The Chinese banks in the N. Korea money laundering scandal skated. They shouldn’t have.

Yesterday’s indictments of the Dandong Hongxiang defendants, who are charged with willfully violating North Korea sanctions by laundering money for sanctioned Korea Kwangsong Banking Corporation, might have been good enough for 2009. They broke the illusion that China’s well-connected bag-men and bag-women were immune from sanctions. To borrow John Park and Jim Walsh’s expression, they meant that we’d finally begun to go after North Korea, Inc.

Unfortunately, this isn’t 2009. We’re now in a desperate race to disarm Kim Jong-un, one way or another, before the coming Korea Missile Crisis, before he can extort us into retreat and South Korea into one-country-two-systems submission. Those who think we can coexist with a nuclear North Korea are blinding themselves to what is flagrantly, repeatedly, and recently obvious — that he will not and cannot coexist with us. In Washington, serious men now speak of preemptive strikes. The appeasers will call for more deals, but we have tried them all. If there is still a chance to avoid war, that chance is regime-crippling sanctions that force the generals in Pyongyang to “stare into the abyss.” For those sanctions to cripple the regime, they will have to cause a liquidity crisis in Pyongyang by freezing solid the slush funds that pay Kim Jong-un’s army, secret police, elites, and civil service.

Just as they were in 2005, banks are the key pressure points. It’s the banks, not shadowy Chinese trading companies, that are most easily influenced to run away from the legal risks associated with North Korea, and that hold the bulk of Kim Jong-un’s assets.

Yet increasingly, the smartest experts on North Korea’s economy are speculating that China and its banks are being even more unhelpful than most North Korea watchers had imagined. Both Steph Haggard and Nick Eberstadt have raised suspicions that someone — most likely, someone in China — is subsidizing Pyongyang and actively undermining financial sanctions, as shown by the surprising resilience of its currency, even after the closure of Kaesong, and in spite of the fact that North Korea is nominally running a substantial trade deficit. The subsequent exposure of DHID’s role does much to validate suspicions that that support is coming through Chinese financial institutions, in dollars.

But this hidden source of resiliency is also a vulnerability. To Bill Brown, dollarization of the palace economy has helped Pyongyang stabilize that economy in the short term, but also contains longer-term dangers (I’ll let you read about them at his post rather than try to explain them here). The key point is that Pyongyang may be more dependent on the dollar than at any point in its history. Can Pyongyang adapt by further limiting its exposure to the dollar system? If that was a real option for Pyongyang, it would have exercised it either after the Banco Delta Asia episode or since then. As the Justice Department said, Pyongyang needs dollars because sellers take them.

Which is to say, China’s banks are helping Kim Jong-un win his race to nuclear breakout, and by doing so, they’re making a nuclear war on China’s doorstep more likely.

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Now that I have your attention, I must bore you with some banking law. If you just can’t stand it, skip ahead to the next section. I’m about to set the table for why the 12 Chinese banks named in yesterday’s civil forfeiture complaint — and the Bank of China, which was implicated in a criminal case in Singapore last year — skated, and shouldn’t have.

Under U.S. anti-money laundering (AML) law, banks are expected to know the law, the sanctions regulations, and enough about their customers to know who’s legit and who’s using them to launder money or break sanctions. They’re supposed to have compliance programs in place, including trained compliance officers to identify and report suspicious activity, and special software to identify blocked persons who appear on Treasury’s list of Specially Designated Nationals (“the SDN List”). A key part of this compliance program is called “Know Your Customer,” which is self-explanatory in principle but can be complicated in its application

If you’re interested — and let’s face it, you probably aren’t — the Treasury Department’s Office of Foreign Assets Control, or OFAC, has published enforcement guidelines in 31 CFR Part 501, Appendix A, laying out a schedule of fines based on the number and amount of transactions that broke the sanctions regulations, and the willfulness and egregiousness of the violations. What’s slightly more interesting is that OFAC publishes its settlements against banks that violate sanctions laws. A comparison to how similarly situated European banks have been treated puts the Chinese banks (and Treasury) in a very unfavorable light.

OFAC has often imposed steep fines against banks that didn’t even violate the sanctions regulations intentionally. For example, in March 2015, Paypal settled a penalty case with OFAC for $7.6M after violating multiple sanctions regulations through “reckless disregard” in its sanctions compliance before self-reporting its violations. In August 2015, UBS AG paid OFAC a $1.7M settlement for 222 payments to persons blocked for terrorist connections. UBS AG self-reported, but only after learning that OFAC was investigating the payments. UBS had a sufficient compliance program in place; it just interpreted the law incorrectly, concluding that certain investment-related transactions on behalf of a designated client weren’t blocked (wrong). In February, Barclays Bank paid OFAC a $2.5M settlement for processing 159 transactions, totaling just over $3M, for a person blocked under the Zimbabwe Sanctions Regulations, masked behind entities that did not appear on the SDN list. The violation was the inadvertent result of faulty compliance verification software. The bank did not self-disclose. Either way, OFAC expects banks to have effective compliance programs. As excuses, bad software and bad lawyers won’t cut it. Self-disclosure mitigates the penalty, but it’s not a defense.

Willful violations, on the other hand, can be extremely costly. In March 2015, Commerzbank paid OFAC a $258M settlement for processing 1600 transactions in violation of the Iran, Sudan, Burma, Cuba sanctions regulations. The bank stripped transaction data out of the wire transfers to conceal their nexus to sanctioned persons from their correspondents. In October 2015, Crédit Agricole Corporate and Investment Bank paid OFAC a $330M settlement for processing over 4,000 transactions in violation of Sudan, Burma, Cuba, and Iran sanctions regulations. Once again, OFAC found that Crédit Agricole and its predecessor banks stripped data out of the wire transfers.

The mother of all fines, however, was a record $8.9 billion (with a “b”) paid by BNP Paribas for years of willful data-stripping in violation of multiple sanctions regulations. OFAC’s penalty was so gargantuan that Congress passed special legislation (see Division O, Title IV, Section 404) to place $1 billion of that amount into a special fund to compensate the victims of terrorism, including the 9/11 attacks and some of the lawsuits against North Korea. A special master was recently appointed to administer the fund. (Thanks to the reader and lawyer who told me about this recently. I wish him a great bounty of contingency fees. Also, I’m in the wrong business. I do this for free, you know. You’re welcome, humanity.)

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In the case of the 12 Chinese banks named in yesterday’s forfeiture complaint, their AML compliance procedures were, at best, inexcusably sloppy. They serviced international transactions for shell companies that were registered in the British Virgin Islands or the Seychelles, and that listed fictitious addresses in Hong Kong office towers. Yeah, but who among us hasn’t done that as a youthful indiscretion? For those of you in the banking industry, the obvious answer is any banks whose Know-Your-Customer compliance programs do their due diligence and have kept up with strict new beneficial ownership rules in the EU and the U.S., especially since that whole Panama Papers thing, and especially for jurisdictions subject to U.N. sanctions and section 311.

And it’s not like much due diligence should have been necessary, given that Ma boasted openly that her customers were from “the DPRK elite group” and was an outspoken proponent of the trade that propped Pyongyang up.

To add further to the banks’ culpability here, some of the shell companies used the same Tortola, B.V.I. address as DCB Finance Limited, which was exposed for its role in sanctions violations when the Panama Papers went public (surely compliance software should have caught this!). According to the forfeiture complaint, “[a]s recently as June, July and August of 2016, nearly $8 million has transited through U.S. correspondent bank accounts related to three DHID front companies,” so some of this conduct is very recent. If nothing else, it adds more fuel to what Bill Newcomb and I have said about invoking additional beneficial ownership disclosure and record-keeping rules for North Korea.

In the case of the Bank of China, however, it got away with the AML equivalent of murder. Like Commerzbank and BNP Paribas, its employees stripped data out of wire transfers and willfully deceived their U.S. correspondents. There’s simply no defending Treasury’s failure to take enforcement action, given that BoC’s conduct was willful and egregious, unlike the other banks that simply got sloppy.

For OFAC’s penalties to be consistent, all 13 of these banks’ compliance officers ought to be collecting documents and reviewing affidavits with their lawyers right now. Instead, by saying that “[t]here are no allegations of wrongdoing by the U.S. correspondent banks or foreign banks that maintain these accounts,” the Justice Department sent a very different message to the Chinese banking industry.

alfred-e-neuman

That’s why tomorrow’s hearing in the Senate Foreign Relations Committee should not let up on what Senator Gardner and Senator Corker have demanded. They should not accept China’s reported arrest and investigation of Ma Xiaohong, its reported (and belated) investigation of KKBC executives, or its actions to stop North Korean trade representatives from leaving the country as signs that China is serious about enforcement at last. The DHID ships that have been impounded will be released in due course. A reported bribery investigation into the Dandong customs office that passed Ma’s wares into North Korea is self-serving from China’s perspective; China would rather package this as an anti-corruption investigation than admit that it bowed to U.S. pressure. China is not sharing information with DOJ and Treasury about its investigation, and U.S. officials don’t believe China’s actions are coordinated with theirs. More recently, China has lashed out at the U.S. for enforcing its laws: 

China’s Foreign Ministry on Tuesday voiced its disapproval of U.S. actions against the businesswoman, Ma Xiaohong, and her Hongxiang Industrial Development Co. a day after Washington announced criminal charges and sanctions against her and the trading company for allegedly acting as financial fronts for North Korean companies on U.S. blacklists. “We oppose efforts by any country to use their domestic laws to impose ‘long-arm jurisdiction’ over Chinese entities or individuals,” ministry spokesman Geng Shuang told a news briefing, in response to a query on the U.S. actions against Hongxiang Industrial. [WSJ]

That’s some chutzpah, coming from a government that just unilaterally claimed the whole South China Sea and lost an international arbitration testing the merits of its claims, or that bullies Seoul with unilateral sanctions when the latter tries to defend itself from Beijing’s rabid dog. The real unilateralism is yielding to global consensus, voting for U.N. resolutions, and failing to enforce them. Maybe next time, U.S. authorities shouldn’t fly to Beijing to share their investigative findings, and all the sources and methods that approach may have compromised. Unilateralism is claiming a sovereign right to misuse a distant nation’s financial system to break its laws and threaten its security. Next time, maybe the U.S. authorities should just file indictments, freeze assets, and let Xi Jinping read about them in The Global Times. U.S.-China relations may have to get worse before they can get better. They may have to get worse to prevent them from becoming catastrophic. Predators need limits.

Extraordinary claims require extraordinary evidence, and given the long and sordid history of China violating North Korea sanctions, any claim that China has made a principled decision to enforce in good faith the sanctions it voted for at the U.N. should be counted as extraordinary.

Instead, we should take China’s actions as signs that Beijing will do as little as it can get away with doing, but will acquiesce to its enforcement obligations if we attach a high enough cost to its tolerance of North Korea’s violations. We should seek to divide the self-interest of the banks in avoiding penalties and maintaining their dollar access from the interests of the Chinese government, which is to make mischief, drive the Americans out of Asia, and end up dominating both Koreas by default. We should take note of reports that North Korean trading company executives fear repercussions for getting caught. The administration should exploit those fears and divisions, turn as many of those executives as it can, and find out what they know. Above all, it should heed the conclusion of C4ADS, the plucky little NGO that showed it how good investigation works:

With the right resources and political will, it can be possible to significantly disrupt the DPRK’s illicit overseas earnings, and in the process raise the cost of its brazen proliferation activity. As the DPRK grows increasingly dependent on its overseas networks, it creates an opportunity for the international community to leverage their financial intelligence tools to squeeze the regime’s illicit activity. While actors inside North Korea can operate with impunity, abroad they are subject to international norms. A single shipment can require significant documentation and effort, including maintaining corporate entities, processing cross-border payments, or acquiring insurance or bank letters of credit, all of which necessarily leave paper trails that can be followed. By exposing these risk points and peeling away the infrastructure of DPRK illicit overseas networks, the cost and difficulty of operating abroad could rise dramatically.

Following the money is likely to be the most effective means for the international community to coerce the Kim regime toward concessions and a cessation of their nuclear program. Getting there, however, will require significantly expanded efforts to continually investigate, monitor, and act against DPRK entities as they further evolve to evade sanctions. This report aims to build a foundation for this effort. [C4ADS]

A surprising finding? North Korea’s network isn’t really all that big.

A key finding from the UN Panel of Experts was the observation that “While [DPRK] networks appear complex, their key nodes consist of a limited number of individuals and intermediaries…. Although shell companies can be swiftly changed, the individuals responsible for establishing and managing them have remained, often for years.” [C4ADS]

I’ll give Stephan Haggard the penultimate word.

What these reports show clearly is that the “sanctions don’t work” litany is deeply misleading. This trope assumes a hardy North Korean regime ready to resist any pressure no matter how intense. That is simply not the story; rather, the story is that North Korea has not been forced to make any adjustments because it has been able to conduct business largely if not wholly as usual. How does that show that sanctions don’t work? [WTT]

Yes, some Chinese trading companies may indeed run away from North Korea because of the DHID indictments. Those that don’t will probably jack up their commissions from 20 percent to 30 percent, which is itself a sanctions cost for Kim Jong-un. But any casual reader of U.N. Panel of Experts knows that North Korea’s network of enablers in China, though it is finite, is also much more extensive than this. If this indictment is just a beginning, it’s a good one. I have no objection to starting with smaller targets to scare bigger ones. But if this is all we do, North Korea’s network will recover quickly. One way or another, if we mean to prevent war, we must send a clear message to the Chinese banking industry that there will be no more business as usual with Kim Jong-un.

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(Edited after publication to include China’s reaction to the indictments.)

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Treasury sanctions, DOJ indicts Chinese for violating N. Korea sanctions

As of yesterday, and for the first time ever, the U.S. Treasury Department has frozen the assets of Chinese entities for violating North Korea sanctions, and the Justice Department has indicted them for sanctions violations, conspiracy, and money laundering. The company in question is the Liaoning Hongxiang Group of companies, of which Dandong Hongxiang Industrial Development Company Limited, or DHID, is the largest component. The individuals are Hong Jinhua, Luo Chuanxu, Zhou Jianshu, and Ma Xiaohong, the CEO of the Liaoning Hongxiang Group.

All were first implicated by the remarkable investigative work of the Center for Advanced Defense Studies and the Asan Institute, which is wonderful and also troubling, in that it should not have been left to a small nonprofit research group with funding from a South Korean think tank to do the work that the Treasury and Justice Departments should have done — protecting such core U.S. security interests as global nonproliferation, the integrity of the financial system, and freedom of speech in our own towns and neighborhoods. It is wonderful and disturbing that two very young and very bright people with a tiny budget and no security clearances have now done more damage to the financial networks that sustain His Corpulency’s misrule than the Obama administration did on its own in eight years. (Full disclosure: I met with C4ADS a few times since they started work last fall, to help them focus and target their investigation.) Here is how they did it.

To map these growing overseas networks, this report used open source databases, including corporate registries; court filings; Equasis maritime database records; customs and trade data provided by Panjiva, a customs trade data aggregator; and real time data on ship activities provided by Windward, a maritime data and analytics platform. The compiled information was consolidated using Palantir’s Gotham network analysis platform.

In Part I, we focused on building bulk datasets on companies, individuals, and ships. By using corporate and tax registries in East Asian countries, we were able to identify significant points of convergence across seemingly disparate networks and identify 562 ships, companies, and individuals within one degree of separation from known DPRK illicit and regime entities.

In Part II, we identified key nodes from our expanded dataset for a more in depth investigation. We focused, in particular, on one Chinese trading conglomerate that has conducted over $500 million of trade with the DPRK in the past five years. Within this network, we were able to identify its subsidiary and affiliated entities that have transacted an additional $300 million with sanctioned Burmese and North Korean entities, helped maintain the cyber infrastructure of the DPRK, and traded in various goods and services that raise serious non-proliferation concerns. [C4ADS]

The researchers also pulled and read court filings in China, Japan, and Hong Kong to uncover what appear to be significant pieces of North Korea’s overseas financial support and shipping networks. Typically for criminal networks, the North Koreans mix legal and illegal business to conceal their illicit activity and disguise the origin of their profits. The result is that some businesses “are likely to be inadvertently facilitating North Korean illicit activity,” while others, like DHID, do so willingly. I won’t try to do justice to C4ADS’s report here; just read the whole thing. Among its findings —

  • The report uncovered 248 companies, mostly registered in Hong Kong, that operate North Korea’s shipping fleet, much of it concealed behind shell companies and flags of convenience.
  • Liaoning Hongxiang Group is directly responsible for operating 10 of those ships, which import North Korean coal and help Pyongyang get around the “livelihood” loophole in UNSCR 2270.
  • DHID’s parent company, the Liaoning Hongxiang Group, helped to run the Cambodian ship registry, which Cambodia is currently in the process of nationalizing. C4ADS found that Cambodia in the principal registrar of reflagged North Korean ships. UNSCR 2270 prohibits the reflagging of ships owned, controlled, or crewed by North Korea.
  • DHID’s annual trade volume with North Korea was more than twice that of the Kaesong Industrial Complex, and more than enough to fund North Korea’s nuclear program.
  • DHID may have facilitated North Korean exports to the United States, which would violate Executive Order 13570.
  • DHID has an equity stake the Bank of Dandong, which has previously been implicated in handling money transfers to North Korea, in violation of U.N. sanctions.
  • The Liaoning Hongxiang Group’s Vice Chairman had dealings with a sanctioned Burmese tycoon, Tay Za, who also bought a nuclear reactor from North Korea.
  • DHID entered into a joint venture with the Korea National Insurance Corporation, which defector Kim Kwang-jin has accused of insurance fraud, and which has been designated by the EU for the freezing of its assets for proliferation-related activities.

DHID’s parent company is a key facilitator of North Korea’s cyber architecture, which North Korea used in cyberattacks against SWIFT; against South Korean banks, nuclear power plants, and news media organizations; and against Sony Pictures. The empty brackets are for Chinese characters that WordPress can’t read:

Companies associated with the Liaoning Hongxiang Group provide services that are critical to the underlying cyber architecture of the DPRK, including the country’s primary email relay service, facilities from which hackers are alleged to operate, and IT firms producing software with possible military and regime applicability as will be discussed in this section. The Chilbosan Hotel [ ] in Shenyang, one of Liaoning Hongxiang’s joint ventures with the DPRK,117 is alleged to be the staging area for Bureau 121, a group of North Korean hackers.118 119 The source of the allegations is a North Korean defector, Kim Heun Kwang, a former computer science professor in Pyongyang, who escaped from North Korea in 2004 and gave detailed testimony on Bureau 121, a group that began large-scale operations in China in 2005.120 The group is reported to be comprised of about 1800 “cyber-warriors” and is considered the “elite of the military.”121 It has been widely reported that Bureau 121 may have been responsible for the 2014 Sony hack.122 The Chilbosan Hotel is majority owned by the North Korean Pyongyang Economic Exchange Society [ ], 123 which controls a 70% share of the company.124 The remaining 30% is owned by Liaoning Hongxiang Group member Dandong Hongxiang Industrial Development Co. Ltd.

The Chilbosan Hotel also shares a physical address with a company called Silibank.127 128 Silibank is an email relay service that charges for sending and receiving email through servers that connect from the DPRK, through China, and then to the outside world. Established in September 2001, Silibank is reportedly the DPRK’s first ISP provider,129 charging for its service in USD for each kilobyte sent.130 The company’s domain, silibank.com, is currently registered to a Chinese company called Liaoning Zhongtian Real Estate Development Co. [ ].

And finally, C4ADS found a link between DHID and North Korea’s WMD-related procurement operations:

Information found on Dandong Hongxiang Industrial Development Group shows that in several online classified ads and databases, Dandong Hongxiang sold products that could qualify as potential military and nuclear dual use products under the U.S. Department of Commerce Bureau of Industry and Security export restrictions.105 These goods included at least four dual use products: 99.7% pure aluminum ingots,106 aluminum oxide (Al2O3), ammonium paratungstate (APT), and tungsten trioxide (WO3).107 Information discovered using Panjiva customs records shows that Dandong Hongxiang Industrial Development Group sent two shipments of aluminum oxide worth a total of $253,219 to the DPRK as recently as September 2015.108 Classified ads posted by Shenyang Hongyang Fine Cermaics Co., which according to the Chinese business registry is owned by a Chinese national named Ma Xiaohong ???, listed “industrial spaceship” as a potential application for aluminum oxide (further investigation is required to confirm if they are the same individual).109 110

We cannot definitively identify the end-user of such goods, but there are clear dual use applications for the products listed. According to a leaked government cable, North Korea has sought to aquire aluminum ingots in the past. The cable further states that “these commodities have dual-use applications for the products listed. According to a leaked government cable, North Korea has sought to aquire aluminum ingots in the past. The cable further states that “these commodities have dual-use applications and could possibly be linked to the North Korean nuclear program.”111 Ammonium paratungstate and tungsten trioxide are byproducts of separating tungsten from its ore.112 A U.S. patent filed in 2010 states that tungsten trioxide is one of several oxidizing agents appropriate for use in a missile design with increased aerodynamic stability.113 According to the U.S. Nuclear Regulatory Commission, aluminum oxide is a component used to resist corrosion in gas centrifuges during uranium enrichment.114 In April 2013, a British company discovered that a firm they had been sending aluminum oxide to had links to the Iranian government’s nuclear program and immediately “ceased transactions. The article stated that “Aluminium oxide is an important material in gas centrifuges used to enrich uranium.”115 [C4ADS]

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Strictly speaking, the Treasury and Justice Departments sanctioned and prosecuted almost none of this conduct. Let’s turn to the Treasury Department designations first. The “NPWMD” means the assets were frozen under Executive Order 13382, which makes any transaction that facilitates North Korea’s WMD procurement not only sanctionable, but punishable with criminal penalties under section 206 of the International Emergency Economic Powers Act, or IEEPA.

“Today’s action exposes a key illicit network supporting North Korea’s weapons proliferation,” said Adam J. Szubin, acting Under Secretary for Terrorism and Financial Intelligence at the U.S. Department of the Treasury. “DHID and its employees sought to evade U.S. and UN sanctions, facilitating access to the U.S. financial system by a designated entity. Treasury will take forceful action to pressure North Korea’s proliferation network and to protect the U.S. financial system from abuse.”

OFAC designated China-based DHID for acting for or on behalf of North Korean-based KKBC. Specifically, DHID used an illicit network of front companies, financial facilitators, and trade representatives to facilitate transactions on behalf of KKBC. Ma Xiaohong, Zhou Jianshu, Hong Jinhua, and Luo Chuanxu were designated for acting for or on behalf of DHID.

KKBC was designated by OFAC under E.O. 13382 and the UN pursuant to UN Security Council Resolution (UNSCR) 2270 for providing financial services in support of the previously designated entities Tanchon Commercial Bank and the Korea Hyoksin Trading Corporation. Both of those entities were designated pursuant to E.O. 13382 and UNSCR 1718 for their roles in North Korea’s WMD and missile programs. [Treasury Department press release]

As a result of Treasury’s designations, all dollar-denominated assets of the five targets are frozen, and U.S. persons are prohibited from doing business with them.

Not to be outdone, the Justice Department has unwrapped an early Christmas present by unsealing an indictment of Hong, Luo, Ma, and Zhou, and DHID for conspiracy, money laundering, and IEEPA violations, for helping a sanctioned North Korean entity circumvent sanctions. That’s about as much as you’ll see about proliferation in these indictments; the only link to proliferation is the money DHID moved for a North Korean bank that had been sanctioned for proliferation.  The Justice Department also filed a civil forfeiture action against 25 bank accounts belonging to DHID, deposited in a who’s-who of Chinese banks. Want to know the names of the Chinese banks? You know you do.

  • China Merchants Bank
  • Shanghai Pudong Development Bank
  • Agricultural Bank of China
  • Bank of Communications Co. of China
  • Bank of Dandong (as predicted)
  • China Construction Bank
  • Guangdong Development Bank
  • Industrial & Commercial Bank of China
  • Bank of Dalian
  • Bank of Jinzhou
  • Hua Xia Bank
  • China Minsheng Banking Corporation

Contrary to what some news reports have written, a forfeiture action does not freeze assets; if effectively confiscates them. The ownership interest of the person who thought he owned the assets is legally extinguished if the government proves that assets are “involved in” illicit activity.

The banks themselves have no standing to challenge the forfeiture unless they can prove that they’d already closed the accounts. Typically, the feds will use 18 U.S.C. 981(k) to take an equivalent amount to the asset right out of the foreign bank’s U.S.-based correspondent account. It’s up to the foreign bank to make itself whole by taking an equivalent sum from the account holder, something that account holders usually agree to in the fine print of their account-holder agreements.

The actions are venued in the District of New Jersey because the Chinese banks that serviced DHID and the numerous shell companies it set up used Standard Chartered Bank and Deutsche Bank as their U.S. correspondent banks, and both banks based their dollar-clearing operations in New Jersey. I’ve explained how this works a few times before, but DOJ explained it well in its forfeiture complaint.

32. An interbank, also known as a correspondent bank, is a financial institution that provides services on behalf of another financial institution. It can facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of another financial institution. Correspondent banks are able to support international wire transfers for their customers in a currency that their customers normally do not hold on reserve. Correspondent banks in the U.S. facilitate these wire transfers by allowing foreign banks, located exclusively overseas, to maintain accounts at the correspondent bank in the U.S.

33. To obtain goods and services in the international market place, as North Korea must, it needs access to U.S. dollars as some international vendors require purchases to be made in U.S. dollars. As a result, North Korean entities, including designated entities such as KKBC, need access to the U.S. financial system.

The New Jersey venue is interesting, in that most correspondent banks operate in New York. (I wonder if that means we can expect to see another indictment in the Southern District of New York one day soon.)

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Although news reports have said that the indictment was for aiding North Korea’s WMD programs, that’s only indirectly true. The crux of the government’s case is that after August 2009, when Treasury designated Korea Kwangsong Banking Corporation (KKBC) for WMD proliferation and blocked its access to the dollar system, DHID stepped in to serve as KKBC’s work-around and to launder its money. (Broadly defined, money laundering means moving or spending money that is “involved in” certain specified unlawful activity, whether as proceeds or as an instrumentality.) I’m often asked at this juncture why the North Koreans don’t just use Renminbi. I’ll let the Justice Department answer that.

35. Following the KKBC’s designation as an SDN by the U.S. Department of the Treasury in August 2009, DHID began working to find ways to conduct trade on behalf of KKBC despite the U.S. sanctions. One means of doing so was to use Chinese currency rather than U.S. dollars to conduct commodities transactions, so as to avoid sending money through the U.S. in violation of IEEPA. In July 2010, the City of Dandong, China highlighted press reports of a pilot program between DHID and KKBC to allow Chinese Renminbi (RMB) transactions to facilitate trade between China and North Korea.

36. North Korea’s trading needs, however, cannot be met using only Chinese currency. As a result, KKBC has continued to access the U.S. financial system to facilitate the purchase of goods in violation of U.S. sanctions. KKBC has done so by using DHID and its front companies.

In other words, what I said before — North Korea uses the dollar because that’s what sellers want, and also because (as I’ll explain later) Pyongyang is dollarizing to stabilize its economy.

When KKBC wanted to buy something in dollars — in this case, sugar and urea (used for fertilizing and explosives, and also, ewww) — it would place an order with DHID, which then bought the merchandise at a substantial mark-up — as much as 23 percent, through any one of 22 different front companies or shell companies it set up for just that purpose. That’s the kind of premium that, at least according to our friends in the FBI, people only charge to take the risks associated with breaking the law. Ma and DHID were initially well-positioned to charge these commissions due to Ma’s connections with Jang Song-thaek. Only when the guns of Jang’s firing squad fell silent, Ma’s business kept right on booming.

DHID and KKBC kept a ledger where KKBC would credit or debit DHID’s dollar account in KKBC in Pyongyang. The most suspicious transactions — those that involved a North Korean nexus — were all kept off the wires. Instead, DHID set up a whole series of shell companies, mostly registered in the British Virgin Islands or the Seychelles, and listing fictitious addresses in Hong Kong.

And how did DOJ find all of this out? Much of it obviously began with the C4ADS-Asan investigation, but DOJ admits that it obtained a search warrant, possibly of an email account belonging to Ma or DHID.

Why sugar and urea instead of, say, aluminum oxide? I can only speculate that those transactions were the easy ones to prove. Prosecutors prefer to charge the conduct that’s easiest to prove, especially if some of the other transactions with more jury appeal might also require proving up a longer, more complex chain of shell companies and beneficial owners.

All of which is our cue for a round of “Panama Papers Bingo,” which will allow you to read fun stuff about the shell companies named in the indictment and their corporate officers. By all means, leave a comment if you find something interesting in there, although I may hold your comment unpublished for a while for legal reasons.

Although the forfeiture action doesn’t say how much money was in the 25 accounts, it describes multiple transactions in the millions of dollars, including one that was for around $11 million. It wouldn’t surprise me if we learned that the total was well over $25 million, the amount that was blocked (but not forfeited) in the case of the Banco Delta Asia action.

Anyway, now you know why we wrote a section on “forfeiture of property” into the NKSPEA. Originally, we tried to create a special fund to pay for North Korea sanctions enforcement, broadcasting, and humanitarian purposes. Because that funding provision ended up on the cutting-room floor, the Justice and Treasury Departments will put the forfeited money into their respective forfeiture funds and use the money to pay for law enforcement operations. Where, as here, DOJ and Treasury worked the case together, they’ll typically work a deal for splitting that money up between them.

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So what will the impact of all of this be? Financially speaking, DHID and Ma aren’t likely to survive the experience. Because 80% of DHID’s business was North Korea-related, His Porcine Majesty will probably feel a significant impact. DOJ’s indictment quotes a DHID powerpoint presentation that claims that as of 2012, DHID handled 20% of the volume of Sino-North Korean trade, and claims that DHID’s business was growing at 30 percent each year. I have no way of knowing if that’s true or not, but my guess is that these figures are exaggerated for shareholder consumption. After all, DHID was willing to file a false certification with a certain Panama-based law firm — any guesses, kids? — denying that it had any links to North Korea (exhibit 3).

The greater effect may be the in terrorem impact this action will have on companies like the 88 Queensway Group that had dealings with sanctioned North Korean entities and felt untouchable, possibly because they thought their Chinese political connections would protect them from Uncle Sam. Ma herself was a made member of the Chinese Communist Party, and Sam Pa was a former Chinese spy. Equally well-connected figures may feel less invincible today.


GIFSoup

The bad news? Not only the fact that no Chinese banks are facing indictments for facilitating Hongxiang’s willful, long-standing money-laundering scheme, but also, the fact that in its press release, the Justice Department said that “[t]here are no allegations of wrongdoing by the U.S. correspondent banks or foreign banks that maintain these accounts.” I’ll discuss that in more detail in tomorrow’s post

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Defections may not foretell N. Korea’s collapse (but they could help induce it)

The defection of North Korean Deputy Ambassador Thae Yong-ho two weeks ago has tolled a ghoulish vigil in which bloggers, op-ed writers, and academics have speculated about the longevity of His Porcine Majesty. Some of them still read a long lifeline on his palm. South Korean President (and master troll) Park Geun-hye, on the other hand, sees “serious cracks” in the regime and says that the cohesion of the oligarchs is “collapsing.”

“The North Korean regime is taking no account of the people’s lives, while it oppresses the people with continuous rule by fear,” she said. “Recently, even the elite in the North is collapsing and high-profile figures are increasingly escaping their homeland and defecting to foreign countries. As the signs of serious cracks emerge, the regime’s instability is growing.” [Joongang Ilbo]

Park has several advantages over the rest of us. She probably has a good idea of what the seven North Korean diplomats who’ve defected this year — plus any other senior defectors we don’t know about yet, and those who defected in recent years — have said in their NIS debriefings. She probably has some idea of what the NIS found in their laptops and cell phones. Of course, it’s possible that she and the NIS are sexing up or spinning those reports, so the rest of us do what we do best — we speculate.

Christopher Green insists that Thae’s defection means “nothing” for the regime’s stability because Thae isn’t central to the regime’s power structure, other defections didn’t shake the regime’s stability before, and the psychological impact on the proles will be slight. Andrei Lankov acknowledges that the rise in high-level defections is significant, wisely doesn’t claim to know whether the regime will collapse in months or years, but less wisely, is very certain that the defections have nothing to do with sanctions. In an article that’s worth reading for its opening anecdote alone, Mark Fitzpatrick posits that “[s]uch defections reflect fissures in the regime,” but questions whether they “may also signal an impending regime collapse.” John Lee offers the most bearish interpretation of Kim Jong-un’s future, writing that North Korea “is just a spark away from an uncontrollable conflagration.”

In no particular order: I share Lee’s hope, but not his predictive confidence. Green’s is a dangerously tendentious prediction for uncertain times, and as we’ll see below, it didn’t take long for events to supersede it. I can’t quite reconcile Fitzpatrick’s view with itself; a regime like North Korea’s can’t be both riven by fissures and stable. I’ll meet Andrei halfway and admit that multiple factors are probably contributing to the recent defections, including the fear of political purges, self-interest outweighing a decaying ideology, low pay, lack of confidence in regime leadership, concern for their children, the loss of income from sanctions and South Korean diplomatic pressure, and officials’ fears that Pyongyang will hold them responsible for the loss of that income or for the defections of colleaguesOther analysts and South Korean officials think sanctions are also a factor, and the coincidence of events suggests that they’re right:

Both experts said that the implementation of recent UN Security Council sanctions may have been one determining factor in understanding the recent flurry of diplomatic defections.

Jeong said the salaries of DPRK diplomats are not high, meaning many of them have to make ends meet by sharing apartments, for example. And such personal economic difficulties may have pushed some of them to defect, he said.

“As the international community has strengthened sanctions against the North and surveillance of North Korean diplomats has increased, they can no longer make foreign currency as they did in the past,” Cheong said, citing old tactics such as the selling of counterfeit cigarettes or liquors.

Heightened pressure from the North Korean regime may have also driven them to the brink, the Korea University professor said.

“Kim Jong Un has had trouble in securing government funds after (the latest) sanctions, making the North’s foreign economic activities hard,” said Lim. “So, he has increased the pressure on diplomats abroad in charge of funds management.” [NK News, Dagyum Ji]

But if much of the conventional wisdom still predicts stability, conventional wisdom has a poor predictive history.

[Everything is absolutely fine.]

Most experts thought the regimes in East Germany, Romania, Albania, Libya, and Syria were as stable as Lehman Brothers, right up to the moments when each of those “stable” regimes fell. Most Sovietologists failed to predict the collapse of the East Bloc and the Soviet Union. Status quo bias is a powerful thing. The conventional analyst who predicts that the status quo will go on looks smart every day — until the day when he suddenly doesn’t. The unconventional analyst who predicts doom looks like a lunatic every day until the day when he suddenly looks like a prophet. The only day history remembers is that last one.

But prediction is a fool’s errand. Great events often start with infinitesimal and unpredictable ones — an official’s misunderstanding of an order, or the courage of one forgotten man in a crowd. Wise analysts do not predict such things. At most, they interpret a regime’s political and financial health from whatever vital signs are known. Once, the North Korean regime had a very strong political body. Since Kim Il-sung’s death, that body has decayed steadily. We don’t know enough to diagnose the disease or assess the progression of the atrophy, but defections by diplomats, like the desertion of soldiers, are contrary to the protagonists’ interests in normal times, and are not normal events. They suggest that the regime is unhealthy, but they are only symptoms. In North Korea, most of the vital signs are unknowable. Even then, they can’t predict when some infection kills a vulnerable host. 

Sometimes, it is easier to alter the course of history than it is to predict it.

The view that comes closest to my own is that of Stephan Haggard, who thinks that the recent defections could cause a financial crisis, which could lead to regime collapse. Haggard points to reports claiming that some of the defecting diplomats and officials have taken tens of millions of dollars with them — amounts which may seem small by most nations’ standards, but which are indispensable to Pyongyang when it’s under rising pressure from U.N. sanctions, the loss of its Kaesong income, and complaints that its labor exports violate the rights of the workers. The reports, however, are anonymously sourced, and they’ve been inconsistent about what (if any) amounts the diplomats absconded with.

Whatever the amounts, however, I agree that these defections could cause a financial crisis in Pyongyang. I just agree for a different reason.

A North Korean diplomat stationed in Russia defected last month, a local source said Thursday, amid a series of defections from the communist country to seek a new life in South Korea.

The diplomat from Pyongyang’s trade representatives under its consulate general in Vladivostok could have possibly defected with family, according to the source who asked not to be named. [….]

The diplomat is known to have been in charge of covering trade issues while sending necessary goods back to North Korea, according to the source. [Yonhap]

Following Yonhap’s report, New Focus International confirmed what I’d suspected — that North Korea’s former trade representative in Vladivostok was not only a purchasing agent for Pyongyang but a Bureau 39 fund manager. Vladivostok isn’t in Europe, so I’ll assume he isn’t the same person as the Europe-based slush fund manager whose defection was also recently reported (perhaps that person was the Bulgaria-based diplomat referred to here). Another Moscow-based trade rep defected in July. Then, there’s the recently reported defection in China of the man who controlled North Korea’s slush funds in Southeast Asia. All told, Seoul says at least seven North Korean diplomats have defected this year alone. Separately, “informed sources” have told Yonhap that ten North Korean diplomats defected in 2015, including another Bureau 39 fund manager based in Singapore. This doesn’t include the colonel in the Reconnaissance General Bureau who defected last year, the high-ranking North Korean banker who defected two years ago, or the diplomat based in Ethiopia who defected in 2013.

Pyongyang’s response to the defections — recalling diplomats to punish them for the defection of colleagues, recalling the families of diplomats back to Pyongyang, dispatching more security agents to surveil diplomats, and reshuffling or recalling embassy staff — risks pushing other diplomats to the breaking point.

If most of these reports of defections are roughly accurate, the NIS, CIA, and Treasury probably have a more complete map of Kim Jong-un’s bank accounts, assets, and financial networks around the world than at any time in North Korea’s history. (Ironically, Thae Yong-ho, who was posted in the capital of a U.N. Security Council member and U.S. ally with a strong regulatory and legal system, may be the least likely of these men to contribute much to that map, beyond the financing of his own embassy.)

So far, the Obama administration has abstained from taking any public action to block those funds. Its increasingly apparent failure to do this has already attracted criticism in the media, and the more Kim Jong-un provokes in the coming months, the louder that criticism will become. It’s certain to come up at a now-overdue briefing to Congress on the implementation and enforcement of the new North Korea sanctions law. The more attention Kim Jong-un attracts, the more likely it is that Congress will demand hearings on what Treasury has done to enforce the law. Knowing this should make some bankers very nervous. 

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Yet another North Korean slush fund manager vanishes, this time in Europe

I’m no expert, but I don’t see how this could be a coincidence.

A North Korean official managing money for North Korean leader Kim Jong-un in Europe has disappeared, raising speculation that he might have defected with a large amount of state funds, a local media report said Friday.

Citing anonymous sources, major local daily newspaper the Dong-A Ilbo reported that the official in charge of money management for the so-called No. 39 office of the Workers’ Party vanished in June. The office is known for running money for Kim’s regime.

The North Korean official is currently staying in an unidentified European country. He and his two sons are also under the protection of local authorities, the report claimed.

The media report, which has not been independently verified, said that he disappeared with hundreds of billions of won that had been under his management. He was reported to have worked in the same European country for the past 20 years. [Yonhap]

For those of you keeping track, in the last year, that’s one banker from Russia, one diplomat from Russia, a colonel in the Reconnaissance General Bureau, the number two guy at the embassy in London, and possibly the general who runs Pyongyang’s money laundering operations in Southeast Asia. For reasons I explained here, I also believe we know a great deal about the location of North Korean slush funds in China.

According to informed sources, 10 North Korean diplomats defected to the South last year, but the number had reached almost the same level in the first half of this year. Of these defectors, most came from the North’s overseas missions in Europe, with some coming from Southeast Asian countries. [Yonhap]

rats sinking ship

As I said about Thae Yong-ho’s defection: trends that can’t continue, don’t. By now, there can be little doubt that if U.S. and South Korean intelligence agencies are cooperating, they must know where a large portion (if not the majority) of North Korean slush funds are. Of course, the North Koreans will be scrambling to move that money today. As they do, nervous bankers around the world will be filing Suspicious Transaction Reports. Gleeful regulators will tent their fingers and cackle watching them make stupid mistakes. This is a rare opportunity — too rare to waste.

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Why Treasury should require banks to keep records about N. Korean beneficial ownership

In my policy discussions about North Korea, two of the smartest sanctions skeptics I’ve debated are professors John Park and James Walsh. Not only are they both genuinely nice people, their skepticism points to flaws and gaps in the sanctions regime, and that skepticism ultimately serves to improve the quality of the sanctions and their enforcement. They’ve been particularly persuasive about the importance of pursuing “North Korea Inc.,” Pyongyang’s extensive and shadowy network of agents and trading companies in China, who facilitate not only its legal trade, but also act as money launderers and purchasing agents for its WMD programs and luxury goods demands. Such is the nature of money laundering; it uses legal trade to conceal illegal trade.

One answer to Park and Walsh’s criticisms is to add one additional special measure, found at 31 U.S.C. 5318A(b)(2), to the special measures Treasury previously announced on June 1st. This measure would require financial institutions to collect information on the beneficial ownership of property by North Korean persons, or of property in North Korea. That would mirror the European Union’s recent blacklisting of North Korea for money laundering, which triggers increased beneficial ownership reporting rules.

Happily, I’m joined in this view by the most accomplished North Korea sanctions expert I know, William J. Newcomb, who previously served with the CIA, Treasury, State Department, and the U.N. Panel of Experts (here’s a link to an address Bill gave to the Korea Society). Today, Bill and I posted a public comment on Treasury’s proposed special measures against North Korean money laundering. You can read the full text of the comment below the fold, annotated with hyperlinks. It should also be available on the federal regulations portal shortly.

To read the full comment, click the “continue reading” button below.

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

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

~   ~   ~

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

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

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

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

Kim Jong Il counterfeit

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

~   ~   ~

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

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

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

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

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

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

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

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

~   ~   ~

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

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

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

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

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

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

~   ~   ~

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[….]

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

Not quite, but go on.

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

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

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

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

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

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

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

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

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

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

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

[….]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~   ~   ~

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

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

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

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

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

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

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

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

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

[….]

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

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

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

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

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

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

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

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

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

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

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

[….]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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N. Korea sanctions update: I sense a great disturbance in the force, as if billions of dollars cried out in terror and were suddenly frozen.

[First, thank you for your patience with the light blogging recently. Most of my limited spare time has been consumed by a project that must take a higher priority than this site. That project has been perpetually at the verge of completion for weeks now, but should be done soon.]

North Korea’s fourth nuclear test in January was a watershed in sanctions law and policy. Until then, the U.S. and the U.N. had mostly pretended to have tough sanctions against North Korea. Until then, South Korea’s policy was to subsidize and sanction the same government at the same time. Since March, with Congress’s passage of H.R. 757, the closure of Kaesong, the U.N.’s approval of Security Council Resolution 2270, and President Obama’s signature of Executive Order 13722, it has been at least plausible to claim that on paper, there are tough sanctions against North Korea. Whether reality will conform to the law will depend on political will, and the political will of many U.N. member states will depend on whether they believe the U.S. has the political will to use its own secondary sanctions against them if they flout the U.N. sanctions.

Here, the signs continue to be mixed. Almost as soon as Congress moved forward with H.R. 757, and even before the Security Council approved UNSCR 2270, big Chinese banks began to freeze North Korean accounts and close down the branches of North Korean banks. North Korea’s mineral exports to China have, at the very least, dropped sharply, and the drop-off in trade across the Yalu River has emptied office buildings in Dandong. Companies are scrambling to cleanse their supply chains of gold from the Central Bank of the DPRK. Elsewhere, I’ve written extensively about China’s hit-and-miss compliance with shipping sanctions, although the latest reports tell us that there are leaks, and that some designated North Korean ships are approaching Chinese ports with their transponders switched off.

This should be a topic of discussion between U.S. and Chinese diplomats.

Unfortunately, there is little publicly available evidence that the Obama Administration is making the same diplomatic effort to get countries to enforce the sanctions that the Bush Administration did between September 2005 and February 2007. It has now been two months since the U.S. government designated anyone under its North Korea sanctions programs, with the splashy launch of Executive Order 13722. Already, election season is consuming Washington’s attention. Political appointees who should be visiting Brussels, Shanghai, Windhoek, and Cairo to deliver veiled warnings act like they’re busy packing their files and job-hunting. If the administration wants to leave its successor more leverage than it had, it must show the world that it hasn’t lost its interest in implementing U.N. Security Council Resolution 2270.

Fortunately, South Korea has done much to fill this void. Park Geun-hye, ably aided by Foreign Minister Yun Byung-se, has followed her closure of Kaesong, and her lobbying of the European Union to implement sanctions, by lobbying France, Germany, Mexico, India, and even Iran. At least some of this has been effective. Park’s visit to Mexico seems to have played some role in its decision to finally seize the Mu Du Bong, although that action was also held up by questions of legal authority that UNSCR 2087 had already answered clearly and explicitly. India, which had shown signs of cozying up to North Korea, is now promising to implement UNSCR 2270 faithfully. (The outreach to Iran was admirably bold of her, and probably for the consumption of American audiences, but it’s unlikely that Park can offer Iran a replacement for what it really wants from North Korea.) The things Park doesn’t do well are obvious enough, but Park has proven herself a very skillful diplomat. It’s fair to say that she and her Foreign Minister have put our State Department to shame.

Meanwhile, implementation of the most important element of the sanctions — the financial sanctions — is finally beginning in earnest. We have just hit UNSCR 2270’s 90-day deadline for banks worldwide to close the correspondent accounts of North Korean banks. The EU has published strong new regulations implementing the resolution (h/t), and has also just announced a new round of designations, freezing the assets of 18 individuals and one entity, “mostly high-ranking military officials involved in agencies responsible for North Korea’s nuclear and ballistic weapons programs.” This will add pressure on the Obama Administration to follow. (Note to the EU: you’d send a clearer message if EU development funds weren’t being used at Polish shipyards that employ North Korean slave labor.)

Switzerland, which is not an EU member, has also just announced a new round of sanctions to implement 2270:

Measures in the financial sector include freezing assets and a ban on providing financial services. The group of people affected will now be widened. Any funds that are connected to North Korea’s nuclear or missile programmes have been affected, as have the finances of the country’s government or the Korean Workers’ Party.

The cabinet said that an exception has been made for the funds of diplomatic representations.

The sanctions mean that Swiss banks cannot open any branch or subsidiaries in North Korea, and existing banks and even accounts will have to be shut down by June 2. The same is also true in reverse – North Korean banks operating in Switzerland will have to leave.

An existing ban on exporting luxury goods will now include more products, and goods that would “increase the operational capabilities” of North Korea’s army are banned.

Any imports or exports will be checked at a customs point for the prohibited products, and exports to North Korea will require advanced authorisation from the State Secretariat of Economic Affairs (Seco). [SwissInfo]

This could be very important. For years, Switzerland had been one of North Korea’s most promiscuous suppliers of luxury goods, and was also rumored to be a haven for large regime slush funds — perhaps as much as $4 billion — under the control of former Ambassador to Switzerland and master money launderer Ri Chol. North Koreans in exile had called on the Swiss government to freeze those assets. Let’s hope that that’s what just happened.      

Even Russian banks are showing signs of compliance.

Radio Free Asia said in a report posted on its website that Russia’s central bank recently ordered other local banks and financial institutions to halt transactions with North Korea.

The central bank also said that transactions of bonds held by North Korean individuals, organizations and other groups subjected to United Nations’ sanctions should be banned immediately.

In addition, Russian financial institutions should close any accounts deemed to be linked to Pyongyang’s nuclear and missile programs, the report said. [Yonhap]

Kudos to South Korean Foreign Minister Yun Byung-se for exercising more global leadership than I’ve seen from a middle power in my memory. Even as the U.S. looks punch-drunk, the South Koreans are fighting above their weight.

“A perception has taken hold in the international community that sanctions and pressure of a different kind compared to the past should be applied to get the North to change and seek denuclearization,” Foreign Minister Yun Byung-se said in a speech at a forum.

“In the last couple of days, Switzerland the European Union took their own sanction measures. Our government will keep leading the international community’s pressure on the North from all possible directions going forward,” he added. [Yonhap]

Although the Obama Administration isn’t showing much strength now, a key test will come in July, when under section 304 of the NKSPEA, the President will have to report back to Congress on which North Korean officials, to include Kim Jong-un himself, will be designated for human rights abuses. Already, the State Department is saying that it will “identify and sanction those responsible for human rights abuses in North Korea.” It also offered these welcome words.

“The reason that that provision is in the executive order is to make it possible for us first to develop the evidence and second to act on it. The principle of accountability is a feature of U.N. Security Council Resolution 2270 as well,” Russel said. “I think that the prospect of officials being held to account for systemic abuses of universal human rights is a serious one and that is one way in which we and the international community can keep faith with the North Korean people.”

Russel also said he believes that North Korean people, when they are eventually liberated, will “ask who stood by them” and the U.S. is firmly committed to be among the supporters for them.

On Monday, Amb. Robert King, special representative for North Korean human rights issues, made a similar remark.

“We’re looking at the issue of how we might identify individuals that meet our legislative requirements to apply sanctions against individuals and there are a whole range of issues that we’re looking at. People involved in abductions will be one that we are looking at,” he said. [Yonhap]

A designation triggers the freezing of assets, which will further increase the financial pressure on the regime. And if, as now seems likely, Hillary Clinton is elected this fall, her words (and those of her advisors) offer Kim Jong-un no encouragement that this pressure will ease anytime soon. That’s good, because it will likely take between one and two years before Pyongyang starts to show signs of serious financial distress. It will take careful attention and patience to build the pressure needed to change Pyongyang without war. The greater challenge will be to maintain the determination to keep that pressure in place until Pyongyang shows that it will meet the hard conditions set forth in section 402 of the NKSPEA. Until Pyongyang is prepared to accept that level of basic transparency, no deal it signs will be worth the paper it’s printed on.

~   ~   ~

Update: The UK and Swiss governments have published guidance for their banks on their new sanctions regulations, here and here, respectively. Also, here’s more information about Russia’s sanctions implementation rules.

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The Panama papers, Pyongyang, and Nigel Cowie

Here at OFK, we keep a running list of gullible foreigners who’ve tried to get rich in North Korea, justified their support for its regime as ways to reform and open it to global commerce, and instead met the same fate as Hyundai Asan, Volvo, Yang Bin, David Chang and Robert Torricelli, Chung Mong-Hun, Roh Jeong-ho, and Orascom’s Naguib Sawaris, who I predicted back in 2008 would “eventually meet the same fate.” Regulators should require securities issuers to disclose their investments in North Korea as a material risk. This isn’t just because of the risks associated with sanctions; it’s because North Korea is flypaper for con artists — the Trump University of foreign investment — a place where hucksters’ claims are as hard to verify as disarmament agreements.

Already, the Panama Papers scandal, following a massive leak of documents from the Panamanian law firm Mossack Fonseca, is offering fresh evidence of this. In a fascinating report for 38 North, J.R. Mailey tells the story of British businessman Kevin Leech, whom he accuses of “deals with Pyongyang” that “raise serious questions about potential violations of economic sanctions on a global scale,” and of a failed North Korean mining investment promotion that turned out to have no operational mines behind it at all. (Last month, the Treasury Department imposed sectoral sanctions on the North Korean mining industry.)

This week, the neocon hegemons at The Guardian also accused British banker Nigel Cowie of “set[ting] up a secret offshore finance company allegedly used by the Pyongyang regime to help sell arms and expand its nuclear weapons programme.” (See also this report from The Independent.Cowie, the subject of previous OFK posts here, here, here, and here, is a former HSBC banker who moved to North Korea in 1995 and set up its first foreign bank. The bank was known as Peregrine Daesong Development Bank until 2000, when it was renamed Daedong Credit Bank. Later, Cowie registered an offshoot finance company, DCB Finance Limited, in the British Virgin Islands, where the laws allow a high degree of anonymity.

Initially operating out of a ramshackle Pyongyang hotel with a staff of three, Cowie led a consortium that in 2006 bought a 70% stake in the bank. [….]

Giving his address as Pyongyang’s International House of Culture, he registered DCB Finance Limited, an offshoot of the bank, in the BVI in summer 2006, with a senior North Korean official, Kim Chol-sam. The Panamanian law firm Mossack Fonseca incorporated the company, despite North Korea being an obvious high-risk destination. [The Guardian]

Cowie first achieved global infamy in 2005, after Treasury hit Banco Delta Asia with a 311 designation, resulting in the blocking of around $10 million worth of Cowie’s funds. Cowie portrayed himself as the victim of heavy-handed feds for what he repeatedly referred to as “legitimate” business. In media interviews, he called himself an agent of (wait for it) North Korea’s opening and reform, and argued that allowing Daedong Credit Bank to continue its operations was therefore in the U.S. interest.

From Pyongyang he gave several interviews to visiting foreign journalists, extolling North Korea as an under-appreciated investment opportunity. He told the Wall Street Journal he was part of an “effort to try to get the country going again”. Asked if he might prefer to work out of New York or Hong Kong rather than under an oppressive Stalinist dictatorship, he told the paper: “This is a lot more fun.”  [The Guardian]

As a critic of the Treasury Department and a defender and enabler of Kim Jong-il, Cowie became an unlikely cause celebre among members of the pro-Pyongyang crowd who suspended their usual disbelief in capitalism for the greater cause of defending Kim Jong-il. For example, long-standing North Korea apologist Gregory Elich sympathetically quoted Cowie (and conspiracy nut Klaus Bender) in a 2006 piece for the extreme-left rag Counterpunch, questioning Treasury’s allegations of North Korean counterfeiting. Pro-Beijing shill Peter Lee called Cowie the victim of “serial harassment of a legitimate enterprise — moreover one that was in the vanguard of North Korean economic reform and opening to the outside.” (Jang Song-thaek could not be reached for comment on the current state of North Korea’s reforms.)

~   ~   ~

Then, in 2007, Cowie sold his stake in Daedong Credit Bank to one Colin McAskill, who just four years before had been sentenced to six months in jail by an Australian court over a series of failed investment schemes. McAskill, former U.S. foreign service officer Lynn Turk, and others were officers in The Chosun Fund, which helped North Korea sell gold to survive the cash drought that followed the BDA designation. McAskill and his new partners in Daedong Credit Bank planned to persuade Treasury to lift its designation of BDA. 

(By then, it was publicly known that at least some of North Korea’s gold was mined in political prison camps. This year, the U.N. Security Council finally restricted North Korea’s gold sales out of concern that they could “contribute to the DPRK’s nuclear or ballistic missile programs.”)

McAskill had also partnered with Geoffrey Taylor, a fixer of shell companies, in an Australian solar energy concern whose public listing was canceled by regulators in New Zealand after it went insolvent. In 2009, Taylor’s son incorporated SP Trading, the company that leased the Il-76 that was intercepted at Bangkok in 2009, while carrying 30 tons of weapons, including man-portable surface-to-air missiles, from Pyongyang to Iran, allegedly for the use of Tehran’s terrorist clients. According to the Sydney Morning Herald, the incorporation of SP Trading “appeared to have no other purpose” than to lease the aircraft. After the seizure, there were rumors of indictments, but none came. 

~   ~   ~

Although Cowie ostensibly cut his ties to Daedong Credit Bank in 2007, his involvement with DCB Finance continued for several more years. And despite all of the publicity he had so recently attracted, it took the Panamanian law firm Mossack Fonseca until 2010 to figure that Cowie and DCB Finance were linked to North Korea.

It was only in 2010 that Mossack Fonseca realised it had been dealing with North Korean entities, and resigned as agent. The discovery came after the law firm got a letter from the British Virgin Islands’ Financial Investigation Agency asking for details of Cowie’s company. The next year, Cowie sold his share in the bank to a Chinese consortium.

The Panama Papers include acrimonious emails between Mossack Fonseca’s BVI office and its head office in Panama. In 2013, a member of the firm’s compliance department admitted Cowie’s North Korean address “should have been a red flag”. She wrote: “It is not the ideal situation and it is not gratifying issuing a letter highlighting the inefficiencies of Mossack Fonseca BVI.” [The Guardian]

Cowie says DCB Finance “was used for legitimate business and that he was unaware of any unlawful transactions.” In 2013, the U.S. Treasury Department found otherwise.

Daedong Credit Bank has engaged in the same type of activity that was at issue in the FTB designation, most notably providing financial services to the Korea Mining Development Trading Corporation (KOMID), Pyongyang’s premier arms dealer as well as KOMID’s main financial arm, the Tanchon Commercial Bank (TCB), both of which have been previously designated by the U.S. for the central role they play supporting North Korea’s illicit nuclear and ballistic missiles programs.  KOMID and TCB were also designated by the United Nations.  UNSCR 2094 requires the imposition of targeted financial sanctions on entities that work for or on behalf of, or at the direction of, UN-designated North Korean entities.  Since at least 2007, Daedong Credit Bank (DCB) has facilitated hundreds of financial transactions worth millions of dollars on behalf of KOMID and TCB.  In some cases, DCB has knowingly facilitated transactions by using deceptive financial practices.

Since at least 2006, Daedong Credit Bank has used its front company, DCB Finance Limited, to carry out international financial transactions as a means to avoid scrutiny by financial institutions avoiding business with North Korea.  DCB Finance Limited is registered in the British Virgin Islands and also operates out of China.

Kim Chol Sam is a representative for Daedong Credit Bank who has also been involved in managing transactions on behalf of DCB Finance Limited.  As a Dalian, China-based representative of DCB, it is suspected Kim Chol Sam has facilitated transactions worth hundreds of thousands of dollars and likely managed millions of dollars in North-Korean related accounts. [OFAC Press Release, June 27, 2013]

Treasury’s language suggested that even after 2007, DCB Finance and Daedong Credit Bank continued to work in concert with Tancheon Commercial Bank, which was designated by the U.N. and the Treasury Department in 2009 for arms dealing and links to North Korea’s missile programs.

Cowie responded that he had left banking in 2011 to focus on other business commitments. In a letter, his lawyer said: “My client was a shareholder in DCB Finance Ltd, a company set up to enable DCB to continue to operate after correspondent banks had closed its accounts. The name was specifically chosen in order to reflect the historical connection with DCB. DCB Finance Ltd was used for legitimate business. My client was, and still is to this day, unaware of any transactions being made with any sanctioned organisation or for any sanctioned purpose, during his tenure.” [The Guardian]

Cowie is saying, in other words, that he didn’t really know who his own company was dealing with, which sounds (to steal a line from a friend) like something Alfred E. Neuman used to say. After all, as the American Bar Association reminds us, Know Your Customer and due diligence obligations have been “a basic tenet of [anti-money laundering] risk management for a very long time.” Treasury’s Financial Crimes Enforcement Network has been publishing guidance on those obligations, including in the specific context of North Korea, for at least a decadeFor years, the Financial Action Task Force warned bankers and regulators around the world to take “countermeasures” against North Korea’s money laundering risks. Certainly if Cowie continued to deal with Tanchon or Kim Chol-sam after 2009, he was on notice.

Cowie’s definition of “legitimate” couldn’t have comported with how most newspaper readers defined the term. Unfortunately, at the height of Cowie’s fame, few newspaper writers did much digging into his claims. Neither, apparently, did Mossack Fonseca. If Mossack Fonseca was slow on the uptake, so was The Guardian and most of the press. The news for DCB and Cowie is damning for sure, but the real bombshell here is three years old, and it’s Treasury that dropped it. Even this blog was on hiatus at the time (I was busy with other things).

So, assuming that DCB Finance facilitated North Korea’s arms-dealing, was it illegal? Actually, maybe not, depending on the timing. Although the BDA action of 2005 and Treasury’s warnings to other banks had a major effect on North Korean finance, they weren’t technically “sanctions,” but the enforcement of money laundering laws that apply to everyone. During the period between 1995 and 2010, when Cowie says he left the banking business, Treasury’s North Korea-specific sanctions regulations and designations were particularly weak. The Trading With the Enemy Act sanctions in effect against North Korea until 2008 only prohibited arms sales to North Korea. North Korea was listed as a state sponsor of terrorism, which meant that any dollar-denominated transaction with its government required a license from the Office of Foreign Assets Control, but it’s not clear that the transactions DCB Finance allegedly handled were denominated in dollars. Executive Order 13551 first banned transactions incident to North Korean arms dealing in 2010. Presumably, if Treasury was interested in prosecuting DCB Bank, DCB Finance, or Cowie, it would have done so by now.

So, what did we learn from all of this? First, when people doing business with North Korea protest that their business is legitimate, take those claims with a very large grain of salt. Second, engagement never changes Pyongyang, but it often changes the people who engage with it, and very seldom for the better.

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N. Korea’s restaurants, rumored to be involved in money laundering, are closing down.

North Korea’s overseas restaurants are not a significant percentage of its GNP,* but they are an important source of hard currency for Kim Jong-un. As early as 2008, one writer estimated that each restaurant remitted between $100,000 and $300,000 to Pyongyang each year. As of February of this year, there were 130 of them earning $100 million annually. Since then, the South Korean government has told its citizens to stop patronizing the restaurants, and business has fallen dramatically:

On some other night, when the house is packed and the soju flowing, this might set off a drunken singalong, with tables of South Korean tourists clapping wholesomely in the front and smoky huddles of their expat businessmen compatriots leering not-so-wholesomely from the back.

But not tonight.

In the northeast corner of Beijing, the Okryugwan restaurant is feeling the far-flung effects of the latest standoff on the Korean Peninsula. Since the North conducted a nuclear test in January and went ahead with a rocket launch earlier this month, Seoul has instructed its citizens to not patronize the government-affiliated North Korean restaurants that usually pull in a steady stream of curious South Korean travelers, and their precious foreign currency.

“We usually have many tables of South Korean tourists, but business is not good,” North Korean waitress Han Ahn Min said as she poured tea at one of just a handful of occupied tables in a high-ceilinged dining hall capable of welcoming visitors by the busload. [AP]

The Daily NK has reported that the regime had stopped paying the waitresses their salaries.

On the 22, a source close to the issue in China informed Daily NK that female employees at North Korean restaurants were regularly receiving their pay until February (handed out by North Korean managers overseeing each establishment), even if the amounts were meager. However, in February these paychecks failed to materialize, and the outlook for March is also grim.

An additional North Korean source currently residing in China corroborated this news.

“For these female workers from Pyongyang, who scrape by and carefully save every penny, not receiving a month’s pay is a serious and heart-wrenching affair. Unable to voice their complaints over this injustice, these women can only comfort each other during the dark nights before they sleep at night far from home, with tears in their eyes as they think of their parents,” she explained. [Daily NK]

But the greater significance of the restaurants is almost certainly their use for laundering money. The restaurants are a stream of “clean” cash for commingling with the illicit funds North Korea’s diplomats and laborers earn abroad. Commingling, the mixing of legally and illegally derived funds, is the essence of what the Men in Blue call “money laundering.” The restaurants’ inflated prices are one indication of this function. Another is the fact they are controlled by Bureau 39, North Korea’s overseas money laundering agency, which is designated and blocked by both the U.S. Treasury Department* and the U.N. Security Council.

So the news that North Korea’s restaurants in China are closing down is more important and better news than Kim Jong-un’s take from selling naengmyeon or soju. Adam Cathcart even posts this picture of a closed-down restaurant on his Twitter feed.

The closure of the restaurants will likely complicate North Korea’s movement of cash from its illegal enterprises to the Chinese banks that still take its deposits.

One question still gnaws at me: if North Korean restaurants abroad are likely fronts for money laundering, handle revenue from other enterprises, and have a utility beyond their own profitability, a simple drop-off in business wouldn’t be enough to shut them down. I wonder if there’s another reason why the restaurants suddenly became unviable. I wonder if it might have something to do with their bank accounts being frozen. Given the restaurants’ reported control by Bureau 39, banks would be taking a very high legal risk by continuing to service those accounts. Indeed, the Daily NK reports that the regime has blamed sanctions for the closure of the restaurants. It will be worth watching whether banks in Europe, Southeast Asia, and other places follow this trend.

~   ~   ~

* Previously said “GDP,” since corrected, because Curtis.

* Previously said “United Nations,” since corrected.

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North Korean diplomats behaving badly

If you’re a North Korean diplomat, a good general rule is that all publicity is bad publicity. Over the last two weeks, North Koreans, most of them diplomats or former diplomats, have attracted much publicity of the kind they couldn’t have wanted.

The Chinese government reports that “a North Korean consular official” killed two Chinese citizens while driving home drunk in Dandong last month. The North Korean diplomat was on his way home from an “event celebrating North Korea’s launch of a long-range rocket.” So, that’s another way post-launch events may not have worked out quite as His Porcine Majesty might have hoped.

Also this week, Tanzanian authorities expelled a former North Korean diplomat, Kang Sungguk, for using forged passports and for suspected involvement in various unspecified illegal activities. Prior to 2001, Kang had been an “economic councilor” at the North Korean embassy in Dar-as-Salam. Since then, he had been “a prominent North Korean businessman with supposed diplomatic status who ran several businesses from his base in Guangzhou, China.” It’s always China.

The acting Commissioner of Immigration (Border Management and Control), Wilson Bambaganya, said that immigration officers with support from security officers had been watching Kang closely for sometime and observed his various violations of both national and international laws.

“We (Immigration) gathered information about his habit of changing passports with fake names, different dates of births and numbers,” Bambaganya said. “We asked ourselves what his motives were for constantly forging those details, and we realised that for a person of his status to do such things, he must be engaged in some illegal business, although we couldn’t establish exactly what business.”
When Kang was recently interrogated by immigration officers, he failed to produce any traceable legal business links, which only served to raise more suspicions about him, the senior immigration department official said.

“We even tried to communicate with his country’s embassy here in Tanzania, but they also said they had no proper information about Kang and his current businesses. So we finally decided to expel him via a PI note,” Bambaganya explained.

He added: “Even if he (Kang) was a genuine businessman in China or anywhere else, here in our country we have concluded that he was dealing in illegal business activities.” [IPP Media, via The Guardian]

Last week, Sri Lankan authorities detained two North Koreans for carrying $150,000 in cash. That’s U.S. dollars, in case it matters to you which convertible currency discriminating North Korean money launderers prefer. The two — contra the post title, these two probably were not diplomats — were on their way from Oman to China carrying home “wages earned by themselves as well as other co-workers at construction sites in Oman.” Like many governments, Sri Lanka requires persons carrying more than $10,000 in cash to declare it to the authorities.

In China, the two would presumably have deposited the cash into a bank that would have been willing to scrub the subsequent wire transfers of all references to a North Korean affiliation. Not that any Chinese bank would do thatNorth Korea has since demanded the release of the men and the return of the money. Because the money consists of proceeds of North Korean labor exports, it’s subject to blocking under Executive Order 13722, but not under U.N. Security Council Resolution 2270 (unless, of course, it’s associated with WMD programs, weapons trafficking, or luxury goods imports).

North Korean consulates are expected to be self-financing, so North Korean diplomats often find themselves placed under arrest in far-flung, exotic locations, like Mozambique, were North Korean diplomat Pak Chol-jun was arrested in May of last year with ten pounds of rhino horn worth $99,300. South Africa later expelled Pak, who was posted at the North Korean embassy in Pretoria.

Just over a year ago, Son Young-nam, the first secretary of the North Korean embassy in Dhaka was arrested by Bangladeshi authorities carrying 59 pounds of gold, worth $1.4 million, which he hadn’t declared to customs. North Korea later apologized, and Bangladesh expelled the diplomat. Gold smuggling is a traditional method for North Korea to evade sanctions and money laundering crackdowns. UNSCR 2270 requires member states to “prohibit the procurement of” gold by North Koreans.

Also on the slave labor front, the Daily NK has an exposé of the role of North Korean consulates in China in procuring human chattels for rental.

“Starting from about a few years ago, officials in the North Korean consulates in China started to provide young female workers to ethnic Korean owned toll processing businesses for a fee. Recently, one such consulate has been receiving a 200-Yuan per month fee in similar transactions with a wig-making factory. The fee in this case is transferred from the worker’s account in accordance with the contract,” a North Korean source currently residing in China reported to Daily NK on March 18.

This development was corroborated by an additional source close to the issue in China.

The brokering of these deals originated in Shenyang, where ethnic Korean managers of seafood processing and packaging, textiles manufacturing, and wig and artificial eyebrow making factories started hiring young, cheap female workers from Pyongyang. The number of Chinese businesses looking to hire young, pretty, 20-something natives of Pyongyang is so large that the consulates have stepped in to facilitate.

Demand from Chinese businesses in the Northeast cities of Jilin, Heilongjiang, and Liaoning quickly built on the momentum, meeting supply from North Korean authorities looking to export labor for a profit. There is a heavy emphasis on beautiful young girls from big cities like the capital. Even now, in the face of strict primary and secondary sanctions targeting the North Korean regime, the demand for young North Korean female workers has not abated. [Daily NK]

If a plain-looking woman can pack seafood or knit a wig just as efficiently as a pretty one can, it’s unclear why the Chinese employers put such a premium on appearance unless they intend to exploit the women sexually. This goes unstated in the article, but previous reports have alleged that North Korean managers had pimped out female North Korean workers in a food processing plant in Donggang.

Finally, a number of sources are reporting that two countries are about to expel North Korean diplomats who’ve been designated by the U.N. Security Council. North Korea has replaced its Ambassador to Burma after the Security Council designated the incumbent, Kim Sok-chol. The U.S. Treasury Department designated Kim last November for activities on behalf of the Korea Mining Development Trading Corporation, or KOMID, a trading company designated for proliferation.

Egypt is also said to be about to expel North Korean Ambassador Pak Chun-il after his designation. Pak allegedly “played a key role in establishing an Egyptian branch of … KOMID,” and was involved in weapons smuggling and other illegal activities. Egypt has recently come up in multiple reports on North Korea sanctions violations, and was mentioned in the most recent U.N. Panel of Experts report. Last November, the U.S. Treasury Department designated Eko Development and Investment Company, a/k/a, Eko Development and Investment Food Company, a/k/a Eko Import and Export Company, a North Korean trading company based in Cairo, for being a KOMID front. Treasury also designated Egypt-based Ri Won Ho last week, when it first published Executive Order 13722. Treasury describes Ri as “an official of the DPRK’s Ministry of State Security based in Egypt” who was working for KOMID.

Last month, investigative journalist George Turner revealed that Egyptian-U.S. dual national Naguib Sawaris of Orascom/Koryolink infamy was in partnership with North Korea’s Foreign Trade Bank, designated by Treasury for proliferation, through the Orascom-linked, North Korean-chartered Orabank.

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U.S. will announce new North Korea sanctions as early as this week.

At this event at the Heritage Foundation yesterday, I emphasized that U.S. and U.N. sanctions are mutually complementary, and that for the U.N. sanctions to work, the U.S. must show its determination to back them with the new authorities in H.R. 757, and by harnessing the power of the dollar.

The signs I’m seeing this week all suggest that the Obama Administration finally gets this. On Monday, President Obama said “that effective enforcement of sanctions on North Korea is one of the key tasks facing the country.” Yesterday, Treasury Secretary Jack Lew briefed a congressional committee on his talks with Chinese officials about enforcing North Korea sanctions, which he described as only “theory until you implement them” through “sustained efforts.” Said Lew, “We know from these sanctions programs that it’s grueling day-to-day work. You’ve got to identify the entities, act against the entities.” Exactly right.

The administration has also begun the hard work of financial diplomacy:

Adam Szubin, acting undersecretary of Treasury of terrorism and financial intelligence, will be in Beijing and Hong Kong on Monday and Tuesday to meet with senior government officials and compliance officers to discuss “a range of issues of mutual interest,” according to an advisory notice from Treasury. It comes in light of recent United Nations and U.S. sanctions on North Korea imposed this month, Treasury said.

“This trip provides an important opportunity for discussions of ways to strengthen U.S.-China coordination in response to North Korea’s destabilizing behavior and to ensure sanctions targeting the North Korean regime are as effective as possible,” the advisory notice said. [WSJ, Risk & Compliance Blog]

According to Channel News Asia, Szubin was to meet “with both government officials and the private sector” with regard to the implementation of both U.N. and U.S. sanctions. Reading the reports together, Szubin appears to have met with officials of certain banks that may hold North Korean assets. It may be a complete coincidence that Szubin visited Hong Kong just as HSBC froze Sam Pa’s accounts, and that HSBC’s top legal officer is Stuart Levey, Szubin’s predecessor. Coincidences do happen.

What we often forget about Treasury’s anti-money laundering effort against North Korea in 2005 and 2006 is that it was more than an action against one dirty bank. It was a broader campaign of financial diplomacy, led by Levey and Daniel Glaser (who is still a senior Treasury Department official today). It looks like we’re starting to see a similar strategy re-emerge now. There’s no question that implementing it will be challenging, based on what the U.N. Panel of Experts told us last week about North Korea’s extensive use of deceptive financial practices.

179. The financial sanctions notwithstanding, the Democratic People’s Republic of Korea continues to gain access to and exploit the global international financial system (including banking and insurance) through reliance on aliases, agents, foreign individuals in multiple jurisdictions, and a long-standing network of front companies and embassy personnel, all of which support illicit activities through banking, bulk cash and trade.

180. The Panel has concerns about banks without adequate banking regulations and the intent to enforce them, especially in countries lacking effective laws and compliance institutions.91 Transactions originating in foreign banks have been processed through corresponding accounts in the United States and Europe. The enhanced due diligence required under the resolutions in the case of the Democratic People’s Republic of Korea is frustrated by the fact that companies linked to the country are often registered by non-nationals, who also use indirect payment methods and circuitous transactions dissociated from the movement of goods or services to conceal their activity.

Cooperation and information sharing among member states will be essential to the success of the strategy.

181. The implementation of financial sanctions becomes more complex as it moves from targeted financial sanctions based on designation lists to activity-based sanctions,92 an endeavour that requires first establishing whether an entity is being controlled or used by a designated entity. The situation is complicated because lists of aliases are never exhaustive, not least because of alternative ways to transliterate Korean names. In addition, the Panel is hampered in updating information on designated entities owing to time lapses in responses to its inquiries, allowing entities more room to continue their activities.

Yonhap also reports that “[t]he U.S. is putting together a package of unilateral sanctions against the North to carry out the Security Council sanctions and the recent congressional legislation tightening the screws on Pyongyang.” Special Envoy for Human Rights Robert King adds, “There is an Executive Order being drafted right now that will deal with these additional sanctions.”

This is welcome, if unexpected. After all, what could a new executive order do that Executive Order 13687, which the administration has barely used, doesn’t already do? (Search “DPRK2.”) I suppose it could further clarify that the President may impose secondary sanctions on persons who engage in arms trafficking with North Korea, insure or reflag its ships, or maintain correspondent accounts for its banks, but H.R. 757 already gives the President the authority to address those things. What would be more useful would be a round of designations under section 104.

Treasury also sorely needs a better set of sanctions regulations to replace the weak ones at 31 C.F.R. Part 510. Instead, it needs something broadly analogous to the more comprehensive regulations that apply to Syria (Part 542), or to Iran (parts 560, 561, and 562). One important part of the new regulation would be its general licenses for humanitarian transactions, subject to the limits of section 208. Another would expansive definitions of “arms or related materiel” (to include technical assistance) and “severe human rights abuses” (to include the use of North Korean forced labor). Let’s hope Treasury is working on that, too, but for now, the good news is that Treasury is working.

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HSBC freezes “at least” $87M in assets of North Korea-linked Chinese tycoon

You all remember Sam Pa, right? He’s the Chinese ex-spy with a history of dubious business dealings in Africa, for which he was eventually sanctioned by the Treasury Department. Pa’s 88 Queensway group also had dealings with Korea Daesong General Trading Corporation, a financial arm of North Korea’s Bureau 39, for which he was not designated. Today, this happened:

HSBC has frozen more than $87m in accounts linked to a Chinese tycoon behind several multibillion-dollar deals in Africa, while it investigates allegations of “serious financial crimes”.

Accounts controlled by Sam Pa and his business associate Veronica Fung were blocked by the bank a year ago, but its internal investigation is still going, court documents have revealed. Last week, a Hong Kong judge declined Mr Pa and Ms Fung’s request that he order HSBC to release the funds, which are “extremely substantial”, according to the ruling. One account alone contains $87m, the documents show.

Mr Pa has built a network of interests in oil, minerals and infrastructure by cultivating regimes regarded as among the world’s most repressive and corrupt, from Angola to North Korea — often blazing a trail for Chinese state-owned groups. [Financial Times]
The story included no suggestion that the action was related to Pa’s links to North Korea. Oh, and you all remember who’s in charge of compliance at HSBC, right? Good for HSBC.

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U.N. report: Bank of China told shipper in illegal arms deal to hide N. Korean links

Today, the U.N. Panel of Experts monitoring (non-)compliance with its North Korea sanctions released its latest report, and it’s a doozy. Including exhibits, it’s almost 300 pages long, and the substance should be material for several posts. Our first installment comes from the December 2015 conviction of Chinpo Shipping over the 2013 Cuba arms shipment. Remember last July, when I asked, “What about the Bank of China?” Well, we have our answer, and from the look of it, the Bank of China had better lawyer up:

190. In a rare proliferation financing prosecution, the Singapore District Court charged Chinpo Shipping Company (Private) and its Director, Tan Cheng Hoe, with providing financial services or transferring financial assets or resources to OMM (see paras. 137-141). On 14 December 2015, the Court found that Mr. Tan had transferred $72,016.76 to a foreign shipping agent for the shipment aboard the Chong Chon Gang in July 2013 (intercepted by Panama).

191. The judge, Jasvender Kaur, stated that Chinpo “had conducted no due diligence whatsoever” before transferring the funds on 8 July 2013. She found that Chinpo had applied for 605 outward remittances totalling $40 million between 2009 and 2013 on behalf of nationals of the Democratic People’s Republic of Korea. The accused described himself as a “payment agent” for OMM.

192. Court documents provide ample evidence of both the implementation and the evasion of targeted financial measures. The documents indicate that, although Chinpo at one time indicated vessel names in its outgoing remittance forms, it ceased that practice in the second half of 2010. According to Mr. Tan’s statement, “more questions were asked by the bank in the United States when the vessel name was included, and some processing banks will reject the transaction after asking for more information”. He then stated that the Singapore branch of Bank of China, from which Chinpo had undertaken the transaction of $72,016.76, “had advised [Chinpo] to leave out the vessel name in transactions, that bank was aware that the remittances were being conducted on the behest of Democratic People’s Republic of Korea entities”.95 Apparently, as a result of that advice, Mr. Tan began to remove vessel names from the payment details. Chinpo similarly advised entities of the Democratic People’s Republic of Korea on multiple occasions not to include such names in inward remittances, further assisting sanctions evasion. An employee stated that she had been instructed to include that reminder in outgoing e-mails. Another employee elaborated that that instruction had been included “partly because Chinpo wanted to get the money and the funds would be blocked by the US if the US knew that the transfers were made in relation to a Democratic People’s Republic of Korea vessel”.96 The Panel notes that such information-stripping is consistent with the evasion practices used by other OMM entities and individuals.

Got that? The Bank of China, in violation of Executive Order 13551, deliberately advised a customer to strip data out of series of transactions with a North Korean puppet, who was doing an illegal arms deal through the U.S. financial system. Whether the BoC knew the ultimate purpose of the transactions is no defense. Its legal obligations were to perform due diligence and know its customers, especially when that customer was linked to North Korea.

Stripping the North Korean affiliations out of a wire transfer gives this story the whiff of straight-up money laundering, not unlike the conduct that cost Barclays Bank a $2.5M hit for moving $3.3M for Zimbabwe, or caused Credit Agricole to eat a $300M fine for violating Sudan, Cuba, and Iran sanctions. Et cetera, et cetera.

Historically, $40 million hasn’t been a trivial amount of money to the Treasury Department’s Office of Foreign Assets Control, especially when the data-stripping is willful. It is, to use the technical legal term, a “B.F.D.” This may be the point when we figure out whether the Obama Administration is finally serious about enforcing the law against North Korea or not.

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Update: Yup, called it:

In the Bank of China’s case, Beijing’s diplomats have privately raised concerns about the panel’s decision to name the Chinese bank. They have argued that the only evidence comes from a Singaporean court and that the experts should have relied more on the word of Chinese authorities. [Foreign Policy, Colum Lynch]

Read the whole thing.

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Singapore shipper guilty of funding illegal N. Korean arms deal through Bank of China

In 2013, Panamanian authorities seized a huge haul of surplus Cuban weapons, including MiG fighters and surface-to-air missiles, aboard a North Korean ship at the entrance to the Panama Canal. Multiple U.N. Security Council resolutions prohibit North Korea from buying or selling most weapons, so the Cuban stevedores covered the weapons with sacks of sugar. An investigation by the U.N. Panel of Experts found that a North Korean shipper, Ocean Maritime Management (OMM), owned the ship, and that the regrettably named, Singapore-based Chinpo Shipping handled the financial transactions behind the shipment. According to multiple open-source reports, Chinpo used its account in the local branch of the Bank of China for those transactions.

chong chon gang sugar

After lengthy delays by the U.N. bureaucracy, a Security Council-appointed committee and the U.S. Treasury Department designated OMM. Since then, Treasury has designated multiple OMM offices, agents, and enablers. Chinpo was neither designated nor blocked, but the authorities in Singapore charged it with violating a local law codifying U.N. Security Council sanctions against North Korea, and for running an illegal money transmitting business without meeting the financial due diligence requirements that apply to such businesses. Now, Reuters and the AP are reporting that the court has convicted Chinpo:

In announcing the verdict, Singapore District Judge Jasvender Kaur said the firm, Chinpo Shipping Company, could have contributed to the nuclear-related programs or activities of North Korea.

The company was also found guilty of running a remittance business without a valid license for more than four years.

Chinpo had wired $72,017 from its Bank of China account to a Panama-based shipping agent in July 2013 for the return passage of the MV Chong Chon Gang through the Panama Canal. [….]

Chinpo violated a United Nations law adopted by Singapore that prohibits the provision of financial services, assets or resources to North Korea that “may be reasonably be used to contribute to the nuclear-related, ballistic missile-related, or other weapons of mass destruction-related programs or activities.” The maximum sentence is a fine of 100,000 Singapore dollars ($71,000) and five years in jail. [AP]

If you’ve read all of the links I so laboriously embedded in those first two paragraphs, there isn’t much question that Chinpo willfully facilitated the North Korean shipment using deceptive financial practices.

That shouldn’t be the end of the story, however, because financial institutions like the Bank of China are supposed to have compliance and know-your-customer programs in place to ensure that they don’t service illicit transactions. In the specific case of North Korea, the Global Financial Action Task Force has called for “countermeasures” against its money laundering and arms dealing for years.

You would think, then, that one of the world’s largest banks would employ compliance officers competent enough to detect such suspicious activity, which (if denominated in dollars, and in this case, it was) must be reported to the Treasury Department. In fact, the Treasury Department’s Financial Crimes Enforcement Network has published specific guidance on the reporting of suspicious North Korea-related transactions.

The U.N. Security Council’s adoption of specific financial measures to address this conduct reinforces long-standing Treasury Department concerns regarding North Korea’s involvement, through government agencies and associated front companies, in financial activities in furtherance of a wide range of illicit activities. These activities include currency counterfeiting, drug trafficking, and the laundering of related proceeds. FinCEN has previously noted such conduct, most recently in 2007.4 The Treasury Department remains especially concerned about the use of deceptive financial practices by North Korea and North Korean entities, as well as individuals acting on their behalf. Such deceptive practices may include North Korean clients’ suppression of the identity and location of originators of transactions; their practice of arranging for funds transfers via third parties; repeated bank transfers that appear to have no legitimate purpose; and routine use of cash couriers to move large amounts of currency in the absence of any credible explanation of the origin or purpose for the cash transactions. [….]

FinCEN notes that with respect to correspondent accounts held for North Korean financial institutions, as well as their foreign branches and subsidiaries, there is now an increased likelihood that such vehicles may be used to hide illicit conduct and related financial proceeds in an attempt to circumvent existing sanctions. Financial institutions should apply enhanced scrutiny to any such correspondent accounts they maintain, including with respect to transaction monitoring. [….]

Consistent with the standard for reporting suspicious activity as provided for in 31 C.F.R. part 103, if a U.S. financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution shall then file a Suspicious Activity Report. [FINCEN Advisory, June 18, 2009]

FINCEN and FATF have both renewed their North Korea advisories repeatedly in recent years. And yet, from the fact that the transactions went through unimpeded, we can infer that nothing here seemed suspicious to the Bank of China’s compliance officers:

Chinpo had applied for a total of 605 outward remittances totaling $40 million from 2009 to 2013 on behalf of North Korean entities. Chinpo’s director, Tan Cheng Hoe, also heads associated companies Tonghee Shipping Agency and Great Best Trading.

When The Associated Press visited Chinpo’s listed address, another company said it has occupied the premises for more than a year. The case was adjourned until Jan. 29 to give prosecution and defense lawyers time to make submissions. [AP]

As one immediate consequence of this conviction, Treasury will almost certainly designate Chinpo Shipping, and possibly some of its officers. I’d expect to see those designations this week, if not today.

But Chinpo Shipping is a small fish, and no one should view that result as the end of this story. This isn’t the first time the Bank of China has come under suspicion for shady North Korea-related transactions, after all. Just as Treasury has recently taken enforcement actions against other big banks, such as BNP Paribas, Credite Agricole, and Commerzbank, for evading sanctions against other countries, Treasury should investigate whether the Bank of China violated the Bank Secrecy Act by failing to file Suspicious Activity Reports on Chinpo, and perhaps other North Korea-linked customers.

We’ll soon know just how serious the Obama Administration is about enforcing the Security Council’s sanctions by the message it sends — or doesn’t — to the Bank of China.

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Sam Pa, 88 Queensway, KKG & Bureau 39: A case study in how China helps N. Korea evade sanctions

Last week, I highlighted Andrea Berger’s excellent post at 38 North, calling for the U.N. Security Council to sanction North Korea’s third-party enablers. Berger named some of those enablers, but I’d like to name another one of the most important ones — the Hong Kong-based 88 Queensway Group, headed by one Sam Pa, also known by his birth name “Xu Jinghua” or any of “at least eight aliases,” each with its own matching passport. According to multiple news reports, Pa has extensive connections to Chinese politicians, and with its intelligence services.

The mystery over his origins may be related to his former career as a spook. “All his life he’s worked in Chinese intelligence,” one source told the Financial Times. [The Independent]

An FT investigation last year found that Mr Pa and his fellow founders of the Queensway Group have connections to powerful interests in Beijing, including Chinese intelligence and state-owned companies. [Financial Times]

On the web, you’ll find a lot written about Mr. Pa, mostly about his notorious business dealings in Africa. Most of that reporting focuses on what could be described, conservatively, as conflicts of interest. The Economist writes that Pa’s deals “appear to grant the Queensway syndicate remarkably profitable terms,” “would be depriving some of the world’s poorest people of desperately needed wealth,” and “may also have indirectly helped sustain violent conflicts.” These include close partnerships with the governments of Zimbabwe and Angola in their diamond mines, and with Angola’s oil ministry, via an entity called China Sonangol, that was “deemed so corrupt in 2003 that Citibank closed all its accounts.”

The routine need to bribe officials is not a deal-breaker for Queensway either. Chinese investigators found that Queensway’s leaders had bribed high-level officials in Nigeria and several other countries. [J.R. Mailey, 38 North]

Queensway’s deals often traded Africa’s resources for promises to build infrastructure — promises on which Queensway ultimately failed to deliver. The exchange of Africa’s commodities for services has the additional advantage of avoiding the dollar system, and with good reason: the Justice Department and the SEC have opined that making a payment through a U.S.-based correspondent account gives them jurisdiction to prosecute non-U.S. companies under the Foreign Corrupt Practices Act. Even if the feds never make an arrest, they can still forfeit assets “involved in” any predicate offense for a money laundering transaction.

Deals with Zimbabwe would be especially risky. Most of its top officials’ assets are blocked for “subverting or undermining democratic practices and institutions.” One of the Zimbabwean officials with whom Sam Pa has met, Happyton Bonyongwe, heads its dreaded Central Intelligence Organization, its internal security branch. In 2008, the Treasury Department blocked Bonyongwe’s assets for “political repression.” In 2011, opposition members of the Zimbabwean government cut funding for the CIO, but soon, according to The Economist, the CIO was “suddenly flush with cash,” and had “doubled the salaries of agents” and “acquired hundreds of new off-road vehicles and trained thousands of militiamen” who could then help “intimidate voters during next year’s elections.” The Economist adds, “Several sources who have looked at the deal concluded that the money came from Mr Pa.” According to Mailey, Pa financed the CIO, which paid Pa in diamonds, which Pa then smuggled out of Zimbabwe.

Pa and Queensway have also had extensive dealings with North Korea. According to the Financial Times, that relationship started in 2006, right after Treasury’s action against Banco Delta Asia, when most banks wouldn’t touch North Korean customers.

Shortly after establishing contact, Queensway representatives began making frequent trips to North Korea. During these visits, China Sonangol lined up a series of projects in North Korea, including the construction of a gigantic riverfront commercial district called “KKG Avenue” in Pyongyang. Sam Pa also procured 300 Nissan Xterra SUVs for Kim Jong Il’s regime, some of which had “KKG” inscribed on their exterior. [J.R. Mailey, 38 North]

In October 2006, U.N. Security Council Resolution 1718 required member states to “ensure that any funds, financial assets or economic resources are prevented from being made available by their nationals or by any persons or entities within their territories, to” persons providing support for North Korea’s WMD programs.

According to The Financial Times, however, Queensway’s North Korean partner was none other than the notorious Bureau 39 of the ruling Workers’ Party of Korea, via a front company called Korea Daesong General Trading Corporation. Both Daesong and Bureau 39 are designated by the U.S. Treasury Department for “engaging in illicit economic activities,” including drug dealing and currency counterfeiting; managing regime slush funds; money laundering; and luxury goods imports, in violation of U.N. Security Council resolutions. As Treasury noted when it designated Bureau 39 five years ago, “deceptive financial practices” play an important role in North Korea’s nuclear and missile proliferation, and arms trafficking.

In March 2013, after North Korea’s third nuclear test, the Security Council passed Resolution 2094, which tightened the financial due diligence requirements applicable to North Korea, prohibiting the provision “of any financial or other assets or resources, including bulk cash, that could contribute” to Pyongyang’s WMD programs or other prohibited activities. Still, Queensway continued to send a stream of mysterious payments to North Korea.

A document request attached to a June 2013 Hong Kong court decision lists US$11,143,463 (HK$86,505,484) in payments from July 2008 to November 2009 described as “Budget for North Part” or “Kumgang Budget.” The records also describe almost US$2 million in “consulting fees” paid in relation to KKG during 2008 and 2009. [J.R. Mailey, 38 North]

In April 2013, Pa flew to Pyongyang on a charter jet. Mailey quotes a Korean-language report from the Naeil Sinmum that around this time, Pa “visited North Korea up to five times … to discuss the development of an oil field in Seohan Bay.”

Mr Pa struck a deal with Daesong for an eclectic range of North Korean projects, the Asian official says, ranging from power plants to mining to fisheries. Money started to flow — although it is unclear how much flowed directly into North Korea. A ledger published in a 2013 Hong Kong high court ruling in a dispute between some of Mr Pa’s business associates refers to Queensway Group payments including “Pyongyang city bus system”, “Korea airport”, “Korea: 5,000 tons of soyabean oil” and “exhibition sponsored by the Korean consul”. There are no further details. But the list of payments also contains references to KKG. [Financial Times]

In November of 2013, shortly after the end of the Kaesong Industrial Park’s six-month shutdown, Queensway broke ground on a new Kaesong Hi-Tech Industrial Park, which adds concerns about technology transfers to other concerns previously expressed by the Treasury Department: “Precisely what North Koreans do with earnings from Kaesong, I think, is something that we are concerned about.” Even a South Korean official has suggested that the new high-tech annex to Kaesong “could be a violation of UN Security Council sanctions on the regime.”

As recently as last year, KKG began running a new fleet of taxis in Pyongyang, collecting all of the fares in yuan, euros, or dollars. A taxi business working on a cash basis might have a utility beyond the income it earns. As with Pyongyang’s chain of overseas restaurants, it’s a “perfect vehicle” for commingling “legitimate” cash earnings with more questionable payments, to conceal the true origin of the funds.

In the end, however, it wasn’t Sam Pa’s dealings with Pyongyang’s most notorious money launderers that cost him. Instead, in April of 2014, the Treasury Department designated Mr. Pa under its Zimbabwe sanctions program, for “illicit diamond deals” that helped the CIO evade sanctions. (On the SDN list, Pa appears under his birth name, Xu Jinghua, and several other aliases.) Then, last week, the Chinese authorities arrested Pa at a Beijing hotel, in connection with a corruption investigation into the state-owned oil company Sinopec and a former Sinopec official, who also happens to be the governor of Fujian Province.

Why did Pa fall afoul of Beijing after a life spent as a loyal and well-connected spy and arms trafficker? One possibility is that Pa was attracting too much of the wrong kind of attention, and that his arrest was a demonstration for foreign consumption. Another theory is that “[s]ome in Beijing had long been vexed by the insistence from some African rulers that Chinese groups use Mr Pa as a middleman.” Whatever Mr. Pa’s personal fortunes, to this day, 88 Queensway and KKG are still not designated by the Treasury Department.

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