The MKP Group’s website is a feast of mendacity, quackery, possible illegality, and web design hilarity

The aftermath of Kim Jong-nam’s assassination, and the attention it has drawn to North Korea’s connections to Malaysia, continues to yield new revelations about Pyongyang’s illicit finances overseas. Reuters, having already exposed Glocom as a front for the Reconnaissance General Bureau, now adds to what the Wall Street Journal reported two weeks ago about the MKP Group.

To summarize Reuters’s extensive and detailed report on MKP: it was founded by a North Korean named Han Hun-il and a Malaysian named Yong Kok-yeap in 1996. According to its own promotional materials, MKP “operates in 20 countries in Asia, Africa and the Middle East, piling up contracts worth at least $350 million,” mostly for construction (such as building houses in Africa that Africans can’t afford). Reuters has since located a defector named Lee Chol-ho, a former employee of Han. Lee says Han is a former official in North Korea’s Reconnaissance General Bureau and has funneled cash to Pyongyang for years — through Jang Song-thaek until his execution in 2013, and more recently, to the Central Committee of the Workers’ Party. Although Reuters and Lee couldn’t say how Pyongyang used those earnings, we can safely assume it wasn’t to buy grain or baby formula.

MKP’s website — which appears to have been designed by Borat — lists a much earlier founding date of 1964, and a diverse set of products and services it provides, many of them either sanctioned by the U.N. (luxury yachts) or having dual-use applications (machine tools). I’ve posted numerous screenshots from MKP’s site here, for reasons that will become evident later.

Given MKP’s operations in Africa and its involvement in exporting art from North Korea (see “entertainment”), it probably also has links to the Mansudae Art Studio, whose subsidiary, Mansudae Overseas Project Group, exports those grandiose statues North Korea builds in Africa and the Middle East, most infamously this one in Senegal, where half the population reportedly lives below the poverty line. Mansudae Overseas Project Group also works in collaboration with U.N.- and U.S.-designated arms dealer KOMID in Namibia, and was itself designated by the U.S. Treasury Department last December for “exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea,” under Executive Order 13722. The U.N. Security Council banned the export of statues by North Korea last November 30th, in Resolution 2321.

MKP is also involved in North Korea’s chain of clinics in Africa, using North Korean doctors, despite North Korea’s own chronic shortage of doctors to care for its people. A report by Radio Free Asia a year ago exposed that some of those clinics in Tanzania provided quack medicines to their patients. The Tanzanian government subsequently closed two of those clinics.

[* Actual clinics may not contain white people.]

It also lists several trading companies as subsidiaries (lower left sidebar).

Fortunately, when Reuters called, MKP’s reaction wasn’t at all suspicious.

Han, also known as Dr. Edward Hahn, hung up the phone and blocked a Reuters reporter on his messaging app when contacted for comment.

MKP did not respond to requests for comment on Lee’s assertions. The company issued a statement dated March 23 saying MKP had “no reason to hide the fact” that Han is North Korean. It denied owning ICB or any other North Korean bank and said nobody from the United Nations has contacted the company. [Reuters, James Pearson, Tom Allard and Rozanna Latiff]

For reference, here’s what the U.N. Panel said in its 2014 report about the relationship between MKP and ICB:

According to Reuters, “ICB is among several banks the U.N. is currently investigating for possible breaches of various U.N. Security Council resolutions.” U.N. resolutions ban joint ventures with North Korean banks. If the U.N. designates MKP or ICB, member states would be obliged to shut them down, freeze their assets, and expel all of their representatives. The Treasury Department could (and should) designate those joint ventures, and penalize any foreign banks that provide the joint ventures or North Korean banks with the correspondent services and thus help them access the financial system.

At this point, things get really ridiculous:

In its March 23 statement, MKP said its website had been “hacked” to insert ICB under its list of service companies and place a “doctored photograph” of “MKP personnel”, including Yong, visiting ICB’s office in Pyongyang.

A search of archive.org, a database of old websites, shows ICB has been listed on MKP’s website since 2009, including under its earlier name, Sungri Hi-Fund International Bank. As of April 10, ICB was still listed on the website.

Sharp-eyed readers will recall that in this post, dated February 27th, I posted this screenshot from the MKP Group’s website:

[Diamonds are forever. So are screenshots.]

As of this morning, you can still click the “services” tab of the MKP Group’s website and see this image. So evidently, the North Koreans would have us believe that MKP’s website was hacked a month before Reuters called, and yet its website — the website of a multi-million-dollar international conglomerate — remained functional and unrepaired for the entire time until March 23rd, and even today. MKP’s website also lists another bank as a part of its group:

Click here for a summary of what we know about North Korea’s use of Malaysia as a base of operations for smuggling and money laundering, here for a summary of U.N. financial sanctions against North Korea, and here for a list of North Korean banks that are or aren’t sanctioned by the U.N. and the U.S. Treasury Department.

This report reinforces what I’ve said before: the combination of good investigative reporting and good investigative work by the U.N. Panel can expose and destroy the financial networks that fund Pyongyang. These are not fly-by-night operations, but long-established and well-capitalized groups that have put down deep roots in states where corrupt officials and ex-officials allow the North Koreans to ingratiate themselves. Uproot those networks, expel their representatives, and freeze their assets, and Pyongyang will have lost hundreds of millions of dollars and decades of work. It’s anyone’s guess why our own government has abdicated the work of investigation and coercive diplomacy to reporters and the U.N. Panel. Imagine what could be accomplished if our government devoted the political will and the resources to using the tools that Congress has given it.

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What the Trump administration’s first North Korea sanctions designations tell us

Last Friday’s designations of 11 individuals and one company by the Treasury Department are the first North Korea designations of the new Trump administration. So what do they tell us about the direction of the administration’s North Korea policy?

On the positive side, the designation of a North Korean coal company affiliated with the military should, in theory, send a strong message to its Chinese clients, although they don’t seem to have taken the last hint. Also on the positive side, the designated individuals are mostly front-men for North Korean banks, trading companies, arms dealers, and shippers in Russia, China, and Vietnam. It’s good that North Korean operatives in China — and Russia — aren’t off-limits. As I explained here, those governments are already obligated to expel most of these people by U.N. Security Council resolutions.

These are the kinds of targets we should be focused on to uproot His Porcine Majesty’s proliferation and money laundering networks, particularly in China. The designations will send a strong message to Russia and China to kick them out. They’ll also fill the Treasury Department’s SDN database — and consequently, the anti-money laundering compliance software the banking industry uses — with the names and addresses of North Korean agents and front companies. That will help make it harder for those agents’ bankers to defend their due diligence and compliance later, if and when Treasury files civil penalty cases against them.

On the not-so-positive side, this still isn’t what needs to be done — holding the Chinese banking industry accountable for breaking our laws and laundering North Korea’s money through our financial system. For a critical reaction to the new designations, see Anthony Ruggiero’s tweetstorm. As Anthony notes, all 12 entities designated last Friday are North Korean, so these are not the secondary sanctions we need to make North Korea sanctions effective.

Maybe it was too much to expect that some of North Korea’s Chinese front-men would be designated right before Xi Jinping arrives at Mar-a-Lago. I’ll be very interested in seeing what happens after Xi departs. If Trump really is the corrupt empty suit his harshest critics say he is, Xi Jinping will come to Mar-a-Lago, offer to turn a few Lotte stores into Trump hotels, and do what China always does when under sufficient pressure about North Korea — lie like a cheap rug until our national case of Attention Deficit Disorder sets in again.

Overall, however, I may be slightly less pessimistic than Anthony. For one thing, there is this report on the outcome of the administration’s policy review, which sounds like what I’d expected. For another, I interpret Trump’s statement that he’ll act against North Korea with or without China’s help as a threat to act against Kim Jong-un’s Chinese bankers and freeze his accounts. For another, although I might have expected Treasury to sanction Chinese enablers and trading companies now, I would not expect it to start nuking banks just yet. Instead, Trump’s message to Xi should be that the Bank of China is under investigation by the Treasury Department, soon to be followed by the Bank of Dandong and the 12 other banks that held accounts for Dandong Hongxiang and its many front companies and shell companies.

Finally, Trump can drop a veiled hint that ports that don’t inspect North Korean cargo, as U.N. Security Council resolutions require, can expect to be targeted with extra customs inspections. That could drive shippers away from those ports and damage the economies of those cities. Then, Trump would have someone leak that to the press and watch for signs like this.

As of today, however, it’s possible that none of those banks are under investigation because the investigative agencies simply don’t have enough staff to do it all. We’ll turn to that topic, and to this letter from senators Cory Gardner and Ed Markey, in tomorrow’s post. A full list of those designated last Friday below the fold (“continue reading” –>).

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Investigative journalists expose North Korean front companies in Malaysia

The coincidence of the Panel of Experts report’s release and the assassination of Kim Jong-nam continues to focus some of the finest investigative journalism I’ve seen in years on North Korea’s front companies in Malaysia. First up, the MKP Group, a Malaysian-North Korean joint venture that earned “tens of millions of dollars” through construction projects in Zambia, Angola, and elsewhere in Africa. To further reinforce Bill Newcomb’s comments about the links between slave labor, money laundering, and proliferation, MKP often uses North Korean laborers, who “typically must give most of their earnings to the regime as a condition of going abroad, according to human rights groups.”

The Panel of Experts is now investigating MKP and its affiliates in Malaysia, including at least one bank, for sanctions violations. So are the Malaysian authorities, who recently shut down another large North Korean front company, Glocom after the U.N. Panel and Reuters exposed it:

Malaysia is specifically trying to determine whether North Korea used the Southeast Asian nation as a hub for earning foreign exchange in violation of the U.N. sanctions, which were designed to cut Pyongyang off from global financial flows, according to a person familiar with the inquiries. [Wall Street Journal]

A specific focus is International Consortium Bank, which I wrote about earlier this week, as a likely violation of U.N. prohibitions against joint ventures and correspondent relationships with North Korean banks, and of new requirements that member states close foreign branches of North Korean banks and expel their representatives. The key to MKP’s welcome until now appears to have been close ties to local politicians:

MKP is now the main focus of Malaysia’s inquiries, though other companies are also in the mix, according to the person familiar with the Malaysian investigations. MKP lists former Malaysian government officials, including a former senior member of parliament, as shareholders or directors in corporate registration documents. [….]

In the late 2000s, MKP built 5,000 low-cost houses in Angola’s capital, Luanda, using North Korean workers, and later sold them to the government for $50,000 each, a total of $250 million, the person familiar with MKP’s business activities said. Angola’s government didn’t reply to requests for comment.

In Zambia, the chief executive of a private joint venture between MKP and the state-run National Housing Authority said it had built 428 houses there and was constructing another 253, sometimes with North Korean workers.

“We don’t really have a problem with” using the workers because MKP is a Malaysian-registered entity, said the chief executive, Charles Holland. He said he last met Mr. Han, the MKP director, about five years ago.

Two Zambian government officials said that Mr. Han, also known as Han Hun Il, has been an influential businessman in the copper-rich African nation for almost two decades. MKP implemented $50 million in contracts in Zambia between 2006 and 2015, according to a foreign ministry official.

But in the end, few Zambians could afford the houses, most of which are empty now.

In Malaysia, MKP sought to hire or award ownership stakes to politically connected Malaysians to build local support and win contracts, including a road-building deal, another person familiar with the company’s activities said.

The person said people awarded stakes included Malaysia’s former navy chief, Adm. Mohd. Ramly bin Abu Bakar, a shareholder of an MKP subsidiary, according to corporate records, and a senior retired Malaysian member of parliament, Karnail Singh Nijhar, who is a director of the subsidiary.

Other information I’d heard about MKP is that they may have a history of not necessarily building the things they contract to build. One possible explanation for that is that African client was really paying for some other good or service, and the construction contact was a sham. Or, maybe the financing just fell through. When the Panel has completed its investigation of ICB, it should look into CCCL Bank and other MKP companies next.

Then, there is this report, via a site I hadn’t heard of before now, that North Korea was running a sham IT start-up in Kuala Lumpur, which raises strong suspicions about links to hacking:

From the heart of the Malaysian capital of Kuala Lumpur as well as the nearby financial center of Singapore, North Korean spies covertly ran a technology business that, until last year, publicly sold a wide array of products including iPhone apps, web development apps and even cybersecurity tools. Virtually nobody knew who really controlled the company until recently. Even today, nobody is entirely sure how it worked.

Now, CyberScoop has learned that United Nations officials are currently looking into the business as part of larger inquiries into sanctions violations by North Korea.

The connection between Adnet and the network of front companies was first uncovered by Reuters journalists who, alongside U.N. officials, began last year looking into the individuals and entities connected to North Korean companies in Malaysia. Many of the companies were said to be directed by the Reconnaissance General Bureau (RGB), the North Korean intelligence agency responsible for clandestine operations and cyber activity. Over the course of the investigation and publication of the U.N. report, most of the companies stopped operations. [Cyberscoop]

In most cases, these operations either involve blocked North Korean entities like the RGB, which member states are obligated to seize and shut down, or whose continued operation violates other provisions of the U.N. sanctions. There will be no excuse for the Malaysian (and Zambian, and Angolan) governments to let these companies continue operating, and no excuse for our own Treasury Department to allow them continued access to our banking system.

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UN report shows China, others are still havens for North Korean money laundering

Due to a convergence of other commitments, it took me longer than I’d hoped to digest the U.N. Panel of Experts‘s latest findings about North Korea and financial sanctions. If you only read the bottom line and stop there, you’ll either be discouraged or find support for an argument that sanctions are futile.

210. Despite expanded financial sanctions adopted by the Security Council in resolutions 2270 (2016) and 2321 (2016), the Democratic People’s Republic of Korea has continued to access the international financial system to support its activities.  Financial networks of the Democratic People’s Republic of Korea have adapted to these sanctions, using evasive methods to maintain access to formal banking channels and bulk cash transfers to facilitate prohibited activities. At the time of writing, Democratic People’s Republic of Korea circumvention techniques and inadequate compliance by Member States are combining to significantly negate the impact of the resolutions.

But you shouldn’t just stop there. If you read the entire report, you’ll find ample evidence that with sufficient resources and political backing, competent investigators can find, expose, and destroy Pyongyang’s financial networks. The Panel has shown us how it’s done. But even if financial sanctions can work, they are not yet working. Pyongyang’s money launderers are experienced and sophisticated, and they’re still accessing the financial system. Member states (read: China, and to lesser degrees, Russia, Malaysia, Singapore, Namibia, Zambia, and the Seychelles — and by default, the U.S.) aren’t complying with, are ignoring, or aren’t enforcing the resolutions.

In many cases, Pyongyang’s money launderers are the same people who’ve plied their trades from the same Chinese cities for years with impunity. Increasingly, they work through local agents, from offices in storefronts or hotel rooms. They may have formalized links to North Korean banks, or they may conceal those links and work through trading companies to move funds and conduct transactions on their behalf. These techniques aren’t new; they’re the same ones terrorists, drug lords, and other rogue states have used since the passage of the Bank Secrecy Act years ago. What else isn’t new? Pyongyang’s reliance on the dollar system:

Most of the financial activity investigated by the Panel was denominated in United States dollars, euros and renminbi. (Para. 213.)

To help you understand the meaning of the Panel’s findings, I’ve organized this post around a few simplified rules I synthesized from seven different U.N. Security Council resolutions. I’ve also blended in information from last year’s report and from other relevant posts I’ve written about North Korea’s finances.

Some caveats are also appropriate here. First, two of these resolutions (2270 and 2321) are fairly recent. Some member states whose names don’t start with “ch” and end in “ina” may still have been in the process of complying when the Panel’s reporting period closed.

Second, in this post, I use “money laundering” to mean the deceptive financial practices that Pyongyang uses to conceal the ownership, origin, and use of its funds to help it violate U.N. sanctions. In most cases, those practices will also meet the U.S. (or domestic) legal definition, but not always. In U.S. law, “money laundering” is defined in two fairly complex statutes, but can be simplified to mean moving money that’s “involved in” certain categories of unlawful activity, either because the funds are proceeds of a crime (say, spending the take from a bank fraud scam), are the corpus of a crime (such as a payment by a blocked person through a U.S. correspondent), or are being used to conceal a crime (for example, Pyongyang Restaurant profits that are commingled with drug money to obscure the illicit origins of the latter).

Rule 1: Member states must freeze the assets of designated entities.

States must freeze the assets of designated persons and “ensure that any funds, financial assets or economic resources are prevented from being made available to or for the benefit of” them. That includes denying them financial services, closing their representative offices, preventing their agents from participating in joint ventures or business arrangements, and expelling those agents. UNSCR 1718, para. 8(d); UNSCR 2094, paras. 8 & 11; UNSCR 2270, paras. 15 & 32; & UNSCR, 2321, para. 3.

Who’s Breaking it: China, mainly. The Panel suspects that at least four U.N.-designated North Korean banks or their aliases continue to operate from Chinese territory:

  • Korea Kwangson Banking Corporation, which operated from Dandong until the Dandong Hongxiang indictments, and still has fronts in the British Virgin Islands, the Seychelles (where this blog has a readership, for some reason), and Hong Kong. (Para. 224.)
  • Daedong Credit Bank, which has offices in Dalian, Dandong, Shenyang, and may actually be majority Chinese-owned, in violation of the prohibition against joint ventures with North Korean banks (see below). Daedong Credit Bank recently hit the headlines again when it appeared in the Panama Papers. (Para. 225.)
  • Korea Daesong Bank also has offices in Dalian, Dandong, and Shenyang. (Para. 225.)
  • Ryugyong Commercial Bank, a suspected front for Daedong Credit Bank, operates in Beijing, where it processes transactions for designated entities and finances arms deals. (Para. 227.)

Rule 2: Banks must cut off correspondent relationships with North Korean banks.

Member states must “prohibit financial institutions within their territories or subject to their jurisdiction from . . . establishing or maintaining correspondent relationships with DPRK banks,” except with the Committee’s advance approval, and requires member states “to terminate such . . . correspondent banking relationships with DPRK banks within ninety days from the adoption of this resolution.” UNSCR 2270, para. 33.

Who’s Breaking it:

  • The unnamed Chinese banks that maintain correspondent accounts for Daedong Credit Bank, which is helping Glocom, its officers (Rang Su-nyo) and its front companies (Pan Systems Pyongyang, Pan Systems Singapore, International Golden Services, and International Global Systems) process U.S. dollar and euro transactions through U.S. and European correspondent banks. (Paras. 233-38.) That’s a violation of the money laundering statute — specifically 18 U.S.C. 1956(a)(2), because as the Panel notes, Glocom is a front for the Reconnaissance General Bureau, which itself is designated by both the U.S. Treasury Department and the U.N. The obvious predicate offense for a money laundering charge would be the International Emergency Economic Powers Act. If those banks aren’t violating the IEEPA, they may be in violation of their customer due diligence obligations under 31 U.S.C. 5318(i). I’d like some names, please.
  • China, by hosting Kim Chol-sam, an extraordinarily prolific money launderer who is a director of DCB Finance and is linked to Daedong Credit Bank, both of which were designated by the Treasury Department for WMD proliferation in 2013. According to the Panel, Daedong Credit Bank and DCB Finance ran millions of dollars in U.S. dollar wire transactions through our financial system through Korea Daesong Bank (also designated). He also facilitated bulk cash smuggling from China to North Korea. Kim sometimes poses as a South Korean, maintains a series of front companies in China, including Dalian Daxin Electronics, Hongdae International Ltd. (HK), Pan Ocean Investments, Ltd. (set up with help from a Hong Kong company’s Beijing office), Win Talent International Ltd. (ditto). Those links, by the way, are to the Panama Papers database. (Paras. 226-28.)

Rule 3: States must close foreign branches of, and joint ventures with, North Korean banks.

Member States shall “prohibit in their territories the opening and operation of new branches, subsidiaries, and representative offices of DPRK banks,” to “prohibit financial institutions within their territories or subject to their jurisdiction from establishing new joint ventures,” except with the Committee’s advance approval, and requires member states “to close such existing branches, subsidiaries and representative offices, and also to terminate such joint ventures [and] ownership interests . . . within ninety days from the adoption of this resolution.” UNSCR 2270, para. 33.

Who’s Breaking it: China, Russia, Malaysia, Zambia, Egypt, and others.

It’s important to note that the ban on joint ventures with North Korean banks is only as recent as last March, and much of the information below is from the Panel’s previous reports that predate those resolutions. Having said that, I saw nothing in the 2017 report indicating that any of the banks listed below were closed. All of these are North Korean banks with foreign branches, North Korean joint ventures with foreign banks or companies, or both:

  • A bank that calls itself — I am not making this up  — “the International Bank of Martial Arts in Pyongyang,” continues to do renminbi money transfer services from Dandong. According to the Panel, it “has served foreign clients with renminbi savings, loan, and transfer services; has undertaken transactions in China; and has issued guidelines in Chinese and English to foreign clients on how to transfer renminbi from China.” (Para. 216; Annex 15-2).
  • The Central Bank of the DPRK has branches in China, where (my conjecture, based on Dodd-Frank disclosures) it likely sells gold, in violation of UNSCR 2270, para. 30. (2014 Report, Table XXXIV.)
  • The Chinese Commercial Bank in Rason, established in 2013 by the China Gold Trade Exchange of Dalian. (Para. 219.)
  • The First Credit Bank, a/k/a Cheil Credit Bank, a/k/a Jeil Credit Bank, which the Panel’s 2014 report describes as a “possible joint venture.” (2014 Report, Table XXXIV.)
  • First Trust Corporation, a joint venture with the notorious Japan-based front group Chosen Soren to finance trade with North Korean firms based in Russia, which would now violate UNSCR 2321, paragraph 32. (2014 Report, Table XXXIV.)
  • Golden Triangle Bank in Rason, which provides support for trade with North Korea, also in violation of UNSCR 2321, paragraph 32. (2014 Report, Table XXXIV.)
  • Hana Banking Corporation, which the Panel’s 2014 report described as a “joint stock company arranged between Central Bank of DPR Korea and Central Bank of China.” It “operates branches in China and deals in RMB.” (2014 Report, Table XXXIV.)
  • Hi-Fund Bank, a subsidiary of the MKP Group, a joint venture with Malaysian parters with a branch in Zambia, which I mentioned in this post. (Para. 218.)
  • International Consortium Bank, another MKP subsidiary. (2014 Report, Table XXXIV.)
  • Korea Joint Bank, a/k/a Korea Joint Operation Bank, Chosun Joint Operation Bank, a joint venture bank “established by Korea International General Joint Venture Company and Association of Korea Traders and Industrialists in Japan.” Japan has usually been a strict enforcer of North Korea sanctions. I wonder if this bank is still operating. (2014 Report, Table XXXIV.)
  • Koryo Commercial Bank, a/k/a Korea Commercial Bank, a joint venture bank; established by North Korean and U.S. residents — and what I wouldn’t give to know who those U.S. residents are, although I can venture some guesses (which I’ll keep to myself). According to the Panel, it may be related to Kumgangsan International Group. (2014 Report, Table XXXIV.)
  • Orabank, which, as George Turner informed us, is a joint venture between Orascom and the Foreign Trade Bank of North Korea, which the Treasury Department designated in 2013 under Executive Order 13382 for financing the proliferation of weapons of mass destruction. This connection was a legal risk for Orascom and a far greater one for its former CEO, Naguib Sawaris, a U.S. citizen.
  • Kumgyo International Commercial Bank. Per the latest Panel report, this bank is run jointly with the China Inner Mongolia Horizon (Hong Yuan) International Trade Corporation, Ltd. and affiliated with Korea Chongsong Mining Company. (North Korea’s mining industry is now under U.S. sectoral sanctions for its frequent involvement in WMD proliferation and arms trafficking.) The bank is registered with the Chinese Ministry of Commerce as a venture, and is 49 percent owned by a Russian company, Menggely K LLC,  of the Tuva Republic. It facilitates exports of pearls and magnesium. (Para. 220.)
  • First Eastern Bank, Rason. This is a joint venture with the Chinese company Unaforte, which is linked to our friend Jim Rogers. It’s involved in mining, investment, and the (now prohibited) gold trade. We’ve already covered that North Korea is banned by U.N. resolutions from exporting gold. Remember also Leo Byrne’s reports exposing that Unaforte exported gold jewelry to Hawaii, which would violate Executive Order 13570 unless the exporter had an OFAC license (place your bets). It has a branch in Yanbian and is licensed by the North Korean government, but claims not to be subject to either North Korean or Chinese jurisdiction. It advertises that it does not require proof of identity, which sounds like an open invitation to money laundering. (Para. 221.)

To the extent these banks still operate, they’re all violating U.N. sanctions. If the new administration is looking to show seriousness of purpose about cutting off North Korea’s finances, it could start by designating all of them under section 104 of the North Korea Sanctions and Policy Enhancement Act or its implementing order, Executive Order 13722. That would reinforce the message that Chinese banks should not continue to do business with them.

Rule 4: Member states must expel persons working for North Korean banks.

Persons working on behalf of North Korean financial institutions or U.N.-designated entities must be expelled for purposes of repatriation to North Korea, and are ineligible for any immigrant, non-immigrant, or transit visa, unless their presence is required for a legal, medical, or humanitarian reason. UNSCR 2270, para. 15; UNSCR 2321, para. 33.

Who’s Breaking it: China and Malaysia, mostly. See, e.g., Kim Chol-sam and his entire network, the Glocom network, and all of the foreign branches of North Korean banks I mentioned above. The branches are supposed to be closed, and their North Korean employees expelled.

Rule 5: Member states must restrict bulk cash transfers to and from North Korea.

The Security Council “[e]xpresses concern that transfers to the DPRK of bulk cash may be used to evade” the sanctions resolutions, “and clarifies that all States shall apply” the “enhanced monitoring” measures set forth in paragraph 11 of UNSCR 2094 to bulk cash transfers to and from North Korea. Although the language “expresses concern” appears non-binding at first glance, it refers back to mandatory provisions. UNSCR 2094, para. 14.

Who’s Breaking it:

  • China, for hosting bulk cash smuggler and money launderer Kim Chol-sam and his network.
  • Glocom, and also Malaysia for letting Glocom get away with it.
  • Singapore and the UAE, which failed to stop a North Korean diplomat who was carrying $1.4 million in gold through their airports. (Para. 243.)

Who isn’t:

  • The government of Bangladesh deserves an honorable mention for seizing that $1.4 million in smuggled North Korean gold (para. 243) and this Rolls-Royce, which was shipped from Malaysia by a North Korean diplomat …

[to raise money to buy infant formula and TB medicine, naturally.]

Could that have something to do with North Korean hackers picking the Bangladesh Bank as a victim? Could be, but then how do you explain the killing of Kim Jong-nam in Malaysia? Either way, Bangladesh’s good-faith enforcement has earned it a supportive response to that crime.

Rule 6: Member states must limit extensions of credit to North Korea.

States should not enter into new commitments for grants, financial assistance, or concessional loans to the DPRK, except for humanitarian and developmental purposes directly addressing the needs of the civilian population, or the promotion of denuclearization, and should exercise enhanced vigilance with a view to reducing current commitments. Strictly speaking, this is non-binding language. UNSCR 1874, para. 19.

Who’s Breaking it:

  • China, if Sam Pa and the 88 Queensway group are still in partnership with KKG, Korea Daesong General Trading Company, and Bureau 39.
  • Moon Jae-in next year, unless we stop him.

Rule 7: Member states must close bank branches and accounts in North Korea.

Member States must take the necessary measures to close existing representative offices, subsidiaries or banking accounts in North Korea within 90 days, unless the Committee determines on a case-by-case basis that such offices, subsidiaries or accounts are required for the delivery of humanitarian assistance or the activities of diplomatic missions in the DPRK or the activities of the United Nations or its specialized agencies or related organizations or any other purpose consistent with the objectives of this resolution. UNSCR 2321, para. 31.

Who’s Breaking it: China mostly, as noted above.

Concern: Member states should “exercise vigilance” over North Korea’s slave labor exports.

This isn’t a binding rule, but the Security Council expressed “concern that DPRK nationals are sent to work in other States for the purpose of earning hard currency that the DPRK uses for its nuclear and ballistic missile programmes, and calls upon States to exercise vigilance over this practice.” UNSCR 2321, para. 34.

The is provision isn’t, strictly speaking, so much about the exploitation of the workers as it is about the fact that their “wages” are stolen, laundered, and used for prohibited purposes.

Who’s Ignoring it:

  • China, the largest single user of North Korean labor;
  • Russia, which just signed a new contract for North Korean labor;
  • Namibia, whose banks process dollar payments to U.N.-designated Mansudae Overseas Project Corporation, as “wages” for its workers. (Para. 245.)
  • Oman, Kuwait, Qatar, and other Gulf states, as illustrated by Sri Lanka’s seizure of $167,000 in cash, gold jewelry, and watches, which the courier said were wages of construction workers in Oman. Uh huh. (Para. 244.)
  • Malaysia, as discussed.
  • More research about that topic here, herehere.

Conclusion: What we learned about North Korean money laundering from the Panel’s report

First, North Korea increasingly relies on non-bank front companies that essentially operate as banks, and would thus qualify as financial institutions under the U.S. legal definition in 31 U.S.C. 5312.

Second, North Korea still prefers dollars (see, e.g., paras. 114, 224, 226 n.206, 227, 234, 238 & 244). Many of those dollar transactions continue to be run through U.S. correspondents (see, e.g., paras. 217 n.194, 226 & 235), who need to step up their game.

239. Stronger sanctions have led networks of the Democratic People’s Republic of Korea to employ greater ingenuity in using formal banking channels and bulk cash transfers to facilitate their illicit endeavours. At the same time, Member States that host nationals of the Democratic People’s Republic of Korea, that control the movement of persons across their borders, that regulate banks and that regulate correspondent banks have not made a commensurate investment in their own capacity to enforce the strengthened sanctions. Consequently, agents of the Democratic People’s Republic of Korea have been able to mask both their illicit activities and their links to the country.

A new Treasury Department regulation at 31 C.F.R. 1010.569, implementing the ban on correspondent accounts and imposing new due diligence requirements, may give them an incentive to do just that. The fact that Pyongyang still relies on the dollar system gives us more options to intercept those dollars.

While some of that cash is eventually smuggled into North Korea, most of it is probably commingled with illicit (or as the case may be, licit) funds and deposited into Chinese banks by small-time operatives (who do what’s known as “structuring”). From there, it’s transferred into other accounts (“layering”) and spent on stuff the elites in Pyongyang like. Then, the goods are shipped in by boat or Air Koryo (the final stage of money laundering: “integration”).

None of these methods are more sophisticated than those of Al Qaeda (with its use of hawalas), Colombian drug lords (with their clever use of trade-based money laundering), or Iran (with its talent for using gold as a sanctions dodge). The Panel’s report proves that these networks can be uncovered by skilled and determined investigators. So, for that matter, did C4ADS, and the Treasury and Justice Departments. It’s by no means impossible to find and destroy these networks with enough of the right people. The Panel has identified dozens of potential North Korean targets that should be expelled and have their assets frozen. Maybe now we have to political will to make that effort, but do we have enough cops, lawyers, and diplomats to get the job done?

For two other good analyses of the report and how to respond to its findings, read this one, by George Lopez and this one, by Richard Nephew. Lopez, in particular, dispels the myth that North Korea is already isolated and therefore financially impregnable. Instead, the Panel’s report proves that Pyongyang remains dependent on offshore finance.

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Royce introduces bill to toughen sanctions on N. Korea; subcommittee holds hearing

The big news yesterday was that Ed Royce, the Chairman of the House Foreign Affairs Committee, has introduced a sequel to the North Korea Sanctions and Policy Enhancement Act, or NKSPEA. You can read the full text here, but briefly, the bill —

  1. Expands the mandatory and discretionary sanctions in NKSPEA 104 to match the sanctions added by UNSCR 2270 and UNSCR 2321. It also adds a few more, like authorizing Treasury to sanction anyone who imports food from North Korea — a gravely immoral thing when so many North Koreans are going hungry, and when the state obviously isn’t using its food export revenue to buy gbrain to feed them.
  2. Provides new authorities to ban North Korea from financial messaging networks. Of course, SWIFT is reportedly disconnecting all North Korean banks, but this provision now becomes important to prevent SWIFT’s less reputable competitors from taking that business on.
  3. Codifies the Treasury Department’s new regulatory ban on providing indirect correspondent account services to North Korean banks.
  4. Toughens the NKSPEA 203 provisions denying aid to states (mostly in Africa and the Middle East) that buy weapons from North Korea.
  5. Toughens the NKSPEA 205 provision allowing U.S. Customs to increase inspections of cargo coming from ports that aren’t meeting their UNSCR 2270 obligations to inspect North Korean cargo. It also creates a blacklist of non-compliant ports, including Dandong and Dalian. That could put pressure on those ports to either meet their inspection obligations or shun North Korean cargo altogether. Think of it as the customs equivalent of Banco Delta Asia. But I haven’t even told you the best part yet.
  6. Creates the authority for secondary shipping sanctions against North Korea by giving the Coast Guard the authority to ban ships, shippers, and flags that violate U.N. shipping sanctions from U.S. ports and waterways. That will make for some lively discussions with the Ways and Means and Transportation committee staffers. It also takes a page from the South Koreans and Japanese who’ve enacted similar measures. That would effectively bring the U.S. into a coalition with those nations to isolate North Korea from the global trade system. Given that this coalition would now include China’s three largest trading partners, that’s potentially quite a powerful measure. And as I’ve noted more than once, let there be no doubt that it was China that started the trade war over North Korea. This is how we stand by our allies and deter economic bullying.
  7. Increases sanctions against companies that employ North Korean slave labor, and threatens to raise the tier status of those governments under the Trafficking Victims Protection Act.
  8. Adds a new condition for the suspension of sanctions — that North Korea permit Korean-Americans to have unrestricted and unmonitored meetings with their North Korean relatives before they die.
  9. Offers rewards to defectors, and maybe other informants, who provide information leading to the arrest or conviction (in any country) of persons involved in North Korean WMD, cyberattacks, or money laundering.
  10. Piles on more pressure to designate North Korea as a state sponsor of terrorism.

And we still haven’t even seen the member amendments, which promise to be lovely. (On a related note, the Senate is also moving separate legislation to sanction the companies that have participated in China’s island-building in the South China Sea.) This promises to be an action-packed year for all you sanctions geeks out there. The dark circles under my eyes should be proof enough.

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The other big event yesterday was the first hearing run by the new Chairman of the Asia-Pacific Subcommittee, Ted Yoho of Florida. As of yesterday morning, I hadn’t really viewed Yoho as a thought leader on Asia policy, but after his performance yesterday, I’ve reassessed that view. Yoho ran a tight ship, kept the proceedings on time, and despite this being his debut, projected a sense of calm command of the proceedings. More importantly, both Yoho and new Ranking Member Brad Sherman came in extremely well-briefed on the issue, and in full command of the facts. There was undoubtedly some first-rate staff work behind that. They’ve clearly digested the Panel of Experts’ latest, something that I’m still in the process of doing. You should really watch the whole thing:

The panel members were Bruce Klingner of the Heritage Foundation, Professor Sung-Yoon Lee of the Fletcher School, and former State/Treasury official Anthony Ruggiero, who has added much-needed expertise to the debate about sanctions policy and administration. I thought all three were extremely effective in breaking through to the members, but then, I consider all three men to be good friends, so I won’t even pretend to be objective. I’ll just post a money quote from each of them. First, Klingner sets the stage for where we find ourselves today, and why Americans should care:

Professor Lee’s statement, frankly, is some of his best work. It’s a must-read, not just for its historical insight about the often-strained relationship between China and North Korea and what that doesn’t mean, and not just for its insight into North Korea’s political objectives, but for the beauty of its prose (which Chairman Yoho also praised).

Ruggiero then brings his practical experience and careful research to the often-underinformed discussion of sanctions as a policy tool. And if I had to pick one panelist whose testimony really seems to have broken through to the Committee members, it’s probably Ruggiero, who reformatted their c-drives about a lot of junk analysis about sanctions:

Thanks for that!

Ruggiero also had some choice words for SWIFT, which I’ll let you read on your own.

With the Trump administration about to conclude its policy review and clearly headed in the direction of a harder line that will emphasize sanctions without sparing Chinese violators, this advice will undoubtedly find audiences in the White House, the National Security Council, and the State and Treasury Departments. My guess is it’s going to be a tense dinner at Mar-a-Lago when — or if — Xi Jinping comes around. But as I’ve said before, our relations will China may have to get worse before they can get better.

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Will China cooperate on North Korea sanctions? That depends on which “China” you mean.

I often talk about the importance of pressuring China to pressure North Korea. When I do, people sometimes cock their heads like my dog would do when he heard a new sound, and ask me whether China would cooperate with that. I answer this question with a question of my own: “Which China?” China, for all its top-down authoritarianism, isn’t a monolith. Like most societies, it has different constituencies with different views that fear different risks and pursue different interests. That’s why my answer to the first question depends on the answer to the second.

If you mean the Chinese defense establishment, which is constitutionally hostile to the United States and sees itself as in a zero-sum, Cold War competition against us, the answer will always be “no.” That China is our enemy by its own choice. Its default is to view anything that’s bad for America as good for China. Its attitude is probably hardening.

If you mean the Chinese foreign policy establishment, the answer will also be “no,” but its obstructionism might be tempered by strategic compromises or interrupted by some temporary feints at compliance (currently, the so-called coal ban). It’s almost as hostile to us as the defense establishment, but it pursues its ambitions more intelligently. It may despise Kim Jong-un, or it might just be pretending to, but either way, it probably despises us even more. Still, it recognizes the value of playing us, and it does that very well.

If you mean the Chinese businesses that willingly deal with North Korea, the answer will be “no” as long as North Korea’s checks clear, and it will be “yes” the instant they don’t, and it will be “yes” the instant the businessmen learn — to their abject horror — that some other businessman who deals with North Korea just had his bank accounts frozen and couldn’t make the payments on his Buick and that America can really do that.

If you mean the Chinese Finance Ministry, it will be “no” until we raise the cost of non-cooperation to unsustainable levels, by threatening to depress the levels of growth it must sustain to pay pensions for its aging population and maintain economic stability. That is its mission. And interestingly enough, China’s terrible reputation for financial integrity is a growing threat to that mission. I’ll explain in a moment.

If you mean the Chinese banks, it will be “no” until subpoenas start to rain down on their New York branches and their lawyers tell them that the only way to avoid the fate of BNP Paribas is to cooperate with the feds and settle for reduced civil penalties and deferred prosecution.

It’s a misnomer to refer to a “Chinese” banking industry that relies on access to foreign finance, and thus subjects itself to foreign regulation. Going global can cause some culture shock for banks that are used to China’s lax Anti-Money Laundering (AML) regulation. For the last few years, Treasury’s AML focus has been on European and Middle Eastern banks dealing with Iran, so Chinese banks have had a (mostly) free ride from the feds. But New York and EU regulators haven’t been as laissez-faire about AML compliance and have been handing them some stiff fines. That’s why People’s Bank of China officials recently “pledged a tougher fight against money laundering.”

Behind this clarion call by Beijing’s bank supervisors was an unnerving realization that some of the nation’s biggest banks had left themselves vulnerable to anti-money-laundering sweeps by regulators abroad.

This vulnerability stems from ambitious overseas expansions in recent years by the Bank of China (BOC), the Industrial and Commercial Bank of China (ICBC) and other powerful, state-owned lenders. As of June, according to official data, China’s biggest bank, the ICBC, was operating 412 branches in 42 countries, while the BOC had 564 branches in 46 countries. China Construction Bank (CCB) counted 140 overseas branches, and Agricultural Bank of China (ABC) had 17. [Caixin Global]

Here comes the culture shock.

At home, according to banking experts who spoke with Caixin, Chinese banks have been operating in a regulatory environment that’s generally soft on money laundering rules for financial institutions. Some of these banks have thus learned the hard way that many regulators outside China not only diligently enforce rules designed to prevent dirty transactions, but are also eager to slap violators with heavy fines and even imprisonment.

And also, don’t usually take bribes.

The BOC, the nation’s fourth-largest lender, reportedly agreed on Feb. 17 to pay 600,000 euros ($634,000) to settle a money laundering case involving its branch in Milan, Italy. The branch had been targeted by Italian investigators since June 2015 who had looked into whether BOC helped clients transfer to China about 2 million euros linked to criminal activity.

In addition, a judge in the Italian city of Florence on the same day handed four BOC-Milan branch employees two-year suspended prison sentences after they were convicted of breaking Italy’s anti-money-laundering laws.

A Hong Kong-based expert on money laundering who declined to be named said while the fine against BOC-Milan was comparatively “moderate,” the criminal convictions were “surprising.” The decisions in Italy followed a November decision in the United States by New York state’s Department of Financial Services, which fined a local ABC branch $215 million for illicit money transfers.

By now, it has become reasonably clear that the Trump administration will soon revoke the sub rosa immunity the Obama administration had given Chinese banks to launder North Korea’s money. Not only will Chinese banks have to worry about EU and state regulators, they’ll have to start worrying about the Treasury Department, too.

That isn’t just a worry for China’s smaller, shadier banks. Some of the biggest banks in China were servicing North Korean customers until at least early 2016. Others were named in the Dandong Hongxiang case for doing so months later. Some of those banks have branches in New York. Those without still depend on U.S. correspondents to process their payments through the financial system, just as Banco Delta Asia once did.

The correspondents, in turn, have legal duties to comply with Know-Your-Customer (KYC) and AML regulations, which will require them to ask questions about the names, nationalities, and passport numbers of their customers; whether they’re sanctioned by the UN, Treasury, or the EU; and whether their business addresses are, say, shell companies in the British Virgin Islands, or empty offices next door to the local North Korean embassy. Treasury expects banks to hire qualified compliance specialists, employ highly specialized compliance software, and implement AML and KYC compliance procedures.

If Treasury begins to enforce those rules, banks will skimp on AML and KYC compliance (such as) at their own peril. If you click those last two links, you’ll see that I just cited examples of Chinese banks that got away with lax compliance in the past. The Agricultural Bank of China (ABC) is an example of one that didn’t:

After the branch opened in August 2012, Yu worked to boost the ABC’s interbank-transaction business through trade financing and other services. His goal was to quickly expand assets at the branch, which was ABC’s only operation in the United States.

But Yu’s strategy apparently exposed the branch to compliance risks, as his favorite businesses involved transactions executed on behalf of other banks’ customers. And ABC had limited access to information about those customers.

Yu maintained his strategic focus despite a 2014 warning by the central bank pointing to risks associated with overseas banking services.

Until a whistleblower came along, anyway.

But that same year, Taft’s allegations landed on investigator desks at the New York Fed, triggering a probe that led to a Fed order in September: ABC was given 60 days to deliver a plan for fixing risk management flaws and enhancing money controls at the New York branch.

The fines were levied two months later after New York state regulators determined ABC had deliberately failed to scrutinize dubious money transfers.

Now for the part where the bank rolls over, cooperates, and promises to get its compliance act together to reduce its penalty.

Sources close to the matter said an original fine of $500 million was eventually cut by more than half following negotiations between regulators and ABC-New York. The branch also agreed to hire an independent, regulator-approved monitor to assess its business.

“After the incident, ABC (headquarters in China) held several meetings emphasizing managing overseas branches and subsidiaries,” said a source at the bank.

Nevertheless, the bank’s reputation had taken a major hit. In November, for example, the credit rating agency Moody’s said the regulatory penalty had highlighted oversight failures at ABC and would have a negative effect on the bank’s credit rating.

Political subversion and human intelligence can be another wedge to incentivize banks to make better choices. Every arrest or defection of a North Korean diplomat or financier has the potential to expose more parts of Pyongyang’s financial network and implicate the banks that skirted the law to do business with them. If banks begin to see North Korea itself as unstable, more of them will begin to see North Korean customers as legally risky. The best possible way for a bank to mitigate that risk? File a Suspicious Activity Report with the Treasury Department and cooperate.

All of which is a long way of saying that China’s generals and diplomats almost certainly won’t cooperate on North Korea, at least not voluntarily — and not yet. That will make it harder to enforce sanctions (especially trade sanctions) but by no means impossible, because the Chinese banking industry has to cooperate. China’s generals and diplomats may not want commercial banks to be AML compliant, but China’s central bank does. Banks in Malaysia, Russia, Vietnam, Singapore, and Tanzania will face the same choice, of course, but China is the lynchpin, the Abbottabad of North Korea’s illicit finance. That finance is absolutely essential to Kim Jong-un’s capacity to buy, sell, import, export, pay, fuel, repair, and sustain. The Workers’ Party almost certainly keeps most of its money in Chinese banks. After all, what are you going to buy with all the money in Pyongyang, especially now that correspondent relationships with North Korean banks are banned by both the U.N. and the U.S.? Answer: stuff imported from China, bought with dollars held on deposit in a Chinese bank.

Freeze those dollars and Pyongyang is living on borrowed time. Sure, you can smuggle bulk cash a few million dollars at a time. Sure, you can run uninsured rust-buckets across the Yellow Sea with their lights and transponders turned off, carrying away whatever wares that cash buys, at least until all the (uninsured) ships smack into rocks, get T-boned by oil tankers, or get seized at the entrance to some canal or another. Drug cartels can run that way for years, but that isn’t a sustainable model for ruling over 23 million increasingly informed and resentful people.

Now that I’ve laid this foundation, you’ll understand the legal and policy implications of my upcoming post about what U.N. Panel of Experts report, and what it just told us about China, North Korea, and money laundering.

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N. Korea, Lazarus & SWIFT: Are the white hats closing in? (Update: SWIFT cuts off remaining N. Korean banks)

In the last month, major news stories about North Korea have bombarded my batting cage faster than I’ve been able to swing at them. I’d wondered when I’d have a chance to cover Katy Burne’s detailed story in the Wall Street Journal about the empty half of the SWIFT glass — that despite its recent decision to disconnect three U.N.-designated North Korean banks, it’s still messaging for banks that are sanctioned by the Treasury Department, but not by the U.N.:

The U.S. Treasury-sanctioned banks that remain on Swift include the state-owned Foreign Trade Bank of the Democratic People’s Republic of Korea, the country’s primary foreign-exchange bank; Kumgang Bank; Koryo Credit Development Bank; and North East Asia Bank, according to people familiar with the network. A search on Swift’s website listed active bank identifier codes for the institutions as of Monday.

The U.S. designated for sanctions the Foreign Trade Bank in 2013, saying it facilitated weapons of mass destruction programs in North Korea. The other three were sanctioned in December as the U.S. targeted entities it said supported the North Korean government and its weapons programs following the Asian nation’s September 2016 nuclear test.

The apparent sanctions gap raises questions about how easily North Korea could move currency through alternative banking channels, something the U.N. said it has been known to do in the past through fronting companies. [….]

While based in Brussels and regulated by Belgian authorities, the company intersects daily with U.S. financial institutions, processing tens of millions of payment instructions, including through a large facility in Culpeper County, Va. [WSJ, Katy Burne]

I won’t sugar-coat this; the fact that these dirty and important (to His Porcine Majesty) banks can still use SWIFT is a major hole in our sanctions, and whether Congress and the administration are willing to close it will be a test of how serious they are about stranding Pyongyang’s money.

I can understand some of SWIFT’s likely arguments against that, mind you: first, SWIFT has earned much good will from Treasury for favors it has done them on terrorist financing; second, there may be other potential providers of the same service that may be less responsive to U.S. legal pressure. Fair enough, but whoever takes up that slack in SWIFT’s wake should be sanctioned to swift extinction (yes, intended). For a list of North Korean banks indicating which ones are designated by the U.N. and the U.S., see this post, and scroll down.

Meanwhile, Symantec now claims it has additional evidence that the hacker group Lazarus, which it had previously linked to the robbery of the Bangladesh bank using hacked SWIFT software, is responsible for that attack, and more:

A North Korean hacking group known as Lazarus was likely behind a recent cyber campaign targeting organizations in 31 countries, following high-profile attacks on Bangladesh Bank, Sony and South Korea, cyber security firm Symantec Corp said on Wednesday.

Symantec said in a blog that researchers have uncovered four pieces of digital evidence suggesting the Lazarus group was behind the campaign that sought to infect victims with “loader” software used to stage attacks by installing other malicious programs.

“We are reasonably certain” Lazarus was responsible, Symantec researcher Eric Chien said in an interview.

The North Korean government has denied allegations it was involved in the hacks, which were made by officials in Washington and Seoul, as well as security firms.

U.S. Federal Bureau of Investigation representatives could not immediately be reached for comment.

Symantec did not identify targeted organizations and said it did not know if any money had been stolen. Nonetheless, Symantec said the claim was significant because the group used a more sophisticated targeting approach than in previous campaigns.

“This represents a significant escalation of the threat,” said Dan Guido, chief executive of Trail of Bits, which does consulting to banks and the U.S. government. [Reuters]

Further down, the report suggests that one or more Polish banks may also have been hit, but “Reuters has been unable to ascertain what happened in that attack.” The headline having promised evidence of attribution to North Korea, however, the text of the story itself left me wanting more. It’s not news that Symantec has linked Lazarus to North Korea; Symantec did that almost a year ago. Nothing in Reuters’s report adds evidence to that attribution.

Nor does this story suggest that there’s enough evidence for the feds to act against Lazarus, although it does hint that the FBI is investigating. Jurisdiction shouldn’t be an issue in the Bangladesh case; money moved through the New York Federal Reserve Bank. Attribution is the real question. Depending on what they can prove, the feds would have many potential charging options, including bank fraud, wire fraud, the Computer Crime and Abuse Act, racketeering, and money laundering. Furthermore, there are anti-hacking provisions in both the NKSPEA (section 104(a)(7)) and Executive Order 13722, which means that if the feds could find any of Lazarus’s money, or any assets of Lazarus’s co-conspirators — regardless of whether those assets can be traced to any of these specific acts — the Treasury Department could freeze them, and the Justice Department could forfeit them.

And needless to say, the indictment of a state actor would be a big deal, for a lot of reasons.

So far, I don’t see enough in the open sources to support that, but it’s good news that the white hats are working diligently on this. If they can attribute this to senior officials in the North Korean government — most likely, within the Reconnaissance General Bureau — then it would be our legal basis to go after the RGB’s assets, which we’ve recently learned include some sophisticated and global commercial operations. This story bears close watching.

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Update:

Reuters is reporting that SWIFT will disconnect the remaining North Korean banks:

SWIFT, the inter-bank messaging network which is the backbone of international finance, said it planned to cut off the remaining North Korean banks still connected to its system, as concerns about the country’s nuclear program and missile tests grow. SWIFT said the four remaining banks on the network would be disconnected for failing to meet its operating criteria.

The bank-owned co-operative declined to specify what the banks’ shortcomings were or if it had received representations from any governments. Experts said the decision to cut off banks which were not subject to European Union sanctions was unusual and a possible sign of diplomatic pressure on SWIFT. [Reuters]

Now that SWIFT has gotten itself right with Jesus, I would like to implore everyone, everywhere to lay off SWIFT. It’s absolutely true that if we turn SWIFT into a political surrogate for our sundry political conflicts, the world’s dirtiest banks will just take their business elsewhere. That’s not a trend we want to encourage. SWIFT has usually been a responsible member of the financial community, sometimes at great cost to itself.

My argument all along has been that (1) North Korea deserves to be an exception to that rule because (2) North Korea is a unique threat to the financial system — not to mention, to all of humanity — as documented in (3) seven U.N. Security Council Resolutions, a Patriot Act 311 determination, and a call for “countermeasures” by the Financial Action Task Force. You can’t say that about any other country on earth right now — not even Iran. I can’t reconcile messaging for North Korean banks with any of those authorities. And if any competitor tries messaging for the FTB, it’s especially important that the Treasury Department should have the authority to obliterate them (which is why Congress should still proceed with something like the BANK Act).

Having said all that, I wouldn’t be too quick to assume that diplomatic pressure was the main reason for this most welcome decision. “Operating criteria” could mean a lot of things, but it’s a slightly better fit with “massive global bank fraud” than it is with “diplomatic pressure.” If there are more developments in the Lazarus investigation than the Reuters report makes apparent, and if those developments convinced SWIFT that it had unwittingly helped the North Koreans defraud its more reputable clients by sharing its software with them — and their hackers — that would be a perfectly good (and equally plausible) reason for SWIFT to have cut the North Koreans off.

Yet again, the North Koreans are tactically brilliant criminals. And yet again, they’re strategically moronic. It’s a rare and happy day when someone finally holds them to account for it.

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Yay, it happened! Jim Rogers got burned by hyping North Korea!

And just like that, crackpot investment advisor Jim Rogers joins the distinguished company of Hyundai Asan, Volvo, Yang Bin, David Chang and Robert Torricelli, Chung Mong-Hun, Roh Jeong-ho, and Orascom’s Naguib Sawaris, all of whom won Darwin Awards in North Korea. I’ve previously written about Rogers and his enthusiasm for North Korea and its worthless currency. That OFK post caught the eye of a New York Times reporter, who has just published a story on the relationship between Rogers and his self-described business partner, a Chinese entity called Unaforte:

“It’s very exciting. The kid has been opening up North Korea,” Mr. Rogers said in an interview, referring to Kim Jong-un, the country’s ruler.

But North Korea can be a murky place to tread — as Mr. Rogers’s experience shows.

A Hong Kong company called Unaforte that is involved in several North Korean businesses named Mr. Rogers as a shareholder a year ago, according to a corporate filing. Investing in a North Korean business like that would probably violate American sanctions if it happened now, though experts say it was legal at the time. [NYT, Patrick Boehler & Ryan McMorrow]

In this case, “experts” means me. Rogers’s investment came just a month before President Obama signed Executive Order 13722, which imposed sectoral sanctions on North Korea’s transportation, mining, energy, and financial services industries. That E.O. was enough to drive investor and fund manager James Passin out of North Korea. Before that, however, our threadbare North Korea sanctions probably didn’t prohibit what Rogers did. Still, staying one step ahead of the law doesn’t mean one isn’t stepping in something.

Mr. Rogers said he gave Unaforte $100 as a token of good will but never expected that it would name him as a shareholder. Asked about his stake in the company in October, he interrupted an interview with The New York Times to call Unaforte and told the English-speaking sister of its founder that the company had agreed he could not be a shareholder.

Speaking into his phone, Mr. Rogers said, “I know I have told you, ‘Never, never, never.’”

Unaforte no longer lists Mr. Rogers as a shareholder in its filings but will not release shareholder records that might show more details about the shares given to Mr. Rogers. Officials at Hong Kong’s corporate registry said they were investigating whether Unaforte is complying with the city’s disclosure laws. Unaforte did not respond to emailed questions for comment. [NYT]

The Times chronicles how Rogers quickly distanced himself from Unaforte once its reporters started asking questions (“I make speeches for hundreds of people.”). At one time, Unaforte featured Rogers prominently in its promotional materials. Its founder, Zhao Chunhui, calls himself “Jim Rogers’s business partner in China.” Then, a Unaforte website marketing its North Korea investments — a bank, an office park, and a stake in a gold mine — “went offline after The Times began to ask about its businesses.” On March 17, 2016, two days after President Obama signed EO 13722, Rogers wrote to Unaforte, asking “that it return his $100 and take back an unspecified number of shares.”

To make matters worse, Unaforte also drew a mention in the latest report of the U.N. Panel of Experts, for setting up a bank in the Rason Special Economic Zone. Sorry, my WordPress installation doesn’t read hanja:

221. A Hong Kong, China, company, Unaforte (?????????), with a Yanbian branch (?????) established the First Eastern Bank (????) in Rason in 2014 as a subordinate enterprise to provide financial support and loans to Chinese investors in mining and real estate projects in Rason (see annex 15-11). The bank is licensed by the Central Bank of the Democratic People’s Republic of Korea (see annex 15-12) and provides loans to Chinese individuals and companies in the Rason area. In its promotional materials, Unaforte claims: “The [First Eastern] Bank is fully independent and does not require proof of identity. It is not subject to the jurisdiction of China or [the] Democratic People’s Republic of Korea and is not required to report to the Chinese government or the Democratic People’s Republic of Korea government!” (see annex 15-13). The Panel notes that foreign nationals holding accounts in banks of the Democratic People’s Republic of Korea would be a violation under resolution 2321 (2016).

Under sanctions adopted by the U.N. Security Council last year, the Far Eastern Bank must now be closed. Specifically, Paragraph 31 of UNSCR 2321, adopted on 30 November 2016, requires Member States to close all existing representative offices, subsidiaries or banking accounts in the DPRK within 90 days. UNSCR 2270, paragraph 33, requires Member States to “prohibit in their territories the opening and operation of new branches, subsidiaries, and representative offices of DPRK banks,” to “prohibit financial institutions within their territories or subject to their jurisdiction from establishing new joint ventures,” except with a U.N. Committee’s advance approval, and requires member states “to close such existing branches, subsidiaries and representative offices, and also to terminate such joint ventures [and] ownership interests.”

Previously, Leo Byrne of NK News also reported on Unaforte’s exports of gold jewelry to Hawaii. The gold was allegedly mined in North Korea; thus, exports to the U.S. could have violated a 2011 executive order prohibiting imports from North Korea, except pursuant to a Treasury Department license. Rogers comes across looking like a fool, a charlatan, and a generally amoral person, but from a strictly legal perspective, not even he can be faulted for ex-post facto sanctions violations. There’s no evidence that Rogers knew of the gold jewelry exports to the U.S., but if he did, that might be his greatest legal risk.

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U.N. report: SWIFT banking network violated North Korea asset freeze

Since last year, this blog has covered SWIFT’s continued provision of financial messaging services to North Korean banks, despite suspicions that North Korea was involved in stealing almost $100 million from the Bangladesh Bank by hacking into SWIFT’s messaging software. Later, I wrote about an effort in the last Congress to ban North Korean banks from SWIFT, mirroring a sanction that was one of our most effective measures against Iran. SWIFT is effectively the postal service of the financial system, sending instructions between banks to credit and debit accounts to facilitate payments. Losing SWIFT access makes it slow, costly, and inefficient for a bank to operate.

The U.N. Panel of Experts’ latest report, released over the weekend, now confirms that SWIFT continued to provide services to three North Korean banks — Bank of East Land, Korea Daesong Bank, and Korea Kwangson Banking Corporation, the object of this recent Justice Department indictment — long after those banks were designated by the U.N. and the U.S. Treasury Department. Worse, the Belgian government authorized that. Generally speaking, both sets of designations require the freezing of any of the target’s assets, and prohibit any action that facilitates the target’s transfer of property or interests in property.

248. In response to inquiries by the Panel, SWIFT confirmed to the Belgian authorities that it provided financial messaging services to designated banks of the Democratic People’s Republic of Korea. As part of its procedure for doing so, SWIFT requests authorization from the Government to receive the moneys owed for the services. Upon receipt of such authorization, SWIFT receives payment for its services from the designated banks.  The payments are then entered in its books and recorded as revenue. The Belgian authorities have authorized SWIFT to receive the amounts set out in tables 13 and 14 from designated banks in exchange for the provision of financial messaging services, the provision of the SWIFT handbook, training in the use of the SWIFT network and maintenance costs.

SWIFT stopped providing services to four other North Korean banks — Amroggang Development Banking Corporation, Daedong Credit Bank, Tanchon Commercial Bank, and Korea United Development Bank — not because SWIFT was even minimally principled, but because “those banks themselves requested SWIFT to do so.”

Paragraph 8(d) of UNSCR 1718 requires all Member States, and all persons subject to their jurisdiction, 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 or for the benefit of” designated entities. The whole point of financial messaging services is to make economic resources available. I can’t for the life of me see how financial messaging on behalf of designated North Korean banks is anything but a clear violation of 1718.

The unavoidable fact of SWIFT messaging is that it enables banks to effect financial transfers. Thus, messaging services that facilitate designated banks’ financial transactions violate a Member State’s duty (in this case, Belgium’s) to “prevent” the funds “from being made available” to designated entities, per paragraph 8(d) of UNSCR 1718 (2006), paragraph 11 of UNSCR 2094 (2013), and paragraph 10 of UNSCR 2270 (2016). To authorize the acceptance of payment from designated DPRK entities would permit those entities to purchase goods and services and access the global economy, which would contravene the plain meaning of an asset freeze. That’s exactly what Belgium and SWIFT did here. Bear in mind that last summer, the Justice Department indicted Dandong Hongxiang for using an off-the-books ledger system to move funds for one of the very same banks.

Then, there is the question of whether SWIFT provided “financial services” to North Korean banks. In relevant part, Paragraph 11 of UNSCR 2094 requires Member States to “prevent the provision of financial services . . . by their nationals or entities organized under their laws . . . of any financial or other assets or resources . . . that could contribute to” activities prohibited by the Security Council’s resolutions. By citing Paragraph 8 (d) of UNSCR 1718 (2006), this provision specifically applies to entities that have been designated by the Security Council.

Now, I take it that SWIFT’s highly-paid lawyers and lobbyists (at least, more highly paid than me) have gone to great lengths to persuade people that financial messaging services aren’t “financial services.” In paragraph 249 of the Panel’s report, Belgium cites domestic and EU law to that effect. At best, that’s a valiant effort to make chicken salad from chicken shit. To its credit, the Panel didn’t buy that, although it focused on a different angle — the receipt of fees by SWIFT from North Korean banks.

The Panel notes that, in the absence of a determination by the Committee that these payments fall under the exemptions in paragraphs 9 (a) and/or (b) of resolution 1718 (2006), the receipt of funds from a designated entity is a violation of the asset freeze pursuant to paragraph 8 (d) of resolution 1718 (2006) and paragraphs 8 and 11 of resolution 2094 (2013).

Myself, I’m much less concerned about the minuscule fees SWIFT received — a few thousand dollars — than the (undoubtedly, much larger) sums SWIFT’s messaging services helped those designated banks to move.

With U.N. resolutions, we’re lucky if many states’ officials read them at all. For the resolutions to have any chance to work as intended, thousands of officials in hundreds of member states have to interpret and apply them consistently. Not all of those officials are banking lawyers. Pedantic interpretations of resolutions that fly in the face of their plain meaning are a recipe for exceptionalism. That’s what happens when a Member State’s interpretation of its domestic law is allowed to contravene the plain meaning and purpose of the resolutions.

Belgium, of all places, now finds itself cast as a unilateralist rogue state defying U.N. resolutions and flirting with money laundering. Given SWIFT’s influence on both sides of the Atlantic, it probably saw itself as above the law. There is nothing on SWIFT’s website reacting to that revelation at the time of posting. But with the truth of SWIFT’s enabling of dirty North Korean banks now revealed, it’s hard for me to believe that it will be business as usual. At a bare minimum, I’d expect SWIFT to disconnect the three designated banks. The next move may well be up to Congress. For SWIFT, that’s a lot of risk to take to feed the hand that bites them.

~   ~   ~

Update:

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Malaysia’s lax enforcement of North Korea sanctions has finally come home

Over the weekend, Malaysian authorities painstakingly decontaminated a terminal of the Kuala Lumpur International Airport where North Korean agents — including a diplomatcarried out a lethal attack with the nerve agent VX, a substance so deadly that a tiny droplet can kill an adult. The authorities are clearly concerned that the use of a persistent chemical weapon of mass destruction in a crowded airport terminal will cause panic among Malaysian citizens and members of the traveling public, as well they should be. Pyongyang’s reckless act endangered thousands of innocent lives. It endangered every child who sat on the floor while her mother used the check-in machines. It endangered every baby who touched a contaminated surface and put her finger in her mouth, and every mother who used one of the sinks the attackers used to wash their hands. It endangered every worker who cleaned the restrooms or vacuumed the floors, every traveler who touched the handrails on the escalators going down to the taxi rank, every passenger who rode in one of those taxis after the attackers did, and every person who walked through that terminal and took her shoes off at her front doorstep.

The first object of Malaysians’ outrage is, and should be, the North Korean government. As of this hour, the North Korean embassy is still harboring two suspects, refusing to cooperate with Malaysian authorities, and spewing flagrant lies to deflect blame. Obviously, I can’t speak for the Malaysian government, but if I could, I’d be making plans to close the embassy, to expel everyone with diplomatic immunity, and arrest any suspect without it.

But if Pyongyang deserves the brunt of our outrage, a second object of outrage should be the Malaysian government itself, which had long been warned in U.N. reports that Pyongyang’s agents on its soil were violating U.N. sanctions and the laws of other nations, yet did little to curtail them. Report after report identified Malaysia as the home base of North Korean spies, smugglers, arms dealers, slave traders, money launderers, and procurers of tools to make missiles. In allowing this activity to go on for years, the Malaysian government not only allowed North Korea to endanger Malaysians, but to endanger the citizens of other countries — and indeed, the security of the entire world.

Just last week, for example, Reuters reported on the contents of a leaked excerpt of the 2017 report by the U.N. Panel of Experts overseeing compliance with U.N. sanctions against North Korea, including an embargo on the sale or purchase by North Korea or arms and related materiel. The report described the interdiction last year of a shipment of North Korean weapons in transit to Eritrea, including 45 boxes of battlefield radios manufactured by the Malaysia-based company Glocom. According to the report, Glocom is a front for the Reconnaissance General Bureau of the Korean Workers’ Party, an entity designated by the U.N. Security Council, and the agency suspected of carrying out the Kuala Lumpur airport attack. Glocom still operates through this website marketing its wares. It does not list Glocom’s corporate officers, so I’ll let the Malaysian authorities investigate whether there are any financial, logistical, material, or personnel links between Glocom and the attackers. Overall, that seems likely to be the case.

[Update]

Reuters has a must-read story on Glocom filled with details about how it masked its ownership and control behind layers of front companies and shell companies, and tied itself to Malaysian man with influence in the country’s ruling party. They even made this org chart:

It notes that on one occasion in 2014, a female RGB agent named Ryang Su-nyo was caught at the Kuala Lumpur airport terminal while attempting to smuggle $450,000 in cash through customs (note again the North Korean preference for U.S. dollars). Ryang said she was transporting the money for the North Korean embassy, so the authorities decided not to press charges and gave the cash back. Here’s a newer website for Glocom. This wasn’t like any of the ham-handed, rinky-dink North Korean front companies I’ve seen before. This was a slick, sophisticated, and well-capitalized operation that raised funds for an agency with a long history of terrorism. If any of the money ran through the U.S. financial system, which seems likely, it would be worth exploring a material support charge.

[End update]

Then, there is the case of a 2007 shipment of missile parts seized en route from North Korea to Syria. That shipment, which transited through Dalian, China and Port Kelang, Malaysia contained, among other items, “solid double-base propellant … usable for gas generators to power Scud missile turbopumps.” When the shipment was seized, the blocks of explosive propellant that had passed through those busy ports were removed “for safety reasons.” (2012 report, Para. 57.)

Malaysia has long been a hub and meeting venue for North Korean arms smuggling. A shipment of tank parts bound for the Republic of Congo, and which was seized in South Africa in 2010, was routed through Dalian, China and Port Kelang. (2010 report, Para. 63.) In June 2009, Japanese authorities arrested three individuals for attempting to illegally export a magnetometer to Myanmar through Malaysia, “allegedly under the direction of a company known to be associated with illicit procurement for Democratic People’s Republic of Korea nuclear and military programmes.” (2010 report, Para. 51.) In 2012, Japan notified the panel of 2008 and 2009 shipments through Malaysia of machinery useful for producing missile gyroscopes. (2012 report, Para. 91.)

Malaysians have seen the tragic results of anti-aircraft missiles falling into the wrong hands. In 2012, a British court convicted arms smuggler Michael Ranger of attempting to sell Azerbaijan “between 70 and 100 man-portable air defence systems”* from Hesong Trading Company, a subsidiary of the notorious Korea Mining Development Trading Corporation, or KOMID, Pyongyang’s principal arms-dealing front company. Ranger “was in regular e-mail correspondence with” O Hak-Chol, a North Korean diplomat and Hesong representative whom Mr. Ranger met in a number of third countries, including Malaysia. (2013 report, Paras. 90-95 & FN.61.) As recently as 2015, KOMID representatives continued to transit through Malaysia. (2016 report, Para. 177.)

As of 2015, long after the Security Council designated North Korean shipper Ocean Maritime Management (OMM) for arms smuggling and required member states to close its offices and expel its representatives, OMM still maintained an office in Kuala Lumpur. (2015 report, Para. 128.) Until early 2015, a Malaysia-based North Korean agent named Pak In-su acted as an agent for the Mirae Shipping Company, a front for OMM.

Pak In-su’s primary employer was Malaysian Coal and Minerals Corporation (2015 report, Para. 143), a company that is almost certainly linked to Malaysia’s use of North Korean labor in its coal mines. What little we know of working conditions for North Korean expatriate laborers in Malaysia, and what we know of the conditions elsewhere, suggests that those conditions are tantamount to slavery. At least one North Korean miner in Malaysia was killed in an explosion in 2014. In the end, the regime in Pyongyang probably keeps most of the workers’ wages.

The Committee for Human Rights in North Korea estimates that 300 North Korean laborers are working in Malaysia. Partially as a result of such labor practices, Malaysia was recently downgraded to Tier 3 under the Trafficking Victims Protection Act, which imposes penalties on legitimate Malaysian businesses that export to the United States. It also subjects Malaysia to sanctions risks, and the entire world to security risks. In a press release announcing its designation of the Mansudae Overseas Project group, for exportation of workers in violation of Executive Order 13722, the Treasury Department listed Malaysia as a market for Mansudae’s services, and said, “Some of the revenue generated by overseas laborers is used by the Munitions Industry Department, which was designated by the Department of State in August 2010 pursuant to E.O. 13382 for its support to North Korea’s WMD program.”

The procurement network that obtained parts and materials for North Korea’s missile programs has long had a strong presence in Malaysia. This presence has included entities that were designated by the U.N., including OMM, Mirae Shipping, and KOMID, and a U.N.-designated North Korean arms exporter known as Green Pine. In 2006 and 2010, the Korea Chonbok Trading Corporation, a front for Green Pine, purchased pressure transmitters from an unnamed European country for its long-range Unha-3 rockets. A payment invoice for the transactions lists one Ryong Jong-chol, a North Korean based in Malaysia, as the purchaser. (2015 report, Para. 195.) The payments, denominated in Euro, were routed through a Malaysian bank. According to the Panel, “Ryom was acting as the representative of Bank of East Land.” East Land was later designated by the U.S. Treasury Department (in 2011), the U.N. (in 2013), and the European Union (in 2013). (2016 report, Para. 186.) As of February 2016, the Malaysian government had still not responded to the Panel’s request for information about the transactions.

Malaysia’s tolerance of North Korea’s deceptive financial practices endangers Malaysian banks’ access to the global financial system. Malaysia is one of the few nations that still deals with North Korean banks, despite U.N. resolutions requiring “enhanced monitoring” of its financial activities (Para. 11), and warnings by the Financial Action Task Force to take “countermeasures” against North Korean money laundering and proliferation financing. In 2009, U.S. sanctions coordinator Philip Goldberg and Treasury official Daniel Glaser traveled to Malaysia and met with senior officials of the Malaysian government and central bank, regarding the implementation of U.N. financial sanctions under then-new UNSCR 1874. That visit followed reports that Malaysian banks were involved in transferring funds between North Korea and Burma for weapons-related transactions, in violation of a U.N. arms embargo. In 2013, Treasury Undersecretary David Cohen visited Malaysia to discuss its compliance with U.N. financial sanctions.

At least one major Malaysian Bank, Malayan Banking Berhad, was reported by the Panel in 2010 to maintain a correspondent relationship with, or to issue letters of credit for, North Korean banks. (2010 report, page 68.) It’s important to note, however, that the U.N. Security Council did not prohibit correspondent relationships with North Korean banks until 90 days after the adoption of U.N. Security Council Resolution 2270, on March 3, 2016. The Panel’s 2013 report listed the International Consortium Bank, a/k/a Hi-Fund International Bank as having been partially capitalized by and founded by the Malaysia Korea Partners Group of Companies (2013 report, page 132.)

ICB is a subsidiary of a North Korean front company called the MKP Group, which has the world’s most hilariously awful website, appears to have some ties to the Mansudae Overseas Project Group, also operates in Zambia, and really merits a post of its own one day. The existence of these banking relationships shows the importance of Malaysia as a secondary hub in Pyongyang’s financial network, which is often used for illicit purposes.

A recent investigation by Bangladeshi authorities into the smuggling of undeclared luxury goods, including LED televisions, tobacco, Rolls-Royces, and BMWs, has reportedly implicated the North Korean embassy in Malaysia. Under UNSCR 1718, North Korea is prohibited from importing luxury goods. In this case, the end destination for the goods isn’t clear, but whoever is behind the shipments conspired to evade Bangladesh import duties.

For the most part, the substantial network of North Korean arms smugglers, spies, and money launderers who operate in Malaysia merely endanger the citizens of other nations — most obviously in South Korea, but also in Syria and the Republic of Congo. In most cases, however, it’s impossible to predict who and where the next victims of North Korea’s activities will be. North Korea sells the world’s most dangerous weapons and technology to any buyer without regard to end users, victims, or consequences. As the VX attack at Kuala Lumpur illustrates, allowing North Korean agents to operate on one’s soil eventually endangers the host country’s citizens and interests, too. The question that the Malaysian people and government should be asking is whether the benefits of their financial and commercial ties to North Korea are really worth those risks.

~   ~   ~

* North Korea has been caught selling MANPADS before. One shipment of them was seized in Bangkok in 2010, on its way to Iran’s terrorist clients. In 2010, Yi Qing Chen was convicted of attempting to smuggle Chinese-made QM-2 man-portable surface-to-air missiles into the United States in 2005.  In 2011, he was sentenced to 25 years in prison. The QM-2 is a Chinese copy of the Russian Igla-1, or SAM-18.

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For North Korean banks, 2016 has been like that Corleone baptism montage

Years from today, North Korean bankers will remember 2016 as their annus horribilis. In February, a month after the North’s fourth nuclear test, Congress passed, and the President signed, the North Korea Sanctions and Policy Enhancement Act. Section 201 of the new law all but compelled the Treasury Department to designate North Korea a Primary Money Laundering Concern under section 311 of the Patriot Act. Section 311 allows for a menu of special measures to protect the financial system against offenders, but in March, the U.N. Security Council approved Resolution 2270, requiring member states to cut their correspondent relations with North Korean banks. That set the stage for Treasury to invoke the fifth and toughest of those measures, denying North Korean banks direct and indirect correspondent account services and isolating them from the international financial system. By then, the Financial Action Task Force had also called on banks and finance ministries around the world to apply “countermeasures” against North Korean money laundering.

As of January 2016, just eight North Korean banks’ assets had been blocked by the Treasury Department, including the Foreign Trade Bank and Korea Kwangsong Banking Corporation, or KKBC. Over the course of 2016, eight more North Korean banks would be blocked, six of them last Friday alone: North East Asia Bank, Koryo Credit Development Bank, Rason International Commercial Bank, Kumgang Bank, and Koryo Bank. That’s as close as financial regulation gets to this:

For banks that were already designated and had been slipping their payments through the net, events have also taken a darker turn. For years, Korea Kwangsong Bank accessed the financial system illegally through a Chinese conglomerate, Dandong Hongxiang Industrial Development. They would have gotten away with it, too, if not for those meddling (and also, brilliant) kids at the Center for Advanced Defense Studies, who used a shoestring budget and open-source intelligence to expose their international money-laundering operation. Shortly after C4ADS released its report, Treasury froze DHID’s assets, and the Justice Department indicted DHID and filed a complaint to forfeit its accounts in a dozen Chinese banks. 

If the Chinese banking industry is North Korea’s financial Abbottabad, the SEALs have begun to break down the doors of its safe haven. Treasury has not yet cavity searched the (metaphorical) harem by fining the Chinese bankers who’ve flunked their know-your-customer obligations, but by now, those bankers have surely seen the video of Senators Menendez, Rubio, and Gardner calling for their heads.

Is that all? No, that is still not all. Last week, it was a matter of intense speculation when NK News noticed that the CEO of Egyptian conglomerate Orascom Telecom, Naguib Sawaris, had landed in Pyongyang on his private jet. Sawaris had made himself scarce in Pyongyang since last year, when North Korea effectively confiscated Orascom’s profits from a cell phone network joint venture called Koryolink and caused Orascom share prices to plunge like Thanksgiving turkeys from a helicopter. It wasn’t long before we learned the reason for Sawaris’s visit — later that week, Orascom announced that Orabank, its joint banking venture with the DPRK Foreign Trade Bank, would shut down. Scratch seven banks in two weeks (but it’s still only Wednesday).

Orascom shares fell more than five percent the day it announced the failure of Orabank. It blamed sanctions, but its North Korea joint ventures were already write-offs due to Pyongyang’s own confiscatory restrictions before sanctions were strengthened in 2016. The exact cause of Orabank’s death wasn’t the 2013 designation of the DPRK Foreign Trade Bank for proliferation financing. The impending termination of Orabank’s correspondent relationships probably played a role, but I suspect that the investigative reporter George Turner inflicted the fatal wound when he exposed the links between Orabank and the FTB (more meddling kids). Even without the 311 action, knowledge of Orabank’s links to the FTB put Orascom’s corporate officers at risk of prosecution.

This week, Sawaris announced his resignation as CEO. No kidding. If I were an Orascom shareholder, I’d have wanted him defenestrated. Sawaris is one of those larger-than-life corporate caudillos who tend to be susceptible to hubris and delusions of omnipotence. He should have known better. North Korea has a long and near-perfect record of bankrupting its investors and ruining their reputations. As they say, fools and their money are soon parted. The Pulitzer Prize-winning novelist, Adam Johnson, probably put it best when he said, “[E]veryone who deals with them eventually gets burned.”

North Korea may soon enter uncharted territory. Within a few months, it may be the only industrialized state in modern history to have no banking industry to speak of. That will have the immediate benefit of forcing it to rely on third-country banks, which will have more dollar exposure and more incentive to avoid handling transactions for illicit cargo and designated entities. As of today, however, a few North Korean banks still live on. In 2014, the U.N. Panel of Experts published a table with a partial list of them. I copied that table and shaded the columns gray for banks that are designated by Treasury, and a trendy shade of tan for banks that appear to be defunct.

For comparison, here is a list of North Korean banks that have been designated by the Treasury Department’s Office of Foreign Assets Control (it looks longer than it really is because many of these names are aliases and alternative spellings).

Not all of the banks designated by Treasury are on the U.N. list. If some of them are really the same banks using different names, there should be more gray on the first chart. Still, some of the 13 undesignated survivors are significant, including the DPRK Central Bank and the Korea Commerce Bank. Hana Banking Corporation may become especially important to Kim Jong-un’s sanctions survival strategy, as it deals in Renminbi. I’d expect to see a ruble bank arise in the near future, too, but as the Justice Department recently revealed, the North Koreans have already tried that strategy and found its limits. Other banks on the list appear to be small, fly-by-night operations. They may have less global exposure and be more likely to survive a loss of their interbank access; after all, even Banco Delta Asia still survives (in much-diminished form) by dealing in Renminbi and Macanese patacas. Will a few small, non-dollar banks and couriers carrying briefcases full of cash be sufficient to sustain the government of a nation of 23 million people? Not for long, but that will depend on how aggressive we are, and how much time they have.

You will soon read much haughty analysis from aspiring Nobel Peace Prize laureates that sanctions against North Korea will not be airtight. That is true. No sanctions regime has ever been airtight, and no sanctions regime ever needed to be. The effectiveness of sanctions isn’t measured in absolute terms; it’s measured in relative terms. Sanctions work when they force despots to make difficult choices, catalyze corruption and indiscipline, instigate inter-factional knife fights over dwindling resources, and convince the tyrants that they’re losing control. How many brigades can they afford to feed? Will they have to cut back on pay and rations, and will that mean more border guards frag their officers, or carry their guns over the border and rob Chinese villagers? How many diplomats and slush fund managers will defect when they realize they can’t make their kick-up payments, and how many more bank accounts will they finger when they do? Can Bureau 39 buy enough big-screen TVs for the boys in both the SSD and the MPS, and how will the ones who get stuck with crappy Samjiyon tablets feel about that? Will keeping all the goon squads happy only come at the cost of fixing flood-damaged bridges and railways? Will the consequence of not fixing them be that the affected regions drift out of Pyongyang’s orbit? How long will Xi Jinping have their back if secondary sanctions start to cause pain in China’s precarious banking sector, or in its rust belt? Will Xi’s paternal benevolence end if Kim starts a regional arms race, or causes a breakdown in relations with the United States? 

Those are the difficult choices that sanctions can drive, and in the not-too-distant future, those choices will become matters of regime survival. I hasten to add that sanctions aren’t the only strategy that can threaten the regime’s stability. We don’t just have to pick one; in fact, they can complement each other well. Pyongyang’s goal will be to relieve itself of those difficult choices without making the two most difficult decisions of all: first, the decision to disarm completely, verifiably, and irreversibly; and second, the decision to accept enough transparency that anyone possessed of common sense would believe that it really made the first decision. Our discipline must be to multiply and intensify those difficulties until Kim Jong-un — or more likely, someone more reasonable who deposes him — makes those two most difficult decisions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Democratic People’s Republic of Korea (DPRK)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lather, rinse, repeat.

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

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

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

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

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

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

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

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

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

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

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

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

A/S FRIED: Yes, sir.

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

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

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

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

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

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

SEN. MENENDEZ: No Chinese banks.

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

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

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

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

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

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

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

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

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

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

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

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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. Unilateralism is claiming a sovereign right to misuse a distant nation’s financial system to break its laws and threaten its security. 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. Maybe they 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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