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

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

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

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

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

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

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

[….]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Even Russian banks are showing signs of compliance.

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

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

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

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

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

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

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

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

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

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

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

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

~   ~   ~

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

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The Panama papers, Pyongyang, and Nigel Cowie

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

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

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

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

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

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

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

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

~   ~   ~

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

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

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

~   ~   ~

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But not tonight.

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

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

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

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

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

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

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

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

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

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

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

* Previously said “United Nations,” since corrected.

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North Korean diplomats behaving badly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Update: Yup, called it:

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

Read the whole thing.

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

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

chong chon gang sugar

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Treasury designates Singaporean shipping company for N. Korea weapons trade, but what about the Bank of China?

More than two years after the North Korean merchant vessel Chong Chon Gang was caught trying to sneak a shipment of Cuban MiGs and missiles through the Panama canal hidden under 200,000 sacks of sugar, the Treasury Department has, slowly and slightly, expanded its sanctions against the shipping companies involved in the incident.

Yesterday afternoon, the Treasury Department’s Office of Foreign Assets Control (OFAC) designated Singapore-based Senat Shipping and its Director, Leonard Lai a/k/a Yong Chian Lai, a Singaporean national. It also blocked Senat’s one-and-only known ship, the Mongolian-flagged Dawnlight, IMO number 9110236. Both designations were under Executive Order 13,551, a 2010 order that allows the Treasury Department to sanction entities linked to violations of U.N. Security Council sanctions against North Korea, and also allows sanctions for North Korea’s money laundering. The designations mean that any property of the designated entities that comes within U.S. jurisdiction must be blocked. Significantly, this includes dollars that pass through correspondent accounts held in U.S. financial institutions.

The most recent report of a U.N. Panel of Experts (UN POE) investigating violations of North Korea sanctions found evidence of Senat’s long-standing (and almost certainly willful) participation in prohibited conduct by North Korea. Senat often acted in concert with North Korean shipping company Ocean Maritime Management (OMM), which arranged for the voyage of the Chong Chon Gang, and which was designated by both the U.N. and Treasury in 2014. During its investigation, the POE asked Senat about its links to OMM and the Chong Chon Gang, but Senat did not respond (see Para. 150). Even after the Chong Chon Gang incident resulted in widespread press coverage of a clear violation of U.N. sanctions, Senat continued to engage in transactions for the OMM-owned Mu Du Bong, which later ran around in Mexico (Para. 191).

Senat performed two main roles. The first of these was acting as a financial intermediary for OMM’s bunkering transactions, conducting dollar-denominated transactions through correspondent banks regulated by the U.S. Treasury Department (Para. 192), in a willful effort to evade U.N. sanctions.

192. The Panel has also obtained evidence of intermediaries issuing instructions for vessel names to be omitted from OMM-related financial transactions, including dollar transactions through United States correspondent banks. Such instructions were issued by Mariner’s Shipping for financial transactions made on behalf of vessels associated with OMM, the Am Nok Gang and the Mu Du Bong, and by Senat Shipping when issuing an invoice to the charterer of the Ryong Gang 2 (then owned by an OMM-associated entity, Taedonggang Sonbak Co Ltd) in January 2009 (see annex XLVII.1-14). Such efforts to obscure the true nature of financial transactions were confirmed by financial institutions contacted by the Panel.

193. The Democratic People’s Republic of Korea has disassociated logistics from the financial aspects of managing its vessels. This frustrates due diligence and allows the country to keep its foreign currency in circulation rather than repatriating it. In the case of the Chong Chon Gang, OMM Dalian arranged for spare parts from a European company to be delivered to Panama, with payments effected through Chinpo Shipping in Singapore (see annex XLVII.15). Mirae Shipping Hong Kong also paid Panama Canal passage costs. Senat Shipping in Singapore has also been heavily used for these types of dissociated transactions (see annex XLVII.1-14).

Senat’s links to Pyongyang are long-standing and extensive, according to Andrea Berger:

Leonard Lai does not hide his affinity for North Korea. In 2008 he went on record for the Singapore Business Federation encouraging companies to do business with the DPRK, adding that “companies can leverage off the strong loyalty and relationship-driven aspects of [North] Koreans.” In fact, Senat Shipping has ten mentions in KCNA, the most recent in mid-2014. Leonard appears to enjoy bringing flowers to the DPRK mission in Singapore and throwing parties in Kim Jong Il’s and Kim Il Sung’s honor. [Andrea Berger, 38 North]

Senat’s second role was reflagging North Korean ships. Berger writes in exhaustive detail about how Lai, along with fellow Singaporeans Chong Koy Sen and Lim Mei Peng, and working through a company called Sovereign Ventures, Inc., arranged for the reflagging of North Korean ships through their offices in Singapore and Panama since the 1980s. In exchange, the North Koreans rewarded Lai, Chong, and Lim with business contracts. The flag states included Cambodia, Mongolia, Tuvalu, Niue, and Kiribati.

Senat 1

[U.N. Panel of Experts]

The UN POE also found that “Senat’s Director travelled to the Democratic People’s Republic of Korea in 2011 to attend a trade fair.” (Page 130, Footnote 89)

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Also yesterday, Treasury expanded its designation of OMM, adding OMM offices around the world: Pyongyang, of course, but also China (Dalian, Shenzhen, and Hong Kong); Russia (Vladivostok); Thailand (Bangkok); Egypt (Port Said); Singapore; and Brazil. It also added the OMM aliases East Sea Shipping Company, Haeyang Crew Management Company, and Korea Mirae Shipping Company.

Treasury also designated additional aliases of two officials of Tanchon Commercial Bank under a separate 2005 executive order focused exclusively on weapons of mass destruction, Executive Order 13,382.

Overall, the consequences of the July 2013 seizure of the Chong Chon Gang have been stupefyingly slow. A year after the seizure of the Chong Chon Gang, the former head of the U.N. Panel of Experts called the lack of action “regrettable.” Shortly thereafter, the U.N. designated OMM. The U.S. Treasury Department followed suit, and also designated 18 vessels in OMM’s fleet. Even so, OMM continued to operate out of ports around the world by reflagging and renaming its ships. 

The Panel of Experts opined that under UNSCR 2094, all states should seize any OMM vessels entering their ports (see Paragraph 133), but compliance has been mixed. Mexico seized the OMM ship Mu Du Bong when it ran aground in one of its ports. Japan sanctioned OMM, but then allowed an OMM ship to quietly slip in and out of one of its ports earlier this year. As recently as last week, an OMM ship was in the Russian port of Vanino. China has completely ignored the sanctions, as usual. Cuba, the most flagrant violator of them all, got away from the Chong Chon Gang incident scot-free.

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The use of Executive Order 13,551 — rather than the sweeping Executive Order 13,687 — suggests that the Obama Administration is still not ready to cross the key threshold from conduct-based sanctions to status-based sanctions, a move that the General Accountability Office recently found would greatly improve the lagging enforcement of North Korea sanctions.

Together with the EU’s recent designation of the Korea National Insurance Corporation, the actions suggest combined, but uncoordinated, concentration on North Korean shipping networks, a strategy advocated by Hugh Griffiths and Lawrence Dermody of the Stockholm International Peace Research Institute (SIPRI), in this must-read post.

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The designation of Senat again raises questions about another Singapore-based shipping company that Treasury has not designated, the regrettably named Chinpo Shipping, which shares the same address as North Korea’s local embassy. The UN POE found that OMM used Chinpo for the “payment of costs related to the voyage” of the Chong Chon Gang, and that “OMM arranged for payment for the ship’s passage through the Panama Canal to be made by a firm in Singapore, Chinpo Shipping, which told the Panel that OMM had provided it with funds and requested it to pay fees due a Panamanian firm.”

In June 2014, Singapore’s Public Prosecutor filed criminal charges against Chinpo and one of its officers, Tan Hui Tin, a citizen of Singapore, in connection with the Chong Chon Gang incident.

One possible reason for Treasury’s hesitation to go after Chinpo Shipping is the fact that, according to multiple open-source reports, Chinpo ran its transactions through the local branch of the Bank of China, in U.S. dollars. Blocking Chinpo (now, stop that) would raise serious questions about the Bank of China’s compliance with U.N. Security Council resolutions, and also with Know-Your-Customer obligations under U.S. law. According to the POE’s 2014 report, the Equasis database (link here) also associates Chinpo with Pyongyang-based Korea Buhung Shipping Company. 

Banks that use the U.S. financial system — and the U.N. POE reports that most of North Korea’s transactions are still denominated in dollars — must comply with Treasury’s Know-Your-Customer rules, which require banks to make reasonable, due-diligence inquiries into who their customers are, who their beneficial owners are, and whether their business activities seem legitimate. If the transactions seem suspicious for any reason, the banks are required to report them to Treasury, and may also be required to block them.

Since 2011, the global Financial Action Task Force and Treasury’s Financial Crimes Enforcement Network have repeatedly warned banks about North Korea’s deceptive financial practices and misuse of the financial system, and told them to apply “countermeasures” against that misuse. The FATF has specifically warned jurisdictions to “protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices.” The Chong Chon Gang incident also closely followed the adoption of U.N. Security Council Resolution 2094, which directs member states to require “enhanced monitoring” of North Korean transactions to prevent violations, and to freeze any funds that could be used to further prohibited activities.

If the Bank of China was aware of Chinpo’s links to North Korea, then, it would have been obligated to disclose them to its U.S.-based correspondent banksEarlier this month, this blog post at the Wall Street Journal’s China Real Time alleged that Chinese banks, and the Bank of China in particular, have become lax in their anti-money laundering compliance. The Bank of China has come under scrutiny for shadowy dealings with North Korea before. In 2005, the Asia Wall Street Journal reported that Treasury was investigating the Bank of China for laundering funds for Kim Jong-Il’s regime. The Bank of China denied the allegation.

As Acting Treasury Undersecretary Daniel Glaser recently reminded us, “China’s not going to do us any favors. China is going to work with us because it’s in their interests…. We’ve seen that with China’s commercial banks time and time again.” Indeed.

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Update: Additional coverage from NK News (via Leo Byrne), the AP, the Wall Street Journal, and Yonhap. Deutsche Welle contacted Senat, which called Treasury’s allegations “groundless and unwarranted.” It admitted to chartering ships for North Korea — including the Chong Chon Gang — but insisted that all of its dealings have been “legal” and “transparent.”

Treasury’s announcement of the designations contains this very interesting statement:

“Arms shipments transported by OMMC serve as a key resource for North Korea’s ongoing proliferation activities.  Sales from these shipments contribute to North Korea’s other illicit programs,” said Acting Under Secretary for Terrorism and Financial Intelligence Adam J. Szubin.  “We are working to make it as challenging as possible for North Korea to continue its unlawful behavior by actively targeting anyone or any business that supports these illicit arms transfers.”

I wonder whether Treasury bases this statement on specific financial intelligence about Pyongyang’s innermost financial circulatory system, or on the reasonable assumption that Bureau 39 profits from OMM’s arms shipments, and uses those proceeds to fund proliferation. Again, it’s a reasonable assumption, but why isn’t it equally reasonable to assume the same about the Kaesong Industrial Park? If protecting South Korea from North Korean proliferation was the driving motivation for these resolutions, why is South Korea given a special dispensation to violate the sanctions that Singapore isn’t?

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Breaking news! FINCEN rehashes same old North Korea advisory.

To hear Yonhap tell it, the Treasury Department’s Financial Crimes Enforcement Network just stuffed Kim Jong Un into a size XXXXL iron maiden, financially speaking:

The United States has issued another advisory on financial transactions with North Korea, designating the communist country as a jurisdiction with high money laundering and terrorist financing risks, a U.S. report said Wednesday.

The guidance to U.S. financial institutions, issued Monday by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), is based on the international money laundering watchdog Financial Action Task Force’s updated list of countries with anti-money laundering and counter-terrorist financing deficiencies, according to the Radio Free Asia (RFA) report. [Yonhap]

The truth is much less dramatic. In reality, FINCEN didn’t “designate” North Korea as anything. It’s just echoing the latest iteration of the same call for “countermeasures” against North Korean money laundering that the Financial Action Task Force (FATF) has been issuing since 2011. If you actually read FINCEN’s advisory, there’s a section called “Summary of Changes to this List,” which shows that the advisory language applicable to North Korea didn’t change at all.

Jurisdictions in this section (Iran and DPRK) are subject to the FATF’s call on its members and other countries to apply countermeasures to protect the international financial system from AML/CFT risks. U.S. financial institutions should continue to consult existing FinCEN and U.S. Department of the Treasury (Treasury) guidance on engaging in financial transactions with Iran and DPRK. Previous FinCEN advisories and guidance on Iran and DPRK remain in effect. [….]

Existing U.S. sanctions – in particular, those under the North Korea Sanctions Regulations and Executive Orders 13570 and 13551 – create a legal framework that limits U.S. financial institutions’ direct exposure to the types of North Korean financial or commercial transactions contributing to DPRK’s proliferation activities that are the focus of UNSCRs 2087 and 2094, as well as UNSCR 1718. [FINCEN]

Warnings like these may well dissuade the more reputation-conscious banks from handling transactions with North Korea or encourage them to report the suspicious ones, but this advisory doesn’t block anything, and strictly speaking, isn’t even a sanction. It’s the banking equivalent of, “Hey, kid, be careful, broken glass.”

In fairness, I vaguely recall that I made the same mistake myself several years ago, when I knew much less about this subject. There isn’t really much of a story here at all.

For those interested in what our North Korea sanctions actually do — and don’t do — the only primer I’m aware of is the one I wrote for the Fletcher Security Review.

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Why legal investments in North Korea are a money laundering risk

You’ve often seen me write about the importance of “financial transparency” in transactions with North Korea. For a decade, economic engagement has mostly been done by one of two models: (1) controlled interactions with members of the elite, the actual effects of which are negligible at best; and (2) barbed-wire capitalism, where a few North Korean officials relay orders from foreign managers to hand-picked workers, and where the regime seals the whole enterprise off to prevent it from influencing the local community.

The former are, for the most part, of little financial significance. The latter may represent a significant source of income for illegitimate uses, and may also help the regime hide its flows of dirty money.

It wasn’t supposed to be this way by now. The idea behind economic engagement was to gradually draw North Korea into compliance with the rules that the civilized world lives by. Yet ten years later, the South Korean Unification Ministry can’t tell us how much (if anything) Kaesong’s workers receive after the regime takes its cut from their wages, and the Undersecretary of the Treasury recently expressed his concern about just how North Korea is spending that money.

The U.N. Panel of Experts now expresses a related worry — that North Korea could be using its ostensibly legal businesses to conceal and launder the proceeds of illicit activity:Screen Shot 2015-03-03 at 7.32.53 AMScreen Shot 2015-03-03 at 7.33.11 AMA few days ago, we saw that North Korean diplomats have been smuggling gold to earn hard currency for Pyongyang. That’s not just of concern because of how North Korea spends the earnings, but also because of concerns about conditions in which the gold is mined. As noted here, however, North Korea continues to run most of this business through the dollar system.

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Hence, the renewal of FATF’s warning about “countermeasures.”

Recently, a scholar friend emailed me that his opponent in a debate had criticized the effrontery of blocking North Korean assets that are the co-mingled proceeds of legal and illicit activity. In fact, that is standard law enforcement practice, because co-mingling is the essence of how criminal organizations conceal the illicit origin of their earnings.

Defendants often commingle SUA proceeds with legitimate funds. The government need not prove that all proceeds in a transaction were unlawfully derived, but must be able to trace some of the proceeds to a SUA. Criminally derived proceeds deposited with legal funds are considered to be withdrawn last unless the account/business is deemed to be permeated with fraud. This implies that the business operations are so intertwined with fraud that to segregate the legitimate operation and profits is impossible. Special agents should work closely with the attorney for the government when investigations involve commingled funds to ensure the elements of the crime are met. [IRS]

That’s why Congress, and many third-country parliaments, have long given their law enforcement agencies the authority to seize co-mingled funds.

The Treasury Department could do a great deal to regulate transactions with North Korea — and perhaps, put more food into empty bellies and drive the development of a true market economy — simply by requiring OFAC to license them. As a condition of each license, the Treasury Department could ask the applicant for assurances that the ultimate end-use of the funds would be for items that would benefit the people: food, clothing, medicine, consumer goods, materials for civilian construction projects, or electronic items like desktop computers that help to open up information flows.

To make this requirement truly effective, the EU Central Bank could impose similar requirements for Euro-clearing transactions. If Canada, Britain, Australia, and Switzerland joined, they would collectively cover just about all of the world’s convertible currencies, leaving only trades in Chinese Yuan unregulated. Of the latter, the Treasury Department could still target the most egregious with secondary sanctions.

In his paper about labor conditions in Kaesong, Marcus Noland called for investors in North Korea to adhere to a single set of minimal standards, akin to the Sullivan Principles. What I’m calling for here is a financial analogue to the Sullivan Principles — a requirement that investors ensure that their money will be used to better the lives of the North Korean people, rather than being wasted on weapons and luxury goods.

The real flaw in the engagement argument today, ten years after it began, is that it can’t show any significant, enduring, positive impact on North Korea, its treatment of its people, or its relations with the wider world.

It’s unfortunate that so many advocates of engagement are too focused on making nice with their minders to insist that the regime make any of the changes they once promised. Two good places to begin would be transparency in their labor and financial arrangements. If they did, they might strengthen their argument by showing that they’ve made legitimate, positive change in how North Korea does business.

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Yes, North Korea is still using the dollar system to launder its money.

The Financial Action Task Force has re-issued its call for “countermeasures” against the risks of money laundering and terrorist financing emanating from North Korea. The FATF’s call is not significantly different from advisories the FATF has issued since 2011, but it is significant in one way.

More sensible Korea-watchers are accustomed to the pavlovian response of the South Korean press, and of certain American academics, whenever North Korea hints at being willing to talk. We saw this again after Kim Jong Un’s New Year speech, which was (as is traditional) so selectively overanalyzed that Kim Jong Un’s intent could not be identified from dental records. We saw it when the editors of The New York Times seized on a risible North Korean offer and called on President Obama to “test North Korea’s intentions” — it would be equally enlightening to test Dennis Rodman’s urine — as if the last 20 years have tested nothing. By my count, North Korea has conducted three underground tests of its intentions. But I digress.

We saw the same Pavlovian response in some reporters after North Korea agreed to hold talks with the FATF, and after its Central Bank issued a statement committing “to implementing the action plan of ‘international standard’ for anti-money laundering and combating the financing of terrorism.” (As if.) Yonhap even took it seriously when Pyongyang announced that it had established its own anti-money laundering body. And here’s how the FATF dispensed with that:

Since October 2014, the DPRK sent a letter to the FATF indicating its commitment to implementing the action plan developed with the FATF.

However, 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.

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 and financial institutions. In addition to enhanced scrutiny, the FATF further calls on its members, and urges all jurisdictions, to apply effective counter-measures to protect their financial sectors from ML/FT risks emanating from the DPRK. Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices, and take into account ML/FT risks when considering requests by DPRK financial institutions to open branches and subsidiaries in their jurisdiction. [FATF]

The force may have a strong influence on the weak-minded, but Pyongyang’s mind tricks haven’t influenced the FATF’s bankers. Maybe all those years of foreclosing on tearful widows and orphans have built an immunity that can, in a different context, serve mankind’s greater good. It never ceases to fascinate me how much better bankers are at diplomacy than diplomats are. A certain discipline may come with the expectation that the words in contracts are meaningful and enforceable as written. The FATF expects more than words from North Korea, and the latest draft U.N. Panel of Experts report goes far to explain why.

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That is, North Korea habitually uses deceptive financial practices similar to those used by criminal organizations. Moving money this way has a higher risk premium, higher cost, slower speed, and less flexibility. North Korea wouldn’t use these cryptic, bronze-age methods unless it was hiding something. Similarly, if Pyongyang’s finances are legit, why is it using Reconnaissance General Bureau agents as bulk cash smugglers?

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The U.N. report also tells us that North Korea continues to use the dollar system for those deceptive practices.

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That isn’t the only report this week that King Dollar rules in Pyongyang, partially as a consequence of Pyongyang’s catastrophically self-destructive currency “reform.” An interesting report in The Daily NK tells us that North Korea’s Ministry of Railways expects payment for shipping from both its state-controlled “foreign-currency earning enterprises” and “individual vendors” in U.S. dollars. This Yonhap report quotes an anonymous source, who says that “Pyongyang has become a de-facto dollar-using economy,” although the Yuan is more popular near the Chinese border.

And here’s an example of how this works in practice:

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The FATF’s warnings, of course, are merely persuasive authority; they don’t have the force of law. They are persuasive to responsible governments and banks, but North Korea finds its enablers among the world’s less responsible actors. That will not change until the U.S. Treasury Department and other regulators credibly threaten those actors with secondary sanctions. You can almost hear the Panel of Experts calling on the Treasury Department to do exactly that here, with respect to North Korean weapons smuggler/shipper Ocean Maritime Management, and others:

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And what has President Obama done about any of this lately? On January 2, 2015, he signed Executive Order 13687, the actual legal effect of which was to block the assets of ten low-level arms dealers. If there is a single theme that emerges from the latest POE report, however, it is Pyongyang’s speed and deftness at whack-a-mole. I can just about guarantee you that those low-level arms dealers have been replaced by ten other low-level arms dealers. Whatever the effect of EO 13687’s original designations, they were minimal and brief.

There are several conclusions this evidence points to. First, Pyongyang is worried about sanctions. Second, its growing dependency on King Dollar gives it good reason to be. Third, it continues to use the dollar system to engage in money laundering and to violate U.N. Security Council sanctions. Fourth, the Obama Administration has yet to show that it is serious about protecting the U.S. financial system from North Korea’s money laundering, or about making U.N. sanctions work. It tells you everything you need to know that even the U.N. is (in its own subtle way) pleading for the President to enforce the law.

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NHK Documentary: Money & Power in North Korea

I haven’t watched it all — was busy finishing another project — but it looks to be an interesting examination of the subject that interests me most about North Korea: its money. It talks about the regime’s “gift politics,” luxury goods trade, the “royal court economy,” money laundering, and hunger.

Although the documentary itself is new, some of the info seems a bit dated. There were other things I didn’t know. For example, it claims that in Pyongyang, there’s a massive vault filled with yen, dollars, and euros, in cash. It also claims that North Korea continues to operate out of Macau, selling gold (among other things). It also discusses North Korea’s statue-building business in Africa, and its slave-labor exports.

The documentary also claims that Jang Song-Thaek was purged because of a shortage of funding and because his control of wealth was seen as a threat. That makes sense to me, but I would still treat any “insider” accounts with great suspicion.

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Update: OK, I finished watching it. It’s well worth seeing, although based on other information I’ve seen, I don’t agree that Kim Jong Un’s hard currency streams are dwindling. Just look at this chart.

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FATF and FINCEN again call for “countermeasures” against N. Korean money laundering

If you will permit me to extend a metaphor for North Korea’s stature in the world of global finance, Pyongyang may have been invited to one Boy Scout jamboree, but it’s still on the sex offender registry. If anything, it has reached a co-equal status with Iran:

Since June 2014, the DPRK has further engaged directly with the FATF and APG to discuss its AML/CFT deficiencies. The FATF urges the DPRK to continue its cooperation with the FATF and to provide a high-level political commitment to the action plan developed with the FATF.

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.

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 and financial institutions. In addition to enhanced scrutiny, the FATF further calls on its members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from the DPRK. Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices, and take into account ML/FT risks when considering requests by DPRK financial institutions to open branches and subsidiaries in their jurisdiction. [FATF Public Statement, Oct. 24, 2014]

Treasury’s Financial Crimes Enforcement Center followed that statement with its own advisory today.

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Another North Korean money man vanishes

The head of a foreign currency-earning enterprise, which is said to be involved in managing Kim Jong Eun’s slush fund, has disappeared, raising questions as to why. The company, which is based in Yangkang Province, operates under the No.121 Department, a bureau that specializes in timber supplies. [Daily NK]

Based on my reading of the reports, it doesn’t sound like the same person as that guy who was reported in August to have defected in Russia, but I’m not 100% certain.

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