Archive for Money Laundering

Top N. Korean money man defects to “third country”

A senior North Korean banking official who managed money for leader Kim Jong Un has defected in Russia and was seeking asylum in a third country, a South Korean newspaper reported on Friday, citing an unidentified source.

Yun Tae Hyong, a senior representative of North Korea’s Korea Daesong Bank, disappeared last week in Nakhodka, in the Russian Far East, with $5 million, the JoongAng Ilbo newspaper reported. [Reuters, Ju-Min Park and James Pearson]

Daesong Bank is sanctioned by both the U.S. Treasury Department and the European Union, and is closely linked to the infamous Bureau 39. This guy could know where a lot of bodies are buried, metaphorically speaking. Also, literally.

The Joongang Ilbo, which broke the story, says that Yun “officially worked as president of the bank” and “was in charge of raising and managing slush funds for Kim in Northeast Russia.” Apparently, Yun made a withdrawal of about $5 million from that slush fund before his defection, and North Korea has a substantial penalty for early withdrawal.

North Korea’s activities in the region include its infamous logging camps and the recently-sanctioned, Vladivostok-based Ocean Maritime Management, the agent for the Chong Chong Gangthe Mu Du Dong, and other sanctioned vessels. And, God-knows-what else.

“We were tipped off that Jon Il-chun, the first deputy director of the Central Committee of Workers’ Party who was effectively in charge of Office 39, is currently in a very unstable position in an ongoing power struggle [in the ruling party] following several recent incidents,” another source said. 

The allegation suggests to Seoul officials that in his third year of power, Kim Jong-un may be having problems managing his financial affairs.

Some sources said Yun’s defection could be part of the aftermath of the brutal execution of Kim Jong-un’s uncle, Jang Song-thaek, in December 2013.

North Korean officials in charge of foreign currency in China and other Western countries were allegedly part of Jang’s inner circle, sources said, and some of them felt threatened by Jang’s death and have vanished. [Joongang Ilbo]

After Jang’s purge, there were reports that dozens of North Korea’s offshore financiers had been called home, and (wisely) didn’t come. The Joongang Ilbo has done the best reporting of North Korean money laundering of all of the Korean papers.

God, how I hope the CIA and Treasury will have a chance to debrief this man. And that he brought his laptop with him. And that he isn’t the only one who has reached safety in the embrace of “third-country” intelligence officers.

Hat tip to a reader and friend.

Australian government finds “abandoned” N. Korean funds.

While most of these were accounts held by people in China, Hong Kong, Japan, Britain and the United States, some can be traced to addresses as far afield as North Korea, Syria and the Democratic Republic of the Congo. Some will doubtless never be claimed.” I’ll bet there’s a fascinating story there.

APG needs N. Korea like the Vienna Boys’ Choir needs Jerry Sandusky

The Asia/Pacific Group on Money Laundering describes itself as “an autonomous and collaborative international organisation … consisting of 41 members and a number of international and regional observers [who] are committed to the effective implementation and enforcement of internationally accepted standards against money laundering and the financing of terrorism, in particular the Forty Recommendations of the Financial Action Task Force on Money Laundering (FATF).”

APG has an Associate Membership in FATF, the world’s primary international organization dedicated to fighting money laundering and terrorist financing, and one of the few international organizations in this world that actually works. Although membership in APG does not confer membership in FATF, it does allow the member (or observer) a degree of secondary influence over FATF’s decision-making. And since 2010, FATF has issued statement after statement cautioning banks and finance ministries about North Korea’s “failure to address the significant deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threat this poses to the integrity of the international financial system.”

No doubt, Kim Jong Un’s financiers in Pyongyang understand the potential consequence of being severed from the global financial system, which is why, since February, Pyongyang has “engaged” with FATF to “discuss” its deficiencies. Presumably, those discussions are nothing more than discussions; otherwise, FATF wouldn’t still be urging Pyongyang to “immediately and meaningfully address” the deficiencies. It also explains why North Korea wants into APG.

As always, the flaw in this engagement is the absence of evidence that Pyongyang has made a decision to abide by the rules and common values of the association engaged with. As U.N. Security Council Resolution 2094 points out, FATF also supports “targeted financial sanctions related to proliferation.” North Korea not only remains constitutionally dedicated to developing nuclear weapons in violation of that resolution (and others), it is also dedicated to financing its WMD programs by any means necessary. We saw this most recently when North Korea lost a World Cup match of sorts — no, not that internet hoax, but the one it played against the Cambodian police.

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Earlier this month, Yonhap reported that Cambodian authorities had arrested 15 North Koreans in Phnom Penh for running illegal gambling websites that were booking bets on the World Cup, which North Korea did not win, and for conducting cyber warfare against South Korea. The report was sourced to “a South Korean government source,” who also said the Cambodians “seized computers and other related equipment.”

It’s a far better thing to seize computers, which talk, than to seize North Koreans, who don’t. The computers could provide valuable information about North Korean bank accounts, financial relationships, co-conspirators, and the currencies and media of exchange used. It might even provide proof to support longstanding suspicions that North Korea’s overseas restaurants, including those in Cambodia, are fronts to launder money from the proceeds of activities like illegal gambling.

If the Treasury Department were at all serious about targeting North Korea’s financial enablers — a purely theoretical discussion, because it isn’t — an effective computer forensic analysis could give Treasury the basis to sanction North Korea’s third-country enablers.

North Korea has a long history of using illegal online gambling to finance itself. In 2011, the rheumy-eyed, snaggle-toothed old Trotskyists at The Guardian reported that “an elaborate hacking network” run by 30 North Koreas based in China “broke into online sites hosted in South Korea and stole prize points worth almost £3.7m ($6m)” using malicious code. Authorities also arrested five South Koreans for distributing the malware. Just four months before that report, the Russian Foreign Ministry “reprimanded the North Korean and Belarusian ambassadors for running illegal gambling on their premises in Moscow;” specifically, “a large network of underground casinos.” Even Dennis Rodman’s recent visit to Pyongyang was sponsored by Paddy Power, a (legal) Irish online gambling site. More here, here, here, and here.

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Given North Korea’s long, promiscuous history of counterfeiting, proliferation, arms sales to terrorists, and money laundering – and the fact that this history leads right up to the present day – I can’t help wondering whose bright idea it was to offer North Korea “observer” status in APG, whose “members and … observers” are supposed to be “committed to the effective implementation and enforcement of internationally accepted standards against money laundering and the financing of terrorism.”

The arguments against this are as obvious as the reasons why those Craigslist ads say “disease-free.” North Korea will use its usual Jedi mind tricks to make contacts, schmooze, and persuade APG members (and indirectly, FATF) that it’s this close to some endlessly receding horizon that may or may not be a real step toward financial transparency. If, like me, you spent the last ten years watching how well those tricks worked on South Korea and our State Department, you can imagine how they’ll work against APG. The consequence will be the relaxation, rather than the strengthening, of anti-money laundering enforcement standards.

It’s clear enough how accepting this invitation serves North Korea’s interest in perpetuating its money laundering and proliferation.

The APG will decide later whether to elevate North Korea from observer status to a member country once it evaluates Pyongyang based on its annual reports to the organization and visits by the representatives of the group over the next three years.

South Korea and many other members are trying to figure out the motive behind the unexpected move by Pyongyang, because North Korea was previously opposed to joining the APG.

“[North Korea’s motive] is a mystery to us,” said a high ranking government official, who requested anonymity. “We suspect that North Korea, while looking for ways to ease the international financial restrictions imposed on them, decided to show their efforts in improving their global image [by joining the APG].

“But since the lists that they need to follow are long, we will probably have wait and see how sincere and determined they are with their decision.”

In other words, it could be a facade as a way for North Korea to ease the sanctions imposed on it, since the possibility that Pyongyang will give up its nuclear ambitions is low.

The action is particularly suspicious because up until last year’s APG meeting held in Shanghai, North Korea refused to join the organization because of the rule requiring members and observers to follow global standards. North Korea at the time argued that it would join the APG only after the agreement to follow UN resolutions was taken out. [Joongang Ilbo]

It’s hard to see what good this invitation does for APG, FATF, or the financial system. North Korea clearly hasn’t made the fundamental decision to abide by the shared values of any of those associations. And that fundamental decision is what gives “engagement” the potential for those associations to change North Korea, as opposed to the very opposite outcome.

It’s easier to see the dangers this move creates — again, absent evidence that North Korea has seen the evil of its ways and decided to change them. The most obvious is that it gives North Korea undeserved legitimacy in area where it has been the world’s most flagrant recidivist.

Then, there is the example of the U.N. Human Rights Commission to draw from. I suppose that once, long ago, some addlebrained diplomat hypothesized that if only the leaders of China, Cuba, and Libya could be exposed to the principles by which the rest of civilized humanity lives, their leaders would feel compelled to conform themselves to those principles. What happened instead was that China, Cuba, and Libya took over the Human Rights Council, eviscerated its founding values, and destroyed it. So it goes whenever international institutions welcome members who don’t share the common principles of the institutions.

FBME Bank denies money laundering allegations

FBME Bank, whose correspondent accounts were ordered closed by a Treasury Department action under Section 311 of the USA PATRIOT Act last week, has responded to Treasury’s allegations of money laundering:

FBME said it was “shocked” by the content of the US Department of the Treasury notice “that sets out unexplained allegations of weak AML controls,” which, the bank said, it had not been given any opportunity to comment on or refute.

The bank denied the allegations, saying it had commissioned the German division of an international accountancy firm to carry out a detailed assessment into its operations and practices over the past two years.

FBME, it said, was found in compliance with applicable rules on AML regulations of both Cyprus and the European Union.

“FBME Bank welcomes the involvement of its regulator, is cooperating fully with it and reiterates its absolute continued commitment to full compliance with applicable laws and regulations,” the bank said in an announcement posted on its website. [Cyprus Mail]

That welcome may be a bit superfluous, because according to the Cyprus Mail and the Lebanese news site Ya Libnan, the Central Bank of Cyprus has taken over FBME’s operations for “as long as the central bank deems it necessary.” The move is similar to the Macanese government’s takeover of Banco Delta Asia in 2005, after Treasury published a similar set of notices against it for laundering money for North Korea. With Cyprus trying to stave off a broader banking crisis now, the last thing it needs is for a bank operating on the island to collapse, even if that bank is chartered in Tanzania and serving a largely non-Cypriot clientele.

I’ll offer a few points in response to FBME’s statement, which largely misapprehends how Section 311 (codified at 31 U.S.C. sec. 5318A) operates.

First, it is both technically true and legally irrelevant that FBME had no notice of this specific action. A Notice of Finding and a Notice of Proposed Rulemaking under Section 311 are intended to be no-notice actions to block correspondents accounts that may contain illegally derived funds. FBME’s opportunity to respond began with the publication of the notice and will end 60 days after that. After considering any comments on the proposed action, Treasury will make its final findings and conclusions and publish its Final Rule. Presumably, this process will give FBME an opportunity to hire lawyers to argue Treasury hasn’t met the criteria of 31 U.S.C. sec. 5318A(b).

Second, until that point, it would be fair to say the allegations are “unproven,” but it would not be fair to call them unexplained. Treasury’s notices explain them in great detail.

Third, Treasury has no obligation to warn the target of a law enforcement investigation that it is investigating the target for suspected illicit activity; rather, it is the duty of the financial institution to know its customers and make reasonable inquiries about suspicious transactions – that is, to perform due diligence. If true, FBME’s alleged provision of financial services to an unnamed front for a Syrian entity involved in WMD co-development with North Korea suggests that it fell short of these “know your customer” obligations. Presumably, FBME’s response and Treasury’s evidence will be given due consideration before Treasury publishes its Final Rule. If FBME can make the case that it didn’t fall short of these obligations, or that the shortfalls were inadvertent, Treasury should mitigate or rescind the special measure.

Finally, if half the allegations in Treasury’s Notice of Finding are true, FBME can’t honestly claim that it wasn’t on notice of deficiencies in its “know your customer” and anti-money laundering obligations. Of course, FBME has another 55 days to make its case to the contrary. After that, FBME can appeal Treasury’s decision to the federal courts, in which case Treasury’s decision would get a high degree of judicial deference, but its evidence would still be subject to judicial scrutiny. Even classified evidence Treasury relies on would be subject to the court’s in camera review.

You can read the full statement at FBME’s web site, which is loading rather slowly. For some reason.

Treasury nukes bank with possible North Korea links (updated)

The Treasury Department has gone full Banco Delta on Cyprus-based, Tanzanian-chartered FBME Bank for money laundering, terrorist financing, and possibly even Syrian WMD proliferation — proliferation that is closely linked to North Korea.

According to Treasury’s press release, FBME promoted itself as a provider of no-questions-asked banking services with loose anti-money laundering controls, although I saw no evidence of this at FBME’s Web site. But according to Treasury’s more detailed Notice of Finding, FBME was laundering money for Hezbollah, illegal online gamblers, phishing hucksters, drug lords, African kleptocrats, and various swindlers who ripped off victims in California, Ohio, and Michigan.

Treasury invoked Section 311 of the USA PATRIOT Act against FBME, applying the dreaded Fifth Special Measure, which closes the target’s correspondent accounts and effectively cuts it off from the global financial system. You can read Treasury’s Notice of Proposed Rule-Making here. Or, for those of you who aren’t banking lawyers, I’ll simplify:

Well, almost. A bank can survive that sort of thing and continue to do business, but only on a small, local scale. Banco Delta Asia itself continues to do business for a local customers in Chinese Yuan and Macanese Petacas. In the case of FBME, however, its business model depends on international transactions. It isn’t offering commercial banking services in Cyprus, and it only has four branches in Tanzania.

So far, Treasury has invoked Section 311 against four jurisdictions — the Ukraine and Nauru (since rescinded), Burma, and Iran. It has also listed 13 financial institutions, including Banco Delta Asia, which remains listed to this day.

North Korea, the only existing state known to sponsor currency counterfeiting and drug trafficking, and to encourage illicit activity by its diplomats abroad, has never been listed. Discuss among yourselves.

Treasury’s case against FBME makes no direct reference to North Korea, but according to the Notice of Finding, one of FBME’s customers was a front for a sanctioned Syrian entity, the Scientific Studies and Research Center (SSRC), and used FBME to process transactions through the U.S. financial system. (This is the part that people never get — the bad guys love them some dollars. They just don’t think they’ll get caught, probably because they usually aren’t.)

Treasury did not name the front company.

According to the Nuclear Threat institute, SSRC “collaborates heavily with Iranian and North Korean entities” on missile technology. In February 2013, the Israeli Air Force bombed a convoy loaded with anti-aircraft missiles at SSRC’s complex north of Damascus, damaging what The New York Times described as “the country’s main research center for work on biological and chemical weapons.” Further on, the Times article says, “Intelligence officials also believe that the center has links to North Korea, a source of much of Syria’s missile technology.”

Oh, and those anti-aircraft missiles were SA-17s, the same kind suspected of shooting down that Malaysian airliner today. [Update: Subsequent press reports have said that the missile used to shoot down the airliner was an SA-11.]

Earlier this year, the Times of Israel, citing Jane’s Defence Weekly, alleged that SSRC has gone into the business of manufacturing its own ballistic missiles domestically to bypass international sanctions against Syria, and that it has done so “with the assistance of countries including Iran, North Korea, and Belarus.”

The SSRC is also working on a project with North Korea to help improve its Scud D missile capabilities. North Korean officials at the Tangun corporation have already begun researching and producing components for Scud D missiles which would make it difficult for enemy targets to calculate the missiles’ flight trajectory upon atmospheric entry, Jane’s reported, thus preventing or delaying interception by anti-missile systems, including those in Israel’s possession.

Korea Tangun Trading Corporation appears on the SDN List. For more about the links between SSRC and North Korea, NK News has done some superb investigative reporting on this topic.

According to the Notice of Finding, the SSRC front company shared the same address in Tortola, British Virgin Islands with 111 other shell companies that are also subject to international sanctions. There are only 74 targets on the SDN list with Tortola addresses. Most are fronts for Cuba; a few are sanctioned for links to Hezbollah, Iran, or Zimbabwe. One, DCB Finance, is North Korean, and is a front for Daedong Credit Bank. DCB Finance and Daedong Credit Bank were sanctioned last June for proliferation-related activities.

By itself, the coincidence of address adds little to Treasury’s case, which presumably relies on financial evidence of the SSRC front company’s transactions. It does suggest that in financial terms, you will never find a more wretched hive of scum and villainy than Road Town, Tortola.

FBME had did not immediately respond to a Wall Street Journal reporter who contacted it for comment. Perhaps when he called, the reporter heard a Board of Directors cry out in terror before it was suddenly silenced.

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[Update: Greetings to my visitors arriving from FBME Bank and FBME Card Services on the lovely island of Cyprus. If you want to get your side of the story out there, do feel free to send an email or drop a comment. I have to say this for FBME -- after a lot of searching, I never did find the evidence that it marketed its lax AML compliance, although the pre-paid card services it offered did not have a particularly good compliance reputation.]

The U.N. Panel of Experts is starting to follow Kim Jong Un’s money.

The main headlines that will come of the U.N. Panel of Experts’ new report on the enforcement of North Korea sanctions will mostly cover the Chong Chon Gang incident — the large amount of weapons seized, the brazenness of its deception, and the complexity of its corporate and financial links to entities operating from Russia, Singapore, and China. There has been relatively little attention paid to the newly revealed evidence that North Korea has helped Syria and Iran arm terrorists. In this post, I’ll discuss some other important conclusions we can draw about the enforcement of UNSCR 2094 a year after its adoption.

1. North Korea is still making a lot of money selling weapons.

In case you doubted it, the latest POE report finds that North Korea “remains … actively engaged in trade in arms and related materiel in violation of” U.N. Security Council resolutions, and concludes, “[T]here is no question that it is one of the country’s most profitable revenue sources.” How profitable? The POE doesn’t pretend to know and “doubts that all existing illicit cooperation has been identified,” but something is paying for all that rice and baby formula ski lift equipment. There has been a construction boom in Pyongyang recently, and those who know how Kim Jong Un is paying for it aren’t saying.

Clearly, North Korea is doing a brisk trade in weapons, mostly with Africa and the Middle East. Paragraphs 90 to 115 of the report recount a long series of reports of North Korean arms smuggling — everything from the fuzes in rockets fired at Israel to specialized alloys to submarine parts to gas masks — that the POE is either still investigating, or found out about after the fact and by happenstance. It’s obvious that the sanctions are leaky, and the U.N. POE admits it.

That’s why I can only shake my head when the Foreign Minister of Korea says that the POE report shows that “relatively successful in restricting the country’s ability to raise funds.” The statement could only mean two things: either he didn’t read the report, or South Korea isn’t serious about enforcing these sanctions at all. I mean, just have a look:

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Obviously, I can’t say what this construction costs, but it’s safe to assume it’s enough to feed a lot of hungry North Koreans. The POE doesn’t know how North Korea can afford to build two high-rise bank towers in Pyongyang, either, but judging by its inference about the arms trade, it’s fair to say that plenty of the money that’s paying for these buildings is illegally derived and laundered. This is not a picture of effective enforcement.

The report calls for no new sanctions, but once you read it, it’s apparent why: states aren’t even enforcing the sanctions that exist now. It says that member states already have adequate enforcement tools at their disposal — a point I’d quibble with — although it’s obvious that not all member states are using those tools.

2. China is violating North Korea sanctions — flagrantly.

China, naturally, is caught in flagrante delicto. The POE recounts the story of a trade show in China last year, when a concerned citizen spotted a booth festooned with a banner bearing the name of Korea Ryonha Machinery Joint Venture Corporation, a subsidiary of a firm designated by the U.N. for proliferation activities, and an entity named on Treasury’s list of Specially Designated Nationals.

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When the POE pointed that out, hilarity ensued:

149. In its reply to the Panel’s inquiry, Chinese authorities reported that Ryonha’s name was not on the list of exhibitors provided by the Democratic People’s Republic of Korea, nor did it appear on any booth before the fair’s opening. Upon discovering its presence, China requested Ryonha to withdraw from the fair and ensured that the relevant persons left its territory (according to Panel information there were at least seven Democratic People’s Republic of Korea nationals working on behalf or at the direction of Ryonha during the fair).

150. The Panel also discovered that, even though designated, Ryonha remained listed as a “recommended company and member” on the website of the China- Democratic People’s Republic of Korea Trade Network.103 In reply to an enquiry from the Panel, China responded that Ryonha had been removed from the listing.

At the end of the day, the POE wasn’t even able to confirm that the ChiComs had frozen Ryonha’s assets and seized the machinery on exhibit, as required under UNSCR 2094. Another North Korean firm, Leader International, still appears on Hong Kong’s official business registry more than a year after its U.N. designation.

Embarrassments like this will not cause China to actually enforce the sanctions it supported in the Security Council. Nothing less than sanctions against the Chinese entities that knowingly fail to enforce sanctions will do that. And because China would block those additional sanctions at the U.N., it’s up to the Treasury Department, which can bar those companies from the global financial system, to put some teeth into the sanctions now.

3. Other nations, including nations in Europe, aren’t taking sanctions seriously enough.

China isn’t the only member state that has failed to enforce North Korea sanctions effectively. Taiwan, in particular, has emerged as North Korea’s main new source of precision machine tools and related technology since it lost its access to the Japanese market. Plenty of states haven’t met their requirements to file compliance reports with the POE. Others aren’t reporting violations they find out about.

Notably, not a single Member State reported a violation of the luxury goods ban, despite the many violations that occurred at the Masik Pass Ski Resort. Even the U.K. failed to report North Korea’s attempt to purchase a yacht from a British manufacturer.

In most of these cases, the non-enforcement isn’t coming from the highest levels of the government, as with China. It’s a simple problem of member states failing to make enforcement a priority, or failing to reign in the profiteers in their jurisdictions. That’s a problem that could be dealt with through competent bilateral diplomacy in most cases, though sanctions and criminal prosecution should be options for deserving violations.

There is an another, more fundamental problem — what, exactly, are member states supposed to report? U.N. definitions of controlled items are often too narrow. For example, ski lift equipment doesn’t fit the U.N. definition of a “luxury good.” (Update: It does fit the U.S. and EU definitions.)

The same problem recurs with North Korea’s acquisition of missile parts. When the South Korean Navy recovered the remains of the last Unha-3 from the bottom of the Yellow Sea, it found that the rocket contained numerous foreign components, including some of U.S. origin, that were not on the U.N. list of controlled items.  A shipment intercepted by “a Member State” contained parts described as being for “freezing carriers”and “fish-factory mother ships,” all of which were “spare parts or other items related to Scud ballistic missile systems.” Yet those items also did not meet “the criteria defined by the lists of prohibited items, material, equipment, goods and technology related to nuclear, other weapons of mass destruction and ballistic missile programmes.”

This calls for the POE itself to proffer an expanded list of controlled dual-use items, something that was (but for a few especially sensitive items) lacking in the POE’s report. (Update: If it wanted to, the U.N. could borrow or cross-reference the U.S. Munitions List.)

4. Existing financial sanctions on North Korea only show the tip of a big, dirty iceberg.

The best news in this report is that it appears to be the work of people who are intelligent, inquisitive, and serious about their work. They’ve begun investigating how North Korea launders the money it makes from its illicit activities:

166. During its mandate, the Panel commissioned an in-depth study to learn more about how the Democratic People’s Republic of Korea makes use of foreign-based firms and individuals to evade scrutiny of its assets, financial and trade dealings. It sought a comprehensive view of the Democratic People’s Republic of Korea’s commercial footprint abroad to learn how entities and individuals that have figured in its investigations relate to this broader network and to one another. The Panel believes that an examination of those linkages would assist its efforts to detect and advise the Committee and Member States about others who might play controlling and supportive roles in evading trade and financial measures adopted in the resolutions.

167. [....] The study provided the Panel with a rich database of leads for further investigation. Starting with less than 500 loosely connected or unconnected individuals and entities that had come to the Panel’s attention during its investigations, the study found connections to an additional 700 individuals, more than 1,600 companies and nearly 2,500 corporate identifiers.

168. The results of the study show that the operations of the Democratic People’s Republic of Korea abroad no longer fit the description of “two persons and a fax machine”. Instead, it found a relatively mature, complex and international corporate ecosystem. Patterns that emerge from examination of the connections between identified individuals and entities show six large, discrete networks, all of which share links.

Other North Korean banks come under suspicion because of the POE report.  A table at Annex XXXIV gives a list of banks known to be affiliated with North Korea, including those designated by the U.S., the U.N., and the EU. But among those not designated —

  • The Ilshim International Bank “was reported to be associated with the Ministry of People’s Armed Forces.”
  • The Koryo Bank is “possibly associated with Office 38 of the KWP.” (Office or Bureau 38 is the slush fund of Kim Jong Un and his court, and receives funds from the more notorious Bureau 39, which is in charge of laundering the proceeds of North Korea’s illicit activities by co-mingling those proceeds with the proceeds of “legitimate” business operations, like its overseas restaurants. The restaurants are believed to fall under the control of Bureau 39.)
  • The Kumgang Bank is “described as a window of the Foreign Trade Bank,” which was recently designated by the Treasury Department for its involvement in proliferation.
  • The North East Asia Bank is “[a]ssociated with the Korea National Insurance Corporation,” whose massive insurance fraud scam was the subject of international litigation and revealed by former KNIC official Kim Kwang Jin.

Curiously absent from the list is Sili Bank, which is based in Shenyang, China, and which briefly aroused international curiosity when it began offering e-mail services to and from North Korea, but which has no functioning English web site today. At one time, Sili Bank was the only game in town for anyone, including North Korean companies, to obtain international e-mail service.

Ocean Maritime Management, which the Washington Post describes as “a Pyongyang-based company with links to the North Korean government,” used a Sili Bank e-mail address to send a protest letter to the Panamanian authorities when they boarded the Chong Chon Gang and found a cargo of MiGs, MiG engines, missiles, and other weapons hidden under a layer of sugar. OMM, which arranged the shipment from its Vladivostok office, denied knowing of any cargo other than the sugar, which it describes as “essential for our people’s living” and “a cargo of humanitarian nature.”

5. Air Koryo is effectively an arm of the North Korean Air Force, and is involved in suspicious financial dealings.

North Korea’s General Administration of Civil Aviation, which is controlled by the North Korean Air Force and in turn controls Air Koryo, also lists a Sili Bank e-mail address. Air Koryo falls under the POE’s suspicion for a series of “dubious” debts owed to it by “recently formed shell companies” related to gold trading.

The Panel is suspicious that the Democratic People’s Republic of Korea may be using or considering the use of precious metal sales on credit terms to create “accounts payable”. Such sources for funds would not necessarily show as being under its control and even could be swapped with other firms to further distance its connection and thereby better evade sanctions and enhanced due diligence by banks.

Because of its military links, the POE says that “providing financial transactions, technical training, advice, services or assistance related to the provision, maintenance or use of Air Koryo’s aircraft” could be a violation. It will be interesting to see whether future POE reports confirm whether Sili Bank (a) still exists and (b) is knowingly facilitating illicit activities.

6. North Korea’s overseas monument business may be a money laundering scheme, too.

Finally, North Korea’s work building memorials and statues overseas has drawn its share of snark from bloggers and reporters, but the POE gives us cause to suspect that those operations could be used as fronts for money laundering, too:

Available media reports, particularly about projects in several African countries, note that project values appear inflated. Participation in overseas construction also takes place through joint ventures where a foreign partner could hold funds on behalf of or for the benefit of designated entities and prohibited programmes.

For example, if the Syrians wanted to pay for North Korean technical assistance with a missile program or a reactor while avoiding detection, they could commission the construction of a grandiose memorial at an inflated price. All perfectly legal, right?

If so, the POE should be wondering whether North Korea has recently made illicit deals with Zimbabwe and Namibia. Ironically, Zimbabwe once paid North Koreans to train their troops, who proceeded to kill tens of thousands of civilians in areas backing the Zimbabwean African Peoples’ Union, led by Joshua Nkomo. Today, Zimbabwe is paying North Korea to build a statue of Joshua Nkomo, and Zimbabwean dissidents have taken note.

A Christian blogger in Namibia also protests his government’s hiring of North Korea to build political monuments in Windhoek, when North Korea is rumored to be shooting people for having contact with Christian missionaries. (By contrast, nearby Botswana severed diplomatic relations with North Korea when the U.N. COI report came out.)

Is the next Banco Delta Asia in Malaysia?

Over the weekend, a lot people were giggling at the decision by Paul Chan, President of HELP University, to award an honorary degree in economics of Kim Jong Un. Foreign Policy’s Isaac Stone Fish, who first revealed the story, obligingly prints Chan’s manifesto, which reads like the work of a true belieber — a man who writes as if he has spent an inordinate amount of time watching High School Musical over and over again. I have fond memories of my friendships with Malaysian students during law school, so it saddens me to say that this can’t be unrelated to the weirdness of Malaysia’s political culture. At the end of the day, however, the main consequence of this will be to make HELP University look ridiculous, and to highlight how little Kim Jong Un really knows about economics.

What concerns me more is how the weirdness of Malaysia’s political culture may play a role in North Korea’s illicit arms deals and the evasion of U.N. Security Council sanctions. The Korea Herald has called Malaysia “a cornerstone for North Korea’s diplomacy in Southeast Asia.” Malaysian banks are suspected of hosting offshore bank accounts for North Korea, and of serving as financial intermediaries for North Korea’s arms deals with Burma, long after those transactions were banned by U.N. Security Council resolutions. As of July, Malaysia had not yet provided the U.N. a report of its compliance with U.N. Security Council resolutions sanctioning North Korea. Today, it is one of just two states that still has direct Air Koryo flights to Pyongyang.

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).

Sanctions are working in Iran. They’ll work better against North Korea, and here’s why.

Drag a modest grant check through DuPont Circle and you’ll accumulate at least ten pundits, several dozen grad students, and a multitude of assorted kooks who would willingly write you an academic paper entitled, “Why Sanctions Never Worked.” And that’s true, except for South Africa, Yugoslavia, Burma, Nauru, Al Qaeda, Iran, and North Korea, and only if you limit the argument to trade sanctions and exclude other tools of economic pressure, like coordinated divestment, third-party financial sanctions like those in Section 311 of the Patriot Act, or targeted money-blocking sanctions like those in executive orders 13,382 and 13,551.

The notable counter-example is Iraq, which was willing to let its people and infrastructure suffer while it survived on oil smuggled through Turkey. But the sanctions against Iraq were old-fashioned trade sanctions, and it’s not hard to understand why they failed.

Because trade is mainly decentralized, it is difficult to regulate and control. The finance on which trade depends, however, is centralized–around the U.S. dollar, U.S. financial institutions, and the financial district of New York City–the Treasury Department’s power to restrict the access of bad actors to the global financial system by regulating U.S. financial institutions has emerged as a key tool of global U.S. power. That’s especially true in an age of weariness about the use of military force. Washington is only coming to terms with the potential power of these new legal and financial tools.

Sanctions also require unity of effort. They can only work as part of a comprehensive strategy that may include military deterrence, carefully monitored humanitarian assistance, law enforcement, financial regulation, industry liaison, information operations in the targeted country, and tough-minded diplomacy with the targeted country, domestic opposition, and third countries. They don’t work if they’re at odds with these other tools of national policy. The State Department’s failed 2007 deal with North Korea, which threw away the very leverage that made that deal possible, is an ideal example of this.

At almost every meeting aimed at getting the North Koreans to halt their nuclear weapons program, Pyongyang has demanded that the United States lift its penalties against Banco Delta Asia. This week the Russian government asked the United States to remove the sanctions against the bank, too. [New York Times, Jan. 18, 2007]

Now we know it worked against North Korea, but not long ago, we were told it wouldn’t work against Iran. This 2007 New York Times report quotes a skeptical eurocrat, who explains why the financial sanctions that devastated North Korea’s palace economy and exceeded even Treasury’s expectations would never work against Iran:

The United States has tried to apply similar pressure on Iran in recent years without as much success. The size of Iranian oil exports and the country’s deeper integration into the international financial system make it much more difficult to isolate.

“It is not so easy with Iran, but it has shown great effect on North Korea,” said Benita Ferrero-Waldner, the European commissioner for external relations, during a visit to Beijing on Wednesday.

That an EU official would hold this view shouldn’t have been surprising. Europe has long resisted the use of financial pressure against rogue states and state sponsors of terrorism. Some of its influential banks and businesses enjoy cozy relationships with them. But there was a sound basis for the skepticism in the case of Iran, which unlike North Korea, has a diverse economy. It sells oil, of course, but also automobiles, carpets, fruit, pistachios, carpets, and other things that people want to buy. Diverse economies are harder to isolate than those whose links to the global financial system are fragile.

Harder, but not that hard, as we learn from a Times report this week:

In repeated meetings during the week, Mr. Rouhani and his foreign minister, Mohammad Javad Zarif, said the government’s financial condition was far more dire than the previous president, Mahmoud Ahmadinejad, had let on.

Mr. Rouhani and Mr. Zarif did not publicly specify the severity of the cash squeeze. But Western economists believe the crisis point may be much closer than previously thought, perhaps a matter of months. Iran news outlets have reported that the government owes billions of dollars to private contractors, banks and municipalities. [N.Y. Times]

What happens in a few months? The businesses and government agencies that have lost their export markets, and that have no domestic customers left, that have been running at losses for months, and that employ most of Iran’s workers will run out of credit and savings. They will have to lay off their workers. Iran’s streets will be full of the unemployed. Most of those people, if asked, would probably say that they want Iran to have nuclear weapons. By a stronger margin, however, they will say they would rather have jobs. When their voices are heard in Iran’s streets and when the regime knows it can’t pay the forces it will need to crush them, diplomacy with Iran will have a chance to work.

It won’t work quite this way in a society as terrorized, physically stunted, and psychologically scarred as North Korea’s. But eventually, the men with guns won’t be able to make up their margin of survival by preying on peasants. They will have to prey on each other.

For a more fulsome explanation of why we can isolate North Korea financial without the cooperation of (and even despite the active resistance of) China’s government, I’ll turn to this Times review of Juan Zarate’s book, Treasury’s War (which I downloaded today):

The genius of Section 311 is that Treasury doesn’t do anything other than apply a financial “scarlet letter.” The actual damage is done by the bank’s peers, which typically refuse to do business with it out of fear that they, too, will be cut off from the financial system. Just the threat of a 311, Mr. Zarate writes, has caused nations as powerful as Russia, and as recalcitrant as Myanmar, to change their money-laundering laws, forcing their banks to conform to international standards. A handful of well-placed 311’s, he says, has put much newfound pressure on governments including North Korea and Iran.

“Geopolitics is now a game best played with financial and commercial weapons,” Mr. Zarate writes. “The new geoeconomic game may be more efficient and subtle than past geopolitical competitions, but it is no less ruthless and destructive.”

The centerpiece of the book, and probably the best example of Section 311’s uses and limitations, is the story of Treasury’s assault, beginning in 2005, on North Korea, which American officials said was involved in activities like counterfeiting and drug trafficking. Mr. Zarate describes how the United States hit one of the banks it linked to North Korea, Banco Delta Asia in Macau, with a 311.

Practically overnight, banks throughout the region, even in China, began turning away or throwing out North Korean government business. By this one simple act, Mr. Zarate writes, “the United States set powerful shock waves into motion across the banking world, isolating Pyongyang from the international financial system to an unprecedented degree.” He adds: “The North Koreans didn’t know what hit them.”

As the depth of its plight sank in, North Korea appeared to panic. First, it fired off a missile into the Pacific, a move that had the additional benefit of freaking out the State Department, which demanded to know what Treasury was up to. Then, Mr. Zarate writes, a North Korean representative contacted the United States, seeking relief from the 311. At the State Department’s insistence, negotiations began in Beijing, and appeared to end when a Chinese bank volunteered to handle a measly $25 million of North Korean money the authorities in Macau had frozen.

Mr. Zarate writes that “the amount of money wasn’t the issue” and that the North Koreans “wanted the frozen assets returned so as to remove the scarlet letter from their reputation.”

Then, he says, something amazing happened. Despite its government’s support of North Korea, the Chinese central bank refused to approve this solution, indicating that it, too, wanted nothing to do with a bank hit by a 311. “Perhaps the most important lesson was that the Chinese could in fact be moved to follow the U.S. Treasury’s lead and act against their own stated foreign policy and political interests,” he writes. “The predominance of American market dominance had leapfrogged traditional notions of financial sanctions.”

Eventually, however, Treasury’s pressure on Pyongyang had to be lifted at the insistence of the State Department, which was far more worried about North Korea’s missiles than its bank accounts. Mr. Zarate deplores the move. “The North Koreans had expertly turned the tables” on the United States, he says. “We were outmaneuvered at the height of international pressure and gave up our leverage.” [New York Times]

If you can’t get enough of this sort of thing, here’s a Q&A with Zarate in the Wall Street Journal, and here’s a must-see video of him explaining how these new tools of financial pressure pressure work:

Stop me if I’ve mentioned this before, but there’s a bill in Congress now that would utilize this very strategy framework to isolate North Korea from its billions in offshore deposits and its sources of regime-sustaining hard currency until it disarms, and makes significant progress on human rights, shuts down its death camps, and allows the open and fair distribution of food aid. And also, allows us to verify these things for ourselves.

We fret constantly about North Korea. We fret that it has restarted the Yongbyon reactor, and that its centrifuges are spinning away, enriching uranium. We fret that it sells nuclear reactors and chemical weapons technology to Syria, and that it might be testing nukes for both itself and Iran. We fret that it starves its people while it blows hundreds of millions of dollars on ski lift equipment, water parks, and yachts. We fret that its new mobile missiles will be able to deliver WMDs, including miniaturized nuclear weapons, and that we won’t be able to find them all in time. We fret that it may have liquidated several thousand people from one of its its prison camps. All this fretting is the constant companion of futility–the implication that there isn’t a thing we can do about any of it.

Except that we can. We could saw the trunk out from under Kim Jong Un’s money tree overnight. A determined campaign of financial pressure would destroy the regime in one or two years. And long before that, Kim Jong Un would come to us and ask for a deal. Only this time, that pressure should only be suspended as long as the progress continues.

H.R. 1771 is the bill that would do this. It has 125 bi-partisan co-sponsors. Some of them are as conservative as Ileana Ros-Lehtinen and Peter King. Others are as liberal as Jim Moran, Joseph Kennedy, and Carol Shea-Porter. You could even call it a rare example of bi-partisan agreement within a Congress that’s often bitterly (and often, unnecessarily) divided. Is your representative on that list? Is your Senator willing to introduce companion legislation?

I can’t wait to read this one: “Treasury’s War,” by Juan Zarate

I wonder if Amazon can deliver this while I still have an unexpected windfall of leisure time:

Zarate, a senior adviser at the Center for Strategic and International Studies, plays the role of the bureaucrat. He joined the Treasury Department just weeks before the 2001 attacks to aid the agency’s enforcement wing. [....]

Treasury launched its most ambitious assault with this new weapon on a tiny bank in Macau. That bank, Banco Delta Asia (BDA), caught the department’s attention in 2003 for doing a hefty amount of business with North Korea. Classic sanctions, such as freezing individual bank accounts and forbidding commercial activity, had succeeded in isolating Pyongyang, but BDA, among others, helped the country stream its profits from illegal arms sales, money laundering and counterfeiting into the international financial system. In the most notable revelation of the book, Zarate recounts a chain reaction that no one predicted. Within two weeks of its September 2005 designation as a primary money laundering concern under Section 311, a hemorrhaging BDA shuttered all of its North Korean accounts and handed its administration to the Macau government. Fearing the North Korean taint, banks in financial hubs worldwide, and even North Korean ally China, ended business with North Korea.

The Kim regime initially dismissed the designation as yet another feckless sanction. But as its lifelines collapsed, it panicked. North Korean leaders refused to return to the six-party nuclear talks until Treasury, in Zarate’s words, removed “the scarlet letter from their reputation.” By designating BDA for its North Korean dealings, the United States exposed a raft of illegal North Korean financial activity, from money laundering to drug trafficking, that no bank wanted to be associated with.

The designation bought the United States real leverage with North Korea. But just when it could have waited for Pyongyang to flail its way into concessions, the administration folded. Zarate bitterly recalls watching from his new perch at the National Security Council as, without any North Korean compromise, the State Department badgered Treasury into reversing the action so as to kick-start the talks. By trying to “put the genie back in the bottle,” Zarate argues, Washington undermined its credibility and “cashed in on BDA too soon.” [Washington Post]

This sounds like the most engrossing read a person can possibly have without having to clear one’s browser history afterward. In fact, it’s exactly the strategy behind H.R. 1771, one of the worthier projects this Congress has taken on–and 1771 would be far more comprehensive and deadly than an action against one dirty little bank in Macau.

Hat tip to a reader.

Kaesong investors beware: Treasury issues new warning about N. Korea money laundering risk

Precisely what North Koreans do with earnings from Kaesong, I think, is something that we are concerned about.”

David Cohen, Undersecretary of the Treasury for Terrorism and Financial Intelligence

Just as Kaesong begins the process of reopening, and as the South Korean government seeks to “internationalize” investment there, the Treasury Department has issued a new warning about money laundering risks emanating from North Korea. The warning echoes longstanding concerns by the global Financial Action Task Force.

Every potential investor in North Korea needs to understand just how severe the potential consequences of turning a blind eye to money laundering can be, especially with respect to a place like North Korea, where Treasury has put the world on notice of the risks. Careless investors face multiple risks, including the blocking of their assets and accounts, civil penalties, and criminal prosecution. Assets that are co-mingled with criminally derived property, or that are co-mingled with assets involved in the commission of a money laundering offense, are subject to criminal or civil forfeiture.

Investors who may think that U.S. Treasury regulations don’t apply to them because they aren’t doing business in the United States may be shocked to learn that nearly all dollar-denominated transactions pass through U.S. Treasury-regulated banks, through correspondent accounts. Chinese and European banks that need their own access to U.S. financial institutions may also shun transactions with North Korea.

To further raise the political risk, new North Korean provocations are likely to cause President Obama, or a future U.S. President, to direct Treasury to further tighten financial restrictions on transactions involving North Korea.

Even today, investments in North Korea will attract greater scrutiny than investments in other countries. U.N. Security Council resolutions impose a duty to refrain from transactions that could help North Korea proliferate, and different jurisdictions have different blacklists of North Korean banks that are known to be involved in proliferation and money laundering.

It’s the investor’s duty to understand those complex and potentially tricky regulations governing transactions with North Korean nationals, something that no investor can do safely without specialized legal advice. Regulators will expect investors to ensure more financial transparency than they would if those investments were in places that did not pose the same money laundering risks. When it comes to the assessment of that risk, North Korea and Iran are in a class by themselves.

North Korea’s “charm offensive” coincides with growing international financial pressure

Observers in the West and South Korea tend to grasp (even gasp) at subtle or superficial changes in the tone of North Korea’s words, but the consistency of North Korea’s actions has always refuted the interpretations of these observers.  No charm offensive ever interrupted Pyongyang’s pursuit of nuclear weapons or its willingness to proliferate nuclear or chemical weapons technology.  Even its provocations, often described as “unpredictable,” follow a cycle that has become familiar to Korea-watchers, including the President of South Korea.

Still, the annual Ulchi Freedom Guardian exercises have always been Pyongyang’s cue to threaten to turn some city into a “sea of fire,” and until April of this year, North Korea was issuing a stream of escalating threats.  Now that this year’s exercises have begun, however, Pyongyang only seems slightly upset about them.  The Daily NK has not noted any increase in exhausting drills or exercises inside North Korea. Similarly, the North has had little to say about public hearings in Seoul about the North’s domestic atrocities.  These are new data points to add to North Korea’s hasty retreat from its closure of the Kaesong Industrial Park, a retreat so hasty that it suggests an effort to recover from a severe miscalculation.

The absence of provocation isn’t exactly conciliation, either; on closer examination, it’s really a blander form of the same old slop–criticism of South Korea’s conservative president mixed with appeals to pan-Korean nationalism and anti-Americanism.  But at least it’s not threatening anyone, and that represents a shift. So does it mean anything? I’ve observed that Pyongyang usually reaches this point in its bipolar cycle when it’s (a) planning a bigger provocation or (b) actually worried about the consequences of a provocation.  I don’t exclude (a) as a possibility, but there are some early, inconclusive, but significant reasons to think that the answer might be (b).

If you’ve been watching carefully for the last six months, it’s not hard to understand what happened here.  In February, North Korea conducted its third nuclear test.  In March, the U.N. Security Council tightened financial sanctions with Resolution 2094.  By itself, this was no threat to Pyongyang.  China and North Korea have been ignoring U.N. sanctions resolutions since 2006, and North Korea’s threats and fulminations escalated through April anyway.  The threats continued even after Treasury blocked all assets of the Foreign Trade Bank (FTB) of North Korea, North Korea’s main financial portal for international trade.  Although the FTB presumably doesn’t park its assets in U.S. banks, the sanctions apply prospectively, and dollar-denominated assets can’t move anywhere–not even between two non-U.S. banks–without flowing through correspondent accounts in U.S. financial institutions, where they would be blocked.

Then, on April 26th, the bi-partisan leadership of the House Foreign Affairs Committee introduced H.R. 1771, a sanctions bill that would not only sanction North Korean banks and trading companies, but the Chinese, European, and other entities that knowingly facilitate their proliferation, illicit activity, and human rights violations.  (Full disclosure: I helped the Committee draft this bill.)  Because the bill is in the early stages of its legislative gestation, I hesitate to infer too much about its contribution to what came next, but it clearly puts pressure on the administration to toughen enforcement, demonstrates how much Congress’s sentiment has shifted, and shows the potential impact of sanctions on third-country banks, ports, and companies in stark terms.  The bill now has more than 120 co-sponsors.

For whatever reason, about ten working days after the introduction of H.R. 1771, third-country banks began cutting off North Korea’s money transfers and the FTB’s accounts.  The decision by the Bank of China on May 7th to block the FTB’s accounts was the most important sign of this trend.  Then, more big Chinese banks halted money transfers to North Korea.

North Korea’s so-called “charm offensive” began immediately after these events.

The reports conflict about whether these banks acted on instructions from the Chinese government; they may well have acted on their fears that doing business with these North Korean banks was becoming legally hazardous for them.  Here’s an interesting quote from David Cohen, Treasury’s Undersecretary for Terrorism and Financial Intelligence:

But Cohen dismissed the claim that China is cooperating with the US, saying it is “taking steps for their own purposes”.

“Whether it’s China or any other country that has exposure to North Korean financial activity, what we have urged is both compliance with Security Council resolutions as well as additional steps to be particularly vigilant to ensure that North Korean illicit financial activity is not allowed in the financial sector,” he said.

“The way to prevent that activity which violates every standard of legitimate financial activity for the banks (is) to be very careful about who they’re doing business with.” [Korea Herald]

European banks have also followed suit, which is important.  We appropriately focus attention on China’s non-cooperation with sanctions, but financially, Europe’s role is almost as important. Depending on which sources you believe, North Korean officials have stowed either $1 billion or $4 billion in European banks.  This money pays for the European luxuries that North Korea’s elite craves.  Because North Korea is prohibited by U.N. Security Council resolutions and EU regulations from importing luxury goods, North Korea’s use of these European deposits could be viewed as a form of trade-based money laundering.  To the extent this money isn’t illegally derived, it should also be treated as the proceeds of kleptocracy.  This is where the World Food Program should go looking for the $98 million it’s now asking donors to contribute to feed less-privileged North Koreans.

Given Congress’s tendency to react to headlines, each new North Korean provocation is likely to provide additional momentum for this potentially game-changing legislation.  If Pyongyang and Beijing realize this, then H.R. 1771 could already be playing some role in deterring additional provocations.

The administration–or least, the Treasury Department–seems more serious about sanctioning North Korea today than at any time since 2007, when the Bush Administration ended a global financial sanctions enforcement campaign that proved devastating to Pyongyang.

A senior administration official told CBS News, “What we’re hoping to recreate is the financial pressure that North Korea endured back in 2005 when we took the action against Banco Delta Asia.”

Those Bush-era sanctions against a Chinese bank that allegedly laundered money for North Korea were viewed as an impetus for North Korea to join the six-party talks on nuclear weapons technology in 2007.  [CBS]

Treasury has since followed the blocking of the FTB by blocking the Daedong Credit Bank, about which I voiced my own suspicions years ago. It has also pushed for tougher sanctions enforcement in Europe, ChinaSouth KoreaJapan, Australia, and Southeast Asia, including Singapore and Malaysia.  Treasury makes no secret of its objective:  to find and block regime accounts worldwide, including the personal assets of Kim Jong Un:

The U.S. is interested in finding funds of North Korean leader Kim Jong Un family (sic), said David Cohen, undersecretary for terrorism and financial intelligence at the U.S. Treasury Department.

In a meeting with reporters Tuesday at the U.S. Embassy to Korea in central Seoul, he said the key purpose of making financial sanctions against North Korea is to prevent the country from developing nuclear weapons and missiles and to make it shift away from provocative policy. The U.S. official has actually admitted he is tracking Kim Jong Un`s money. In charge of financial sanctions against North Korea, Cohen is dubbed an “angel of death.”

Cohen added whether actions (sanctions) will be made and of what kind will be decided after illegal funds of Kim`s family are discovered. When Kim`s father and predecessor, Kim Jong Il, died in December 2011, some foreign media reported that the late Kim may have deposited at least 4 U.S. billion dollars in European banks, including those of Switzerland.  [Dong-a Ilbo]

Our Angel of Death seems to think that this is already having an impact:

“North Korea’s ability to access the international financial system to easily move money to pay for or to get paid for material that it’s either selling or that it’s purchasing for its program has been significantly impaired,” he said.

“North Korea tries to sell conventional weapons where they can. They have only a few countries that are interested in purchasing their conventional weapons ? they’re not very good, the weapons. It’s very hard to pay North Korea.”  [Korea Herald]

There are still loopholes in this emerging international campaign that need to be closed for the sanctions to have their desired long-term effect.  Treasury itself could do much more.  It should declare North Korea to be a jurisdiction of primary money laundering concern, as it has done previously to Nauru, the Ukraine, and Burma, for reasons that apply with equal or greater force to North Korea.  There is a more-than-sufficient basis for Treasury to take this action now, without waiting for Congress to act.  Such a declaration could have a severe impact on Pyongyang’s access to the global financial system.

Europe’s enforcement lags behind China’s in some ways.  Although it tightened its North Korea sanctions regulations in April and July, it still hasn’t sanctioned the Foreign Trade Bank, and it still hasn’t passed a regulation that would force the SWIFT network to cut off sanctioned North Korean banks, the way SWIFT cut off sanctioned Iranian banks last year.  This is something the EU is required to do under any fair reading of Paragraph 10 of UNSCR 2094.  Treasury could also force SWIFT to cut off North Korean banks, given SWIFT’s extensive U.S.-based operations.

China and its banks appear to be doing what they feel compelled to do, and nothing more.  Just before the FTB sanctions went into effect, its banks allowed North Korean agents to move FTB funds in Dandong to another bank.  North Korean money launderers continue to operate in China openly enough to be observed in the act by an intrepid Joongang Ilbo reporter.

Even so, sanctions are probably starting to have a significant impact on Pyongyang’s ability to use the offshore accounts that finance its power structure.  The current level of pressure is unlikely to be sufficient to secure our interests–the verified disarmament of North Korea and its transformation into a more transparent, less brutal, less militaristic society.  In time, North Korea will adjust, adapt, and recover to this level of pressure.  But for the first time since 2007, we are on a path toward applying enough pressure to achieve our interests peacefully.  Will we use the full range of tools at our disposal, or will this be just another pause in North Korea’s progression toward becoming the arsenal of terror for the region and the wider world?  We can sanction North Korea out of its nukes, or we can sanction it out of the headlines for a while. The choice is ours.

Our history of flunking that test every time we’ve taken it is what scares me.  The worst likely outcome of a strategy effective enough to force significant changes in North Korea’s behavior is that we would again settle for insignificant and ephemeral changes instead.

Follow the money. All of it.

Marcus Noland has published two fascinating charts on recent changes in North Korea’s palace economy. According to one, North Korea has begun posting a current account surplus by squeezing its poor, and by taking in foreign exchange from mysterious (but probably Chinese) sources.  That would certainly explain some of its recent, more aggressive behavior — a well-funded North Korea is menacing; an underfunded North Korea is relatively, if temporarily, conciliatory.  Judging by North Korea’s aggressive WMD development and investment in white elephants (gray ones, too) and perks for its elite, the regime doesn’t appear to be starving, even if its people are.  Noland also posts another fascinating chart showing his estimate of the share of North Korea’s income earned through illicit activities, which he estimates at between 5 and 20 percent of its export revenues.

Obvious questions arise about how we can really know such things, but it’s unlikely that anyone in America knows better than Marcus does.  Assuming his charts are correct, enforcement efforts have had considerable success, yet a staggering share of North Korea’s revenues continues to come from illicit sources. It’s now incumbent on us to identify these new revenue sources for the sake of our own national security; indeed, it may also alter our estimates of the “illicit” share of North Korean exports.  Both charts present challenges to the potential effectiveness of sanctions, but not insurmountable ones under anti-money laundering (AML) principles.  It all depends on how widely you’re willing to target North Korea’s income, because our time for playing whack-a-mole has run out.  A strategy that isn’t comprehensive and that doesn’t reach North Korea’s foreign enablers is, by default, a license to proliferate.

How an economist analyzes those challenges is apt to differ from how a lawyer addresses them.  This is why I enjoy my side of this public conversation so much.  Please don’t confuse what follows with criticism.  What it is, is eagerness to devour and parse the research. So having said that, here’s a short list of what else I wish I knew.

First, how do we define “legitimate?” For example, are the Siberian logging revenues legitimate, given that some of the escaped loggers say they aren’t being paid?  That would make any    transaction to facilitate these arrangements “trafficking in persons,” which is a predicate offense for money laundering under 18 U.S.C. 1956(c)(7)(B)(vi), and therefore subject to criminal prosecution, along with the seizure and forfeiture of any proceeds or instrumentalities of the transaction.  The same predicate offense may well describe North Korean gold, coal, iron ore, and copper, probably its largest “legitimate” exports, if they are mined with forced labor (for which North Korea’s mining industry is deservedly notorious).  If the products of this newly announced Chinese-owned garment factory in North Korea (HT) are labeled “Made in China,” importing them into the United States could violate the country-of-origin labeling laws, this executive order, and consequently, the International Emergency Economic Powers Act, which would make the merchandise subject to seizure and forfeiture, and any movement of funds to facilitate that importation (you guessed it) money laundering, under 18 U.S.C. 1956(c)(7)(D).  Drive it past me, and I can probably find a broken taillight that anyone else would be ticketed for. I have never accepted “North Korean exceptionalism,” the idea that we must judge North Korea by a lower standard.

Second, one of the reasons why estimates about illicit revenues are invariably imprecise is the problem of commingling of legitimate and illicit funds.  If a North Korean attache’s diplomatic pouch contains $100,000 in supernotes, $100,000 in dope revenues, and $800,000 in proceeds of North Korean restaurants, how much should the authorities seize?  The answer, under AML principles, is $1 million, because commingling is usually a sine qua non for money laundering, and lawmakers eventually decided to vastly improve enforcement, and save law enforcement officers much annoyance, by empowering them to seize the whole lot.

Third, it’s important to distinguish between proceeds of prohibited activity and instrumentalities of prohibited activity.  Even if you accept the legitimacy of the labor and pay arrangements Kaesong, how do we know that its proceeds aren’t used for WMD development? (My view is that only Jang Song Thaek, Kim Jong Un, and a few people in Bureau 38 really know, and that as North Korea threatens South Korean civilians, and South Korea’s President prepares to visit the United States, for South Korea to revive the idea of importing Kaesong-made products into U.S. markets tariff-free is just crazy talk.)  If those proceeds are misused for WMD programs, they become instrumentalities. Under AML principles, instrumentalities can be seized and forfeited, along with whatever other funds they’re commingled with.

What this means is that, even assuming the accuracy of Noland’s estimates, well-crafted sanctions could and should reach much more than 5 to 20 percent of the regime’s income, and thereby suffice to vaporize its surplus and shock it into instability. After all, the money isn’t being used to better the North Korean people.

If the administration is really serious about stopping North Korean proliferation, it needs a new sanctions law, similar to the Iran sanctions acts of 2010 and 2012, which targeted Iran’s main source of income, its oil industry, as an instrumentality for its proliferation and a means to put political pressure on its regime.  As the Financial Action Task Force has been telling us for years, North Korea lacks the financial transparency needed to ensure that its income does not facilitate illicit activity.  We also know that North Korea prioritizes weapons development over providing food, heath care, and education for its people, and even over feeding some less-favored units of its military. North Korea can’t continue to develop its WMD programs or maintain its system of domestic terror without foreign money, particularly from China, but also from South Korea, the Middle East, and a small amount of European trade.

When it comes to investments, aid, and loans to North Korea, we would be well justified, and arguably compelled by Paragraph 8(d) of UNSCR 1718 to shift the burden.  As such, North Korea’s donors, lenders, investors, and insurers should be required to “ensure” that the end use of their funds is not some banned purpose.  If not, those funds should also be subject to blocking, seizure, and forfeiture.

Correction: A previous version of this post contained an image of an incorrect location for Bureau 39. I will try to post an image of the correct location later.

Open Sources, March 17, 2013: Plan B Watch Edition

WHACK-A-MOLE:  The news that Treasury has designated North Korea’s Foreign Trade Bank under Executive Order 13382 leaves me underwhelmed.  This executive order provides for the blocking of assets of entities involved in the proliferation of weapons of mass destruction, and restricts transactions with those entities, assuming we can reach them.  I’m dubious about how many assets or transactions are within our reach, but the pin-pricky targeting suggests that this approach is far less comprehensive than what’s needed to defang North Korea.

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THEY AREN’T MUTUALLY EXCLUSIVE:  The Christian Science Monitor argues for a “soft response” to North Korea’s nuke test, by encouraging more refugee flows rather than imposing new sanctions.  The problem with this idea is that the regime has somehow found the resources to crack down on, and cut, the cross-border flow of refugees.  Rather than view these ideas as mutually exclusive, we should see them as complimentary — deny the regime resources, and it will have less money to buy barbed wire and pay border guards.  Eventually, when the regime fears for its stability, even diplomacy can pay a productive part in a multi-faceted strategy.

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THE JAPANESE GOVERNMENT is auctioning off the former headquarters of Chongryeon, aka Chosen Soren, the pro-North Korean association of Korean residents in Japan that once poured half a million into Pyongyang each year, and was brought down by revelations of its involvement in kidnapping Japanese citizens.

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JAPAN HAS ALSO SEIZED a shipment of high-strength aluminum alloy on its way to North Korea from North Korea to Burma, suitable for the construction of centrifuges.  Admittedly, this is mysterious to me. What else might this alloy be suitable for that North Korea builds?  But of course, North Korea has forced us to assume the worst about all of its transactions with the Outer Earth.

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THE TINY ISLAND NATION OF KIRIBATI has been outed for selling fake passports to North Koreans suspected of involvement in illicit activities. Fortunately, the practice was detected and stopped several years ago.  The Seychelles is also implicated.

Plan B Watch

Via the Chosun Ilbo, and according to “a diplomatic source:”

The U.S. government is considering labeling North Korea as a money-laundering state to pave the way for sanctions after Pyongyang’s latest nuclear test.  [....]

Article 311 of the Patriot Act was created following the Sept. 11, 2001 attacks and authorizes the U.S. Commerce Department to identify an individual, financial institution or state as a “primary money-laundering concern.” This would ban the target from transacting business with any system that handles U.S. dollars.

This measure is much tougher than the freezing by the Bush administration in 2005 of around US$25 million held in some 50 North Korean bank accounts at Banco Delta Asia in Macao.

Theoretically, yes.  But it won’t be tougher in practice if North Korea is designated and the Chinese and South Korean entities that continue to fund the regime aren’t.  The key to effective economic pressure against North Korea is to cut its financial lifelines to its foreign enablers.  Yes, the North Koreans will always be able to use old money laundering tricks to evade sanctions, like shifting its transactions to bulk cash and stored value cards, and by “structuring” transactions (splitting big transactions into small ones) to avoid reporting requirements.

A drug cartel or a small terrorist organization can operate like that for years, but no one has ever tried to finance a police state, govern 23 million people, or feed and maintain a million-man mechanized army that way.  Sanctions don’t need to be 100% airtight to work; even sanctions that are 30% effective would create a massive shock to the palace economy, disrupt its system of gifting and patronage, impede WMD development, and force the regime to excommunicate large segments of its Inner Party.  That’s potentially destabilizing for a regime that’s recently purged a number of senior officials to consolidate its power base.

How North Korea evades international financial sanctions

There is no such thing as a perfect plan, and the idea of pressuring North Korea through international financial sanctions is no exception.  Like money launderers everywhere, the North Koreans have adapted to get around anti-money laundering controls.  Reuters has an excellent, must-read report on North Korea’s use of bulk cash transactions to avoid the scrutiny of banks and law enforcement.  The report features an interview with Kim Kwang Jin, who defected and revealed his role in an international re-insurance scam.

North Korea has also responded by splitting its income streams via more banks.  South Korea claims that it’s difficult to associate specific accounts with illicit activity, which is always the case with money laundering.  That’s the whole idea of such classic money laundering methods as “structuring” — dividing large payments into smaller ones to evade reporting requirements — and “co-mingling” — mixing illicit funds with the proceeds of “legitimate” activity.  The usual law enforcement approach to such tactics is to impose special measures on all of the suspected launderer’s income and assets.  That approach shifts the burden to those handling the suspect’s transactions to establish the legitimacy of the origin and use of the funds.  It was also the clear intent of Paragraph 8(d) of UNSCR 1718.

All of which suggests that an appropriate U.N. sanction would be to ban bulk cash transactions with North Korea, its nationals, and its agencies.

I’ve often marveled at the inventiveness of the North Koreans at coming up with new schemes to bring in money. What’s more, I wouldn’t hold any of it against them if they were using it to feed their hungry people.  The example that sticks with me is the recent scam in which North Koreans hacked into popular South Korean online games, created algorithms to autoplay them, collected online credits, sold the credits for cash online, and gave the proceeds back to the regime to use for God-knows-what.  The New York Times thinks God-knows-what means “nuclear weapons programs and to smuggle Rolex watches and other luxury goods, which he doles out to buy the allegiance of the party and the military elite,” but with North Korea, no one ever really knows where the money goes.

One source of illicit North Korean income that has probably dropped off is the drug trade.  This piece, which discusses the cross-border meth trade between North Korea and China, doesn’t say whether the trade is state-sanctioned, but I tend to suspect most of it isn’t, except for the involvement of corrupt officials.  Japan’s crackdown on remittances and trade with North Korea badly damaged the state’s capacity to earn through the meth trade, and a lot of the chemists behind the trade turned pro.

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.