Category Archives: Money Laundering

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.

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[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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H.R. 1771: A response to Stephan Haggard

Stephan Haggard has published the second of two comments on H.R. 1771, the North Korea Sanctions Enforcement Act, at KEIA’s blog, following Bruce Klingner’s first post on the subject. Haggard and I have a history of genial disagreement about North Korea policy, but I find much more in this thoughtful and well-considered post to expand on than to argue with. Haggard has obviously read and understood the legislation before opining about it. (Marcus Noland, Haggard’s co-author at Witness to Transformation, has also commented on the legislation, at about 37 minutes into this audio.)

Among our perhaps narrowing differences, Haggard clearly has more reservations than I do about the impact of sanctions on nominally “legitimate” North Korean commerce:

One concern, however, is whether the legislation has intentionally or unintentionally blurred the line between WMD-related and commercial trade. The justification for doing so is arguably legitimate. In such a highly centralized regime, it is difficult if not impossible to draw the line between illicit and commercial activities. Nonetheless, to date the international community has sought to draw such a line, and for several reasons. [KEIA Blog]

What follows will merely expand on what Haggard acknowledges — that Pyongyang itself has blurred that distinction. Somehow, Pyongyang has found the financial means to finance its WMD programs and its brutal security forces, and although its finances are opaque, ostensibly lawful commerce such as mining almost certainly plays a key role in paying for it. Under its byungjin policy, Pyongyang asserts the intention of having it both ways, enriching itself economically while still developing an effective nuclear arsenal. H.R. 1771 seeks to force Pyongyang to choose between those priorities, without harboring any illusions about which alternative Pyongyang will choose, at least initially. But we’ll return to sub-topic that later in this post.

H.R. 1771 isn’t the first recognition of North Korea’s co-mingling of legitimate and illicit funds. Two months before H.R. 1771 was introduced, the U.N. Security Council adopted Resolution 2094 (2013), which also recognized the risk that North Korea misuses both commerce and consular activities. The resolution responded by “targeting the illicit activities of diplomatic personnel, transfers of bulk cash, and the country’s banking relationships,” and by requiring “enhanced monitoring” of “assets or resources, including bulk cash, that could contribute to” Pyongyang’s weapons programs. This language builds on Resolution 1718 (2006), which required member states to “ensure that any funds, financial assets or economic resources are prevented from being made available” to persons involved in breaking sanctions.

Then, In March of 2013, one month before H.R. 1771 was introduced, the Treasury Department sanctioned the Foreign Trade Bank of the DPRK, a bank that was heavily involved in financing nominally legitimate trade, transactions with humanitarian NGOs, and also, according to the Treasury Department, “transactions on behalf of actors linked to its proliferation network.”

Like H.R. 1771, Treasury’s action and the Security Council’s language acknowledge that North Korea, like all money launderers, hides its illicit transactions within otherwise lawful commerce. It also uses the proceeds of that commerce to finance more illicit activities. Its objective is to make the lawful and the unlawful as indistinguishable and inseparable as possible. Like Hamas, Hezbollah, and Al Qaeda, Pyongyang also shields its financial lifelines by entangling them with humanitarian activities—activities that are only necessary because of Pyongyang’s deliberate misuse of money that should be spent on food, and which it could easily disentangle from its proliferation by allowing humanitarian NGOs to bank elsewhere.

In practice, the targeting of some of these North Korean entities will require a careful, case-by-case weighing of costs and benefits based on good financial intelligence. That is why Section 207 of H.R. 1771 provides generous exemption and waiver provisions to avoid doing further harm to North Korea’s food supply, beyond the harm already being done by Kim Jong Un’s crackdown on market activities and cross-border smuggling.

I share more of Haggard’s concern that China will intensify its efforts to help Pyongyang evade sanctions:

One of the perverse effects of the post-2003 sanctions efforts is that North Korea has become increasingly dependent on China; my estimates with Marc Noland suggest that China may account for as much as 70 percent of the DPRK’s total trade. This growing dependence has had the odd consequence of reducing the influence of sanctions as trade has shifted toward the weakest links in the sanctions chain. China probably provides fewer direct supports than is commonly thought, but it remains strongly committed to a strategy of deep economic engagement with the country. It is possible that firms and particularly banks conducting business with North Korea will reconsider, and that is a good thing. But we should not have exaggerated expectations; there are plenty of firms and financial institutions that will continue to ply this trade, and we are unlikely to get much sympathy from Beijing in tracking them down. To the contrary, the Chinese government has already signaled its concern about the use of secondary sanctions and has shown little inclination to use the economic leverage over North Korea that it quite obviously has. Will this legislation make cooperation with China on North Korea easier or harder?

There’s little question that China will try to frustrate the enforcement of H.R. 1771, just as it has tried to frustrate the enforcement of every other effort to sanction North Korea. What distinguished the brief Banco Delta Asia episode from every other such effort, and contributed to its widely acknowledged success, was the Chinese government’s relative powerlessness to blunt it. Recent experience suggests that this hasn’t changed, although China’s willingness to sacrifice its own interests for Kim Jong Un’s may have waned since the purge of Jang Song-Thaek.

China’s adoption of state capitalism has enriched it, through the creation of businesses and parastatals that are highly dependent on global trade and the international financial system. It’s not surprising that a mixed economy has also had a mixed response to sanctions. At the state level, China routinely overlooks U.N.-mandated sanctions. China’s banks, on the other hand, have been highly sensitive to any veiled threat by Treasury to sanction banks that do business with North Korean money launderers and proliferators. We first saw this in 2005, shortly before Banco Delta Asia, when The Wall Street Journal reported that the Bank of China was under investigation for laundering North Korean funds. The report caused the Bank of China to spurn much of its North Korea business. Remarkably, even after Agreed Framework 2.0 in 2007, it still refused to help move $25 million in illegally derived funds back to Pyongyang, despite the express requests of the U.S. and Chinese governments.

As recently as May of 2013, two months after Treasury sanctioned the Foreign Trade bank and a little more than a week after the introduction of H.R. 1771, China’s four largest banks — the Bank of China, the Industrial and Commercial Bank of China, the China Construction Bank, and the Agricultural Bank of China  — all halted money transfers to North Korea. Other, smaller Chinese banks, like the Bank of Dandong, continued to move money for Pyongyang, and at the lowest reaches of the financial ecosystem, North Korean money launderers still operate in Guangdong with impunity, and more discreetly, in places like the British Virgin Islands. Enforcing sanctions is like mowing the lawn. If you don’t do it regularly, things grow back quickly, and it’s the weeds that will thrive the most. Unlike mowing the lawn, you can’t take a uniform approach to different enforcement targets.

That is why H.R. 1771 was designed to be scaleable, allowing harder sanctions for smaller banks that the financial system wouldn’t miss, and more subtle sanctions for larger banks that have historically been highly sensitive to reputational risks. Securing compliance at all levels of the financial ecosystem will require a great deal of hard work by financial investigators and lawyers, and a new demonstration of Treasury’s determination to deter such conduct, both in China and in other countries.

Post-BDA, and since the ascent of Kim Jong-un in particular, North Korea has also sought to diversify its trade, investment and financial links. The KPA and its associates have developed relationships with financial entities that are not concerned with access to the U.S. market, both in China and outside it; Russia will be particularly interesting to watch in this regard but there is also the open field of the Middle East. Throughout, the legislation recognizes that the administration will need to conduct a vigorous diplomacy to close the loopholes created by the fact that some firms and financial institutions will not be deterred by secondary sanctions.

Without question, North Korea’s response to Banco Delta Asia has been to decentralize its hard currency operations overseas. Recently, North Korean senior defectors have provide some direct evidence of this to bolster the suspicions of the U.N. Panel of Experts. One obstacle to untangling this is the laxity of U.S. sanctions against North Korea, which do not require the licensing of most financial transactions like investments, loans, and other transfers. (See 31 C.F.R. 510.201, which bans proliferation-related transactions, imports from North Korea, and little else, and compare that to the corresponding breadth of the Iran and Cuba sanctions regulations). This deprives Treasury of valuable financial intelligence that could help it enforce a sanctions program more effectively, if the President ever directed it to do so.

Even so, it’s probable that North Korea still remains dependent on a relatively small number of key overseas financiers, abetted by a few unethical banks that are still willing to violate the intent of U.N. Security Council sanctions (by “relatively” small, I’m comparing my best guess to the hundreds of persons and entities designated by Treasury for financing Iran or various terrorist organizations; just 62 North Korean entities are designated today).

Of course, there’s nothing new about rogue regimes, terrorists, and drug lords hiding their money. With determined enforcement, it took Treasury three years to bring Iran’s relatively large, diverse, and interconnected economy to the brink of collapse, and about five to force Burma to free Aung San Suu Kyi. Bankrupting a terrorist organization with a low overhead was far more difficult, but within ten years, even Osama Bin Laden died bankrupt and isolated, cloistered with his wives and his extensive library of pornographic videos. There’s more overhead required to run a country with a population of 23 million and a million-man mechanized army, even if one runs it into the ground. This can’t be done with briefcases full of cash. Given Pyongyang’s relatively fragile links to the global economy — its chief exports are coal, meth, and refugees — one could realistically believe that sanctions would create significant leverage as quickly as they did in the case of Iran.

Without question, this will be harder today than it would have been if pursued with determination in 2007. But to suggest that the absence of a single weak link like Banco Delta Asia means that there are no others is to ignore the vulnerability of Pyongyang’s own banking system. One alternative would be to simply shut that system down entirely and force Pyongyang to work through responsible foreign banks, as Section 207(d) of H.R. 1771 contemplates. As Haggard says, correctly:

The outside world has a strong interest in encouraging reform and opening of the North Korean economy, to shift its strategic orientation away from the byungjin line of trying to pursue economic development and nuclear weapons simultaneously. If this legislation were to have the effect of encouraging deeper economic integration, it would be through an initial phase of even greater isolation, autarchy and external controls.

I agree with this, but I believe we’ve gotten the sequence wrong. Reform won’t be possible until North Korea accepts transparency and broad interaction with the outside world, and those prerequisites clearly don’t exist yet. The consequence of shutting down the North Korean banking system would be to force North Korea to rely on foreign banks. Responsible foreign banks that apply stringent transparency and compliance requirements on North Korea’s business transactions could extract some degree of financial transparency from Pyongyang — I’m suggesting something like receivership — that would force it to spend its money more wisely and humanely.

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North Korean Gulag survivors call on Switzerland to freeze Kim Jong Un’s slush funds (Alternate title: Cursed are the Cheesemakers).

Switzerland has always been there for North Korea. When North Koreans were starving to death in heaps, Switzerland was there to receive Kim Jong Il’s personal shopper and sell him millions of dollars’ worth of its finest timepieces. When North Korea needed creative new ways to make money — literally! — Switzerland sold it the very same intaglio presses and optically variable ink our Bureau of Engraving and Printing uses to make money. When Kim Jong Un needed a place to spend his formative rumspringa torturing small animals, masturbating to bondage porn, flunking his classes, and developing the personality profile of a school shooter — a school shooter with nuclear weapons — his daddy picked Switzerland. Thanks to Switzerland’s narrow interpretation of U.N. sanctions on “luxury goods,” His Porcine Majesty is now eating himself into a mobility scooter on Emmental cheese.* And when the Treasury Department sanctioned North Korea’s Foreign Trade Bank for its involvement in WMD proliferation, it was the Swiss who yodeled that Uncle Sam was starving North Korean babies.

Above all else, when Kim Jong Il needed a place to stash somewhere between $1 billion and $4 billion in personal slush funds, Switzerland and its bankers received his money launderers with open arms. But for one regrettable violation of North Korea’s human rights last year, when Switzerland refused to sell North Korea $7 million in ski lift equipment,** Switzerland has always been there to provide North Korea the watches and numbered bank accounts that starving people need so desperately (and the finest cheeses, of course). Switzerland’s refusal to sell the ski lifts may have delayed the opening of the Masikryeong Ski Resort by several days, but the Swiss people can still take comfort in knowing that, thanks to their government’s laissez-faire policies, the death certificates of 2.5 million expendable men, women, and children (might, possibly) record the hour and minute of their sacrifice with Swiss precision.

The Swiss government has also done its share. Every year, as a token of appreciation for North Korea’s patronage, it refunds the equivalent of 0.7%*** of North Korea’s slush funds to the North Korean government … as humanitarian aid. It’s all part of a reputation for impeccable financial ethics that dates back to the Holocaust. You could say that Switzerland is to kleptocrats what Cambodia is to pedophiles, if this wasn’t so grossly unfair to Cambodia.

For a while, it was fashionable for North Korea watchers to suggest that Kim Jong Un’s Swiss education might have influenced him toward a more libertine style of governance, but things haven’t quite worked out that way. It may be that these scholars were working from a flawed model of Switzerland as a liberal European utopia — a land of cuckoo clocks, alpine meadows, open-air heroin-shooting galleries, and drive-in brothels. This, of course, is a crude stereotype. The real Switzerland**** is the home of Europe’s answer to Gitmo, except that it holds more people (476 men, women, and children) and kills one of them now and then (sound familiar?). It’s a land that values simple things, like racial purity (sound familiar?), and that tolerates all religions except the ones that it doesn’t (hello!).

Actually, until this moment, I’d never realized just how much Switzerland and North Korea have in common. There may be enough similarities that, with a little imagination, you could view Switzerland and North Korea as moral equals.***** One logical reaction to this would be to reject everything that any Swiss person says about North Korea — ever — regardless of its substantive merit.****** Another possible response would be to call for Switzerland to use its financial power to alter how Kim Jong Un uses North Korea’s wealth and rules over its people.

This latter view is now advanced by U.N. Watch, a Swiss NGO. Despite the fact that they are Swiss, perhaps we should suspend logic briefly and hear them out. After all, U.N. Watch is really just publishing a call “by 20 North Korean defectors,” including several survivors of North Korea’s prison camps, for the Swiss Government to block Kim Jong Un’s slush funds. I’ve reprinted the letter in full below the fold, but here is the gist of it:

In conclusion, based on international law and Swiss domestic law, prior Swiss precedents, and the basic principles of morality and humanity, we respectfully urge Switzerland to immediately freeze all assets of the North Korean leadership, whether held in their names or those of their associates, that are located within its territory.

Even better, the Swiss government could make every centime of those deposits available to buy food—provided the distribution of those purchases was better monitored than, say, the Oil-for-Food program, or the World Food Program’s current North Korea operations. There is a catch, of course. Funds that are blocked, as opposed to confiscated, still belong to the North Korean government. But surely Kim Jong Un wouldn’t deny starving people their fair share of his vast wealth out of spite alone.

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* Or so say the unverified rumors. I guess you could verify the exports from trade statistics, but I hesitate to believe that anyone who knows what’s on Kim Jong Un’s table is telling.

** I wish this was a tasteless joke, but the North Koreans really did call this a “serious human rights abuse.” The value of the ski lifts, at $7 million, is almost exactly the same amount as what Switzerland donated to North Korea as humanitarian aid the same year.

*** Actually, it’s impossible to estimate that percentage without knowing how big the slush funds are or where they’re deposited, but if you divide $7 million by $1 billion, you get 0.007, or 0.7%.

**** Disclaimer: Author may not have actually been to Switzerland.

***** Especially if you’re really, really high.

****** Some might say that’s especially so of one who called the U.N. Commission of Inquiry’s report on North Korea’s crimes against humanity “a massive exaggeration.” The best thing that can be said of most Holocaust deniers is that they’re merely vicarious, post-hoc deniers. This cannot be said of Felix Abt.

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MUST READ: WSJ on Bureau 39 and North Korean money laundering, post-BDA

The Obama Administration has never talked much, or done much, about North Korean money laundering. There is a tendency to assume that a problem that isn’t discussed isn’t a problem at all, but The Wall Street Journal‘s Alastair Gale has just interviewed some senior defectors with inside knowledge of North Korea’s money laundering, and the product of those interviews was some outstanding reporting. Gale’s interviews confirm the continued importance of Bureau 39 to North Korea’s regime, and that it continues to engage in and profit from illicit activity:

High-level defectors, security officials and analysts say the fund still enables current ruler Kim Jong Un to underwrite comfortable lifestyles for the upper tier of North Korean society to ensure their support. His father, who died in December 2011, was known for throwing lavish parties for officials and importing luxury items such as cognac for himself and the elite.

Analysts and security officials say the execution of Kim Jong Un’s uncle, Jang Song Thaek, late last year may have been because Mr. Jang had interrupted the flow of funds to Office 39. [Alastair Gale, Wall Street Journal]

Admittedly, this much won’t be terribly surprising to many readers, but what I’ve long wondered was how North Korea has hardened its finances to avoid a recurrence of the Banco Delta Asia fiasco, in which a single bank became a point of vulnerability that, when closed off, nearly suffocated the regime itself. That is why Gale’s companion Q&A is, by far, the more interesting read, and possibly the most interesting thing I’ve read about North Korea all year:

How are financial transactions done for North Korea’s trade?

But because of the Banco Delta Asia sanctions, North Korea now does transactions through personal bank accounts under individuals’ names. So, for example, if there’s money from exporting zinc, North Korea divides it among a few individuals’ accounts. Likewise, an order may come from North Korea for individuals to pay out from their accounts to a certain company for an import shipment. Such accounts are in China and Macau. North Korea also works through small regional banks in Italy, Russia and Africa.

To understand the significance of these reports, you first have to understand how money laundering works, and the critical fact that it requires some legal lines of business to conceal the proceeds of the illicit ones. Law enforcement uses the terms “placement” and “co-mingling” to describe the process of blending the legal and illicit proceeds to disguise their origin, and to allow the launderer to claim that it’s all legit.

The co-mingled funds are then invested, spent on goods that are re-sold, and transferred multiple times to hide their origin and ownership. This is known as “layering.” Only then is the money used to buy Swiss watches, Italian yachts, aluminum tubing, cell phone trackers, and maraging steel. None of which is news to the Treasury Department.

What do you know about trade of weapons and other illicit items?

People come from North Korea to do individual deals for nuclear and missile material imports. Trade representatives located overseas don’t really know what’s happening. I was not involved with counterfeiting but I saw people around me getting involved with sales of drugs and counterfeited cigarettes. Drugs are sold in China, Taiwan and Japan and cigarettes mostly to Indonesia.

It’s uncertain whether the state is still involved with narcotics sales. But Kim Jong Un doesn’t care how the money is made if someone can make a million dollars.

This suggests two paths to exerting effective financial pressure on North Korea, either of which would be possible under H.R. 1771.

The first, which would be far less likely to be effective without the cooperation of China and other member states, would be to pursue the individual North Korean agents and accounts used for co-mingling, structuring, layering, and laundering North Korea’s offshore assets money. The term Marcus Noland has coined for this is “whack-a-mole.” This would be extremely resource-intensive for financial investigators. Like the process of bankrupting Al Qaeda, it’s a process that would take years. To be as effective, it would involve the designation of hundreds of individuals, entities, and assets. This clearly isn’t the case today; a total of 62 North Korean entities and individuals have been designated in a decade, most of them during the Bush Administration.

Once Treasury designated an individual or account as North Korean property, the bank holding the deposit would have little choice but to cooperate with Treasury. They key, of course, is identifying the asset as North Korean and associating it with illicit activity in the first place. Treasury’s means to identify non-dollar assets are much more limited if the jurisdiction that regulates that currency doesn’t cooperate.

The obvious limitation of this strategy is the lack of financial intelligence to implement it. The U.S., Treasury typically gathers financial intelligence through the Currency and Transaction reports (for transactions over $10,000), and Suspicious Activity Reports filed by banks. Needless to say, not all jurisdictions require North Korea to report its transactions in such detail, although the Financial Action Task Force has made good progress toward setting base lines for transaction reporting.

That limitation could be remedied if the next U.N. Security Council resolution expands on the “enhanced monitoring” requirement of UNSCR 2094 and requires member states to impose specific reporting requirements on transactions by North Korean persons and entities, and to share those data with the U.N. Panel of Experts, and with member state regulators. This, in turn, would create an international database of North Korean financial data that would be invaluable to regulators in identifying North Korean money launderers, procurers, and proliferators.

Such a database wouldn’t necessarily require the U.N.’s consent, but could be done under the umbrella of the Financial Action Task Force or the Proliferation Security Initiative. On the other hand, it’s hard to expect other nations to enhance their monitoring of North Korean transactions when the U.S. Treasury Department’s own sanctions regulations are as weak as they are, and don’t even require the licensing of most investments, loans, or other financial transactions in North Korean property. It would be fair to say that the U.S. itself is out of compliance with this provision.

The near-certainty that China would cooperate as little as possible, however, also calls for a second approach — to apply a rebuttable negative presumption to all North Korean entities and assets. That presumption finds some support in the burden-shifting language of UNSCR 1718 (“ensure that any funds … are prevented from being made available … for the benefit of such persons or entities”) and 2094 (“resources, including bulk cash, that could contribute to the DPRK’s nuclear or ballistic missile programmes”). Treasury could then apply appropriate exemptions under section 207 of the NKSEA for in-kind purchases of food, medicine, humanitarian goods, consular activities, and other legitimate exempt activities. North Korea’s banking system would be a particular vulnerability — collectively, North Korean banks are the BDA of today.

A combination of these strategies, but one that relied more heavily on the second approach, proved highly effective against Iran and Burma.

A strategy that falls somewhere between these approaches would be the designation of North Korea as a primary money laundering concern. This, along with the discretionary sanctions authorities in NKSEA section 104(b)(2), would allow Treasury to require banks known to service large numbers of North Korean customers to provide enhanced transaction reporting of their dollar-based transactions. This limitation on access to the financial system would be so costly that it could, by itself, cause banks to refuse all North Korean business. It would also help regulators identify suspicious individuals, entities, accounts, and transactions for specific designation.

The secondary effect of this strategy would be to channel North Korea’s dealings into a few financial nodes. Some of those nodes, no doubt, would be the scavengers of the financial ecosystem, the next Banco Delta Asias of the world. Those entities would then be easier to identify and designate as primary money laundering concerns themselves. Others, however, would be foreign financial institutions licensed to handle legitimate, transparent transactions as specifically authorized under section 207(d).

That would be a mechanism to force North Korea to accept financial transparency as a condition of access to the financial system, and would give U.N. member states a wide degree of control over how North Korea earns and spends its money. It would effectively put the North Korean economy into financial receivership, as responsible national governments sometimes do with corrupt unions and banks.

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Correction: A previous version of this post incorrectly stated that the reporter, Alastair Gale, interviewed the subjects of his report in Leiden. Mr. Gale writes in to say that the interviews were actually done in Seoul. Thanks to Mr. Gale for spotting and correcting the error, and for his outstanding reporting for this story.

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N. Koreans are bootlegging liquor in Muslim countries

Last week, NK News published a detailed report on a black market in alcohol run by North Korean diplomats in Pakistan. Almost simultaneously, The Daily NK also reported that two North Korean “chauffeurs,” dispatched by the regime to Qatar, and nominally working for private companies there, had been arrested for bootlegging.

Two North Korean men are being detained in Qatar under suspicions of the distribution of illegal liquor; Voice of America [VOA] reported on September 4th, citing the Gulf Times, Qatar’s English language newspaper.

The men were alleged to have been selling the liquor to North Korean laborers there, as well as to citizens in surrounding nations, and if found guilty of the crime, will be deported back to North Korea. The Gulf Times was unable to confirm when or where the men were first arrested. [Daily NK]

Selling moonshine to thirsty construction workers is a novel, and typically exploitative, way to supplement those “loyalty” taxes expatriate workers must pay to the regime.

The report also references previous North Korean bootlegging arrests in Qatar, and arrests or investigations in India, Bangladesh, and Kuwait. According to a separate Gulf Times report from July of this year, another North Korean, who was working as an interpreter and has access to a car, was also arrested by Qatari police for selling alcohol and illegal drugs. (See also.)

North Korea’s bootlegging operations are not new, and probably as old as North Korea using diplomatic pouches to smuggle contraband and cash. Curtis Melvin points to a 1976 article in Time magazine about North Korean liquor and cigarette smuggling in Sweden and Denmark.

The earliest such report I found from the Middle East is from 2008, when “three North Koreans who converted their apartment into an alcohol factory” were arrested by Kuwaiti police, who also “seized 186 bottles of alcohol, 34 brewing barrels and gallons of alcohol.” There’s even a photograph.

Two other articles from The Arab Times, both undated, may describe separate seizures of 80 bottles and 200 bottles of liquor in Kuwait. Alcohol-related arrests of North Koreans are frequent enough there that annoyed South Korean diplomats monitor the local newspapers and ask them to clarify any reports that “Koreans” have been arrested for bootlegging.

With the exception of the NK News report from Pakistan, the reports do not directly implicate North Korean diplomats, but it’s difficult to imagine that overseas North Korean workers, whose movements and remittances are always carefully monitored — indeed, who have no means to send money home to their families directly — would engage in such activities without tacit official approval, and without being expected to hand the proceeds over to their regime handlers. The Chosun Ilbo described the arrangement this way, in a 2009 interview with a source in Abu Dhabi, in the UAE:

One source in Abu Dhabi said, “North Korean workers make between $300 and $500 a month, but the North Korean government confiscates $150 and even $250 as loyalty payments, leading to a lot of conflict.” North Korean labor export companies skim off an excessive amount of money from salaries. The level of discontent recently prompted the North Korean government to dispatch security agents who trawl construction sites on weekends to provide ideological “cleansing” sessions to workers. [….]

“The North Korean companies that sent the workers abroad are aware of the bootlegging but are turning a blind eye as long as the laborers pay portions of the profits,” one local source said. [Chosun Ilbo]

The construction companies, in turn, are almost certainly under the direct control of the local North Korean embassies. This arrangement has the advantage of putting two layers between the embassies and the retailers. That gives the embassies plausible deniability, and avoids disruption to the other business operations the embassies are involved in.

The real test of the regime’s culpability, of course, is how the profits move. At the end of the day, I’d wager that nearly all of the profits end up deposited in regime-controlled accounts, co-mingled with the proceeds of legal businesses to disguise their illicit origins, and wired through multiple shell companies to other regime-controlled offshore accounts.

I confess to some ambivalence about this line of business. I can certainly think of worse things North Korean diplomats have smuggled, but you can’t pick and choose what you allow a criminal organization to sell. You have to uproot all of it or none of it. And on balance, I don’t suppose North Korea’s bootlegging is any more likely to liberalize the Middle East than a few ChocoPies are to liberalize North Korea.

Yet again, as with the recent and not-so-recent arrests of North Koreans for illegal gambling (second section), we see that North Korea has no moral objection to capitalism, as long as it’s state capitalism. It just objects to granting economic liberty to its subjects, and to freeing them from hunger and dependency.

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

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

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

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

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

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

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

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

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

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

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

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

Hat tip to a reader and friend.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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FBME Bank denies money laundering allegations

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

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

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

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

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

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

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

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

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

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

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

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

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Treasury nukes bank with possible North Korea links (updated)

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

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

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

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

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

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

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

Treasury did not name the front company.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2. China is violating North Korea sanctions — flagrantly.

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

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When the POE pointed that out, hilarity ensued:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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