported to be in Africa, Asia, the Middle East, Europe, and Russia, whose organized crime industry is said to be helping Kim Jong Il launder his money. One account in Liechtenstein was apparently exposed by an employee and whistleblower. The Chosun Ilbo also reports (below) that the South Korean government has identified 10 to 20 suspicious North Korean accounts in its banks. (And I can only hope that the Calderon and Massie plaintiffs are reading this.) At least one entity in China, a Hong Kong-based trading company, is also a reported target.

The stories are too full of interesting detail, some of them slightly varying with each other, not to blockquote at great length. Overall, however, the stories are detailed and consistent enough to suggest that someone in the administration has been directed to speak to the Korean press on background. While the South Korean newspapers are reporting on the asset-freezing campaign extensively, there is surprisingly little coverage of this level of detail in American newspapers. The Washington Times speaks generally about the need for tightening sanctions against North Korea, with quotes from Nick Eberstadt, Bruce Klingner, Kim Kwang Jin, and Chuck Downs.

You can read the longer quotes below the fold. Collectively, they suggest that the administration is making the kind of comprehensive effort that is needed here, and which should have the desired (to me) effect of starving the “palace economy” of cash. And while the cessation of illicit activity and proliferation isn’t a bad thing in itself, the reports say little more about the greater purpose of this. Which, I suppose, is fine for the time being. Read more

Plan B Watch: Clinton Announces Tightening of N. Korea Sanctions

Well, it’s about damn time:

The Obama administration announced Wednesday that it would impose further economic sanctions against North Korea, throwing legal weight behind a choreographed show of pressure on the North that included an unusual joint visit to the demilitarized zone by Secretary of State Hillary Rodham Clinton and Defense Secretary Robert M. Gates.

The measures, announced here by Mrs. Clinton after talks with South Korean officials, focus on counterfeiting, money laundering and other dealings that she said the North Korean government used to generate hard currency to pay off cronies and cling to power. [N.Y. Times]

Clinton announced the sanctions as she visited the DMZ, while accompanied by SecDef Gates, and while displaying her supernatural frost-projection powers against a hapless North Korean border guard. I count at least three priceless expressions in this photo.

clinton-dmz.jpg

The Treasury Department announcement I linked here yesterday now looks to be just the first part of the Obama Administration’s dangerously overdue and initially weak response to the sinking of the Cheonan, using at least some of the legal and financial tools I’ve advocated using for the last several years.

“Today, I’m announcing a series of measures to increase our ability to prevent North Korea’s proliferation, to halt their illicit activities that helped fund their weapons programs and to discourage further provocative actions,” Clinton told a news conference in Seoul after high-level security talks with South Korean officials.

Clinton said Washington’s “new country-specific sanctions” will target the North’s “sale and procurement of arms and related material and the procurement of luxury goods and other illicit activities.”

“Let me stress that these measures are not directed at the people of North Korea who have suffered too long due to the misguided and malign priorities of their government,” she said. “They are directed at the destabilizing illicit and provocative policies pursued by that government.” [Yonhap]

With apologies to KCJ, this is encouraging — a strong opening message that will get the attention of the investors on whose cash North Korea depends. Unfortunately, Clinton offered few details about the sanctions, and via some inside sources, I’ve learned that the administration is still debating just what specific measures it’s going to announce. Until I see what those specific measures are, and how strong and comprehensive they are, I will reserve judgment. Or, as one observer put it:

Nicholas Szechenyi, a northeast Asia policy analyst at the Center for Strategic and International Studies in Washington, said the key to effective U.S. sanctions is how they are implemented.

“If the U.S. is doing this in isolation, doing this piecemeal, then I don’t think they’ll have much effect,” he said. “But if there’s a unified effort to not only announce these sanctions as an act of solidarity with our South Korean allies but also to apply some pressure on North Korea, then I think over time it might work.”

That sounds exactly right to me. Nick Eberstadt is more skeptical, and maybe he knows something I don’t:

The moves resemble piecemeal steps of the past, they add, and are unlikely to strike where it hurts: the regime’s access to under-the-table international funds.

“If I were in Pyongyang, I would not be trembling in my boots about this,” says Nick Eberstadt, a North Korea specialist at the American Enterprise Institute in Washington. [Christian Science Monitor]

The real question here is what the sanctions will be designed to achieve:

“The real question, if the talks resume, is so what?” says Mr. Lieberthal. Neither Republican nor Democratic administrations have been successful over two decades at curtailing the North’s nuclear ambitions, he says, adding that the Obama administration “shows no signs of being in the mood to reward North Korea” to prompt its cooperation, a pattern he says the North has become accustomed to.

“So even if the talks resume at some point, would they produce any serious results?” he asks. “I remain very skeptical about that. [Christian Science Monitor]

If the administration is looking for sanctions that are undone as easily as they’re done, this won’t work. Our financial power over North Korea is our power to scare away investors and sever its financial lifelines, including those that originate in China. If we try to spare Chinese entities and only target isolated investors like Orascom and various shady bankers here and there, this won’t work. If the administration nips at North Korea’s illicit financing at its fringes, a U.S.-led sanctions program will fail just as U.N. sanctions always have, because North Korea is very nimble at setting up new banks and companies to evade sanctions, and because Chinese entities will adopt a see-no-evil approach to transactions with North Korea unless it’s made clear to them that their own comingled assets are also at risk.

For what it’s worth, Hillary Clinton and Robert Einhorn will both be traveling to China to seek its cooperation. Wish them luck.

But if the administration goes all-in to hit North Korea’s finances hard before its big succession-focused party conference in September, this could be extremely effective, and might even disrupt Kim Jong Il’s plans to purge his and promote the next generation of apparatchiks to preserve his dynasty for another generation.