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

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

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

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

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

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

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

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

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

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Congress is marking up North Korea bills faster than I can write about them

Congress’s sentiment about Pyongyang today equates roughly to Cato the Elder’s sentiment about Carthage. (I mean this figuratively, for now, although I increasingly fear that sanctions are our last plausible strategy to prevent war.) It’s now moving more North Korea legislation than it has in the entire decade leading up to the passage of the North Korea Sanctions and Policy Enhancement Act just over one year ago. I can no longer keep up with all of the bills, amendments, markups, and resolutions in what little spare time I still have.

  • H.R. 1644: The Foreign Affairs Committee has moved very quickly in marking up H.R. 1644, the KIMS Act, which toughens the NKSPEA to match or exceed new U.N. sanctions under UNSCR 2270 and UNSCR 2321. It would impose tough new secondary sanctions on foreign ports that fail to inspect North Korean cargo, foreign banks that discreetly connect North Korean banks to the financial system, governments that allow the use of North Korean slave labor, and states that reflag North Korean ships. The Committee Chair, Ed Royce, amended the bill at an action-packed Committee markup earlier this week. I haven’t had a chance to do a line-by-line comparison, although I noticed that the newer version expands a humanitarian exception for North Korean imports of gasoline and diesel fuel.
  • H.R. 479: Ted Poe and Brad Sherman’s bipartisan bill to force the Secretary of State to re-list North Korea as a state sponsor of terrorism was amended to look like Ted Cruz and Cory Gardner’s bill. That means the House and Senate are coordinating their efforts and are serious about putting that bill on the President’s desk. I continue to predict that the Secretary of State will act on his own before that happens, but only because that legislation is advancing toward the President’s desk at such a deliberate pace. Frankly, I’m surprised the Secretary of State hasn’t already acted. This bill may be a necessary incentive to focus the administration’s priorities.
  • H. Res. 223: Ted Yoho, the new Asia Subcommittee Chairman, says China has been sanctioning the wrong Korea, and has introduced a new resolution calling for Xi Jinping to knock it off. (China’s escalation of this crisis, by waging economic war on South Korea, may call for a deterrent escalation of our own. The closure of a South Korean factory in China gives me the idea that our secondary sanctions against North Korea should focus their impact on regions in China that already have higher rates of unemployment. By joining forces with Japan and South Korea to concentrate the effect of sanctions on those regions, we can raise the political pressure on Xi Jinping. As with Kim Jong-un, it may take a threat to Xi’s political control to influence his behavior, or the behavior of those around him.)
  • H. Res. 92: Another bipartisan House resolution condemns North Korea’s missile tests, calls for the quick deployment of THAAD and the improvement of our missile defenses, and calls for the full enforcement of the new sanctions authorities that the U.N. and the U.S. have approved over the last year.
  • S. Res. 92: By a striking numerical coincidence, S. Res. 92, introduced by Senator Mike Lee of Utah, is also North Korea-related. It calls on the government to investigate the disappearance of David Sneddon. Members of Sneddon’s family have raised suspicions that North Korea may have been behind his disappearance in China in 2004.
  • What’s still missing is a reauthorization of the North Korean Human Rights Act, which has to happen this year or the law will expire. Expect to see that effort begin in the Senate and work its way back to the House later.

If there’s another nuke test in North Korea, you can expect to see a flood of member amendments and resolutions. There is, of course, still more that Congress can do, including:

  • tourist travel ban authority,
  • provisions that would require the public disclosure of which companies have investments in North Korea,
  • immunity and encouragement for fund managers to divest from those companies,
  • requiring the public disclosure of any North Korea-related beneficial ownership interests,
  • a flat-out ban on access to the dollar system by any bank or person that transacts with North Korea, and
  • perhaps most importantly for now, a comprehensive transaction licensing requirement for North Korea, although this loophole would be closed by putting North Korea back on the list of state sponsors of terrorism.

Congress could also name and shame more of the banks and other entities that were dishonorably mentioned by the U.N. Panel of Experts. It could also make its voice heard on Kaesong, which Moon Jae-in has promised to reopen, despite the fact that this would violate multiple U.N. Security Council resolutions. If South Korea violates U.N. sanctions, China, Malaysia, and Africa will draw the conclusion that the world isn’t serious, and a global enforcement coalition will never coalesce.

As with the U.N. resolutions, although there is still more Congress can do to create legal authorities for sanctions, Congress is approaching the point where it will have completed its to-do list, and the focus must shift to enforcement and implementation of the existing laws. Making sanctions work is increasingly about putting enough of the right people into the right positions to make an enforcement program effective. The slow pace of political appointments isn’t encouraging. Many of the necessary improvements to our North Korea policy await those key appointments: how we award grants, what we broadcast to the North Korean people, which refugees we admit, how we exploit the intelligence they provide, who coordinates the broader policy among squabbling agencies, and what we do about foreign governments that violate sanctions, use North Korean slave labor, or repatriate refugees to North Korea.

The vast majority of federal employees, of course, aren’t political; they’re career civil servants appointed under Subchapter I of Title 5. They’re the technocrats and experts who faithfully execute the laws and the President’s policies, regardless of who the president is. Although President Trump’s hiring freeze may be affecting their numbers to some degree, the freeze has broad exemptions for national security and public safety, which most eligible agencies have already invoked. The key enforcement agencies are badly understaffed with the career employees needed to enforce sanctions, but not because of the new hiring freeze. Many are working late nights and weekends out of dedication alone. The simple truth is that North Korea investigations, sanctions, and prosecutions just weren’t a priority for previous administrations, so most career employees were assigned to other duties. If personnel is policy, the new administration hasn’t yet changed that policy. Let’s hope it does soon. The administration says North Korea is a top priority, but so far, I’ve seen little evidence that its actions have matched its words.

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Investigative journalists expose North Korean front companies in Malaysia

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Who’s Breaking it:

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

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

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

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

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

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

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

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

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

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

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

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

Who’s Breaking it:

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

Who isn’t:

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

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

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

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

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

Who’s Breaking it:

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

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

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

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

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

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

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

Who’s Ignoring it:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thanks for that!

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

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

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

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

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

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

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

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

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

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

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

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

Here comes the culture shock.

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

And also, don’t usually take bribes.

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

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

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

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

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

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

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

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

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

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

Until a whistleblower came along, anyway.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Update:

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

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

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

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

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

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

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

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Another North Korean ship sinks, this time off the Chinese coast

In an effort to hide their sanctions violations from the prying eyes of the U.N. Panel of Experts — and from Leo Byrne and the sharp-eyed investigators at C4ADS — North Korean ships have taken to turning off the transponders and navigational devices that allow others to know where they are. Now that I’ve explained the advantages of that, let’s talk about one big possible disadvantage: other ships might crash into you and sink you.

That’s the best explanation I can piece together from what Leo Byrne could piece together from the what Chinese Maritime Ministry is saying about the sinking of the M/V Kum San off the Chinese port of Lianyungang, where it had been “hovering,” in standard North Korean fashion, until a Chinese oil tanker came along. Although the report says the Kum San struck the tanker, the report also says that the tanker was undamaged and went along its way, while the Kum San (apparently fully loaded) went to the bottom.

As with the January sinking of the M/V Chong Gen off Japan, all the crew were rescued. The Chong Gen was another North Korean general cargo vessel that sank in the Tsushima Strait with a cargo of rice, for reasons that were never fully explained, but might also have been due to a navigational failure given its proximity to the rocky Japanese coastline.

The Kum San had been flying the flag of Sierra Leone until recently, when it reflagged as North Korean. Its IMO does not appear in the Treasury Department’s SDN List, so it was not directly linked to smuggling. Typical of a North Korean ship, however, its owner is a company with just one ship, which is a tactic North Korea uses to obscure the true ownership of its vessels.

According to Byrne, North Korea recently began to consolidate the ownership of its shipping, and specifically its tanker fleet, as a result of the difficulty it is facing in registering its ships abroad under flags of convenience. A mass re-registration to Tanzania had become an embarrassment for the Tanzanian government. Byrne later discovered a similar North Korean effort to re-register ships under the Fijian flag, but the Fijian police soon began to investigate the practice.

The U.N. also recently banned other states from insuring North Korean vessels, so in theory, Pyongyang’s state insurance company (which was recently designated by the U.S. Treasury Department) will eat the entire cost of the loss. 

More posts on North Korean shipping here.

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Malaysia holds the upper hand in its hostage dispute with North Korea

Three weeks ago, Malaysia was one of North Korea’s most important trading partners — a haven, hub, and way station for its arms trafficking, money laundering, and slave labor. Money has long been the limiting reagent in Pyongyang’s experiment with phobocracy. It’s now clear that Kim Jong-un will soon pay a heavy financial and diplomatic price for the badly botched murder of his half-brother, Kim Jong-nam with a persistent nerve agent in a crowded airport terminal in Kuala Lumpur last month. (I’ve described this as the first case of international terrorism using a weapon of mass destruction.)

The Malaysian investigation quickly implicated eight North Koreans, including a diplomat. Three of those men are still hiding in the North Korean Embassy. North Korea, with ghoulish obsession, demanded the repatriation of Kim Jong-nam’s body. Malaysia refused to release it without a DNA sample from a relative confirming the identity of the deceased. North Korea condemned the Malaysian investigation as biased, Malaysia expelled the North Korean ambassador, and North Korea expelled the Malaysian ambassador. And then, this happened:

Pyongyang, March 7 (KCNA) — The Protocol Department of the DPRK Foreign Ministry, at the request of a relevant organ, on Tuesday informed the Malaysian Embassy here of its decision to temporarily ban the exit of Malaysian citizens in the DPRK until the safety of the diplomats and citizens of the DPRK in Malaysia is fully guaranteed through the fair settlement of the case that occurred in Malaysia.

It expressed hope that the Malaysian Embassy here and the Foreign Ministry of Malaysia would fairly settle the current case as early as possible from the goodwill stand of setting store by and developing the bilateral relations.

In this period the diplomats and citizens of Malaysia may work and live normally under the same conditions and circumstances as before. -0- [KCNA]

Call the ACLU and petition the Ninth Circuit — Kim Jong-un just issued a #muslimban! Malaysian Prime Minister Najib Razak responded in kind:

[link]

The Malaysian government’s ban doesn’t just affect diplomats. The PM said “all North Korean citizens” and he meant it.

Deputy Prime Minister Datuk Seri Ahmad Zahid Hamidi made the announcement today in an immediate reaction to Pyongyang’s ban against Malaysians from leaving North Korea.

“As a response to foreign minister of North Korea, the Home Ministry via Immigration has released an immediate ruling that not one officer in Malaysia is to leave the country. “This is effective immediately to all exits of immigration nationwide,” he told a news conference here.

Ahmad Zahid also said the Cabinet will meet this Friday and discuss if it is to sever all ties with North Korea. He reiterated that Malaysia will not tolerate being accused of a murder conspiracy without proof.

“We have no intent to take any reciprocating action. But after this has been done by a country with diplomatic ties with Malaysia outside of the normal conventions of bilateral relationships, Malaysia is forced to take a similar action as they have manipulated the murder case here.

“We want to send a clear message, ‘Don’t point fingers at us and don’t look down upon Malaysia as (a) sovereign nation,” he said. [Malay Mail Online]

Reports that Malaysian diplomats were burning documents at their embassy in Pyongyang give you a good idea where that decision is headed. The Malaysian government is also reviewing trade relations with North Korea and was expected to make a decision by the end of the week.

“We don’t intend to retaliate but this is what must be done when a country that has diplomatic relations with Malaysia acts outside diplomatic norms,” Deputy Prime Minister Ahmad Zahid Hamidi said Tuesday. “We want to send a clear message — do not point fingers at Malaysia and do not belittle Malaysia’s standing as a sovereign country that has carried out investigations professionally.” [Bloomberg]

Eleven Malaysians are now trapped inside North Korea, some of them at Sunan Airport. Three are embassy employees, six are their family members, and two are humanitarian aid workers for the World Food Program. (I wonder if the Ministry of State Security will send an officer to literally bite their hands, to perfect the metaphor.) There are about 300 North Koreans in Malaysia, including 170 coal miners laboring in brutal conditions in Sarawak. Authorities there are awaiting orders from K.L. about how to respond.

At this point, it’s useful to cite an authoritative definition of “hostage.” Legally, the U.S. Criminal Code only prohibits hostage-taking involving U.S. nationals, but otherwise defines “hostage taking” as “to detain another person in order to compel a third person or a governmental organization to do or abstain from doing any act as an explicit or implicit condition for the release of the person detained.” That sounds like what both governments are doing at this point, with two exceptions — the two North Korean non-diplomats who are hiding inside the North Korean embassy in Kuala Lumpur, and who are wanted by the police for questioning in the Kim Jong-nam murder investigation.

The common reaction to this, even in Malaysia, is to call it a “tit-for-tat.” My immediate reaction was also to view both sides as guilty of hostage-taking and violating the Vienna Convention, which guarantees diplomats freedom of movement and immunity from criminal prosecution. On closer examination, however, the Malaysians might have a case that their action is a lawful “countermeasure,” a doctrine with some basis in customary international law (start at Article 49).

But what the law allows isn’t necessarily the best policy, and I tend to think the Malaysians are going about this all wrong by lowering themselves to Pyongyang’s level. Their best leverage, after all, would consist of a series of perfectly legal acts. Begin with the fact that among some of those 300 North Koreans, not all of them likely want to go back to Pyongyang. That would go double for the ones who are involved in botching the hit on Kim Jong-nam. Regardless of whether the Malaysian government has a legal right to prevent the departure of the North Koreans — and their ban is probably disproportionate, if understandable — holding North Koreans as effective hostages isn’t their best form of leverage by a long shot.

Instead, the Malaysian government should initiate a series of criminal investigations of North Korean activities in Malaysia for violating U.N. sanctions, and start seizing property that belongs to the Reconnaissance General Bureau, Korea Mining Development Corporation, and other U.N.-designated entities. That approach has the advantages of being (a) perfectly legal, and (b) much more concerning to Pyongyang than actions that affect its citizens, who are all deemed more-or-less expendable anyway. To further increase the pressure on Pyongyang, Malaysia could guarantee each departing North Korean a lengthy unmonitored interview with the U.N. High Commission for Refugees, affording each departing North Korean the option to defect instead. Rewards and asylum could be offered to those who provide information leading to an arrest or conviction. Imagine the pressure that would put on Pyongyang. It might even be a useful experiment in how to negotiate with Pyongyang from strength.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Paragraph 8(d) of UNSCR 1718 requires all Member States, and all persons subject to their jurisdiction, to “ensure that any funds, financial assets or economic resources are prevented from being made available by their nationals or by any persons or entities within their territories, to or for the benefit of” designated entities. The whole point of financial messaging services is to make economic resources available. I can’t for the life of me see how financial messaging on behalf of designated North Korean banks is anything but a clear violation of 1718.

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

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

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

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

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

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

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

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Update:

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

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

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

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

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

[Update]

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

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

[End update]

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

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

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

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

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

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

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

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

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

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

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

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

~   ~   ~

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

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GOP heavyweights push for secondary boycott of North Korea

Six Republican senators — Ted Cruz (TX), Cory Gardner (CO), Thom Tillis (NC), Marco Rubio (FL), Pat Toomey (PA) and David Perdue (GA) — have signed a letter to newly confirmed Secretary of the Treasury Steve Mnuchin* calling for improved implementation and enforcement of the North Korea Sanctions and Policy Enhnancement Act (NKSPEA).

As Kim Jung-un has exposed his willingness to increase ballistic missile testing with the ultimate goal of achieving nuclear breakout, the potential for this regime to attain a developed and capable intercontinental ballistic missile (ICBM) poses an imminent threat that cannot be ignored,” the senators wrote. “North Korea’s test of an intermediate-range ballistic missile this past weekend demonstrates advancement in fuel and launch technology, underscoring the necessity of faithfully executing the law to meet this growing threat. [Sen. Ted Cruz]

The letter (the full text is here, and it’s an absolute must-read) proposes ten actions that President Obama never got around to, that would substantially improve the effectiveness of sanctions: (1) designate North Korea’s remaining banks; (2) hire enough cops and lawyers to enforce the sanctions; (3) invoke more Patriot Act special measures to require record-keeping and reporting on North Korean beneficial owners; (4) talk to Rex Tillerson about re-designating North Korea as a state sponsor of terrorism; (5) replace our weak and outdated North Korea sanctions regulations; (6) strictly enforce Know-Your-Customer and reporting rules on North Korean banking transactions; (7) investigate the banks involved in the Dandong Hongxiang and Chinpo Shipping cases; (8) enforce the law against any bank caught providing North Korean banks with direct or indirect correspondent account services; (9) work to cut North Korea out of SWIFT; and (10) show some willingness to impose secondary sanctions on Chinese sanctions violators.

That’s a good list — a very good list. I couldn’t have written it better myself (OK, maybe slightly, but only slightly).

The instigator and drafter of this letter is the man some now refer to as The New Ted Cruz. Although I’m not nearly as conservative as Cruz is on some issues, Cruz deserves commendation for stepping forward to lead on this issue, despite not even being a member of the Foreign Relations Committee or previously showing particular interest in foreign policy. (Tillis and Toomey aren’t Committee members, either; kudos** to them for signing on.) And while we’ve come to know Gardner and Rubio as leaders on North Korea policy, this episode also teaches us the importance of being willing to follow when someone else proposes good ideas. Rubio and Gardner in particular are highly respected in the Senate for their intellect and understanding of foreign affairs. It’s to their credit that they added their heft and gravitas to the letter by signing on. In doing so, they’re shaping the new administration’s policy at an early and malleable stage, when Trump probably needs all the good advice he can get.

Also deserving similar credit is Edwin Feulner, a (the?) founder of the Heritage Foundation and (so I’ve read in various press accounts) a man Donald Trump listens to. Yonhap also calls Feulner a leading candidate to be our next Ambassador to South Korea. Feulner sat down for an interview with Yonhap’s Chang Jae-soon and Shim In-sung, where he expressed similar views to those of the Gang of Six:

“I think anything that happens post January 20, 2017 is a test and is a challenge to President Trump and that President Trump takes anything that happens while he is the President of the U.S. he is going to take it very seriously,” Feulner said of the missile launch.

Increasing pressure on North Korea, including making China, through secondary sanctions, use more of its leverage over Pyongyang as the main provider of food and energy assistance, would be a key part of Trump’s policy on the North, Feulner said.

“Mr. Trump … will be expecting China to do a lot more. The notion of economic pressure on North Korea is one that Mr. Trump understands. Mr. Trump is not going to be reluctant to use his willingness to invoke secondary boycotts, for example, of organizations in North Korea or in China that are pass-through entities for exports from North Korea to cut off even more economic help,” Feulner said.

“Mr. Trump … will not hesitate to employ more significant measures,” he said. [Yonhap]

Also encouraging was Feulner’s call to bring more attention to North Korea’s crimes against humanity, and to appoint a “widely recognized, respected ambassador” for human rights issues, as mandated by the North Korean Human Rights Act (which is up for reauthorization this year, and will be reauthorized).

The rumor of Feulner’s potential nomination as ambassador may be the most encouraging news I’ve heard about the Trump administration so far. Historically, Korea only got the attention it deserved in Washington when ambassadors have had strong political pull and close relationships with the President. And while it’s hard to think of someone with better judgment or public diplomacy talents than Mark Lippert, Feuler’s combination of close ties to Korea, political strength in Washington, good policy instincts, and understanding of the subject matter would make him an outstanding candidate for the job as the North Korea crisis reaches a critical phase.

Most of what the six senators and Feulner said also sounds consistent with what Rex Tillerson, Yun-Byung-se, and Fumio Kishida said after their first trilateral meeting this week, in Germany.

“The ministers condemned in the strongest terms North Korea’s February 12, 2017 ballistic missile test, noting North Korea’s flagrant disregard for multiple United Nations Security Council resolutions that expressly prohibit its ballistic missile and nuclear programs,” the three countries said in a joint statement.

“Secretary Tillerson reiterated that the United States remains steadfast in its defense commitments to its allies, the Republic of Korea and Japan, including the commitment to provide extended deterrence, backed by the full range of its nuclear and conventional defense capabilities,” it said.

The sides pledged to collaborate to ensure that all countries fully carry out U.N. Security Council sanctions on Pyongyang and that violations of Security Council resolutions will be met with an “even stronger international response,” according to the statement.

The top diplomats urged Pyongyang to refrain from provocative actions and “abandon its proscribed nuclear and ballistic missile programs in a complete, verifiable, and irreversible manner” and comply with all U.N. resolutions, the statement said.

“Only in this way can North Korea be accepted as a responsible member of the international community,” it said.

The sides also agreed to continue to draw international attention to the North’s “systemic, widespread, and gross violations” of human rights. [Yonhap]

That latter point is an important one, not only from an ethical or a legal perspective, but from a utilitarian one. Since the release of the Commission of Inquiry’s report, Pyongyang has shown surprising vulnerability to criticism on human rights, to the point where that criticism may be affecting the cohesion of the elites and the stability of the regime itself. It will not be any single vulnerability that convinces the generals there that they have no future on the path set by Kim Jong-un, but a combination of vulnerabilities — financial, diplomatic, and political, both foreign and domestic — converging at once. It’s gratifying to see that the Americans (Update: well, some of them, anyway) who will have the most influence over the future of Korea understand what those vulnerabilities are.

~   ~   ~

* Mnuchin’s confirmation hearing is here. It’s about 5 hours long, in case you have a long weekend coming up and no life.

** Previously said “kudus.” Since corrected, although I wouldn’t mind “kudus” myself. As I can testify from personal experience, kudu is delicious.

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Some on-point congressional testimony on sanctions as part of a broader N. Korea policy

Reuters reports that, following North Korea’s weekend missile test, the Trump administration “will consider a full range of options in a response to Pyongyang’s missile test” that are “calibrated to show U.S. resolve while avoiding escalation.”

Those options will include increasing “pressure on China to rein in North Korea,” “new U.S. sanctions to tighten financial controls, an increase in U.S. naval and air assets in and around the Korean peninsula and accelerated installation of new missile defense systems in South Korea.” The U.S., South Korea, and Japan are also bringing the launch up at the U.N. Security Council, although it’s not yet clear if they will ask for a new resolution, a toothless presidential statement, or a new round of designations (which is likely the best we can get).

What we’re about to confront is the question of whether we can coexist with a nuclear North Korea — or, more precisely, whether a nuclear North Korea will coexist with us.

This is where its nuclear weapons program fits into North Korea’s designs. In Pyongyang’s thinking, the indispensable instrument for achieving the DPRK’s grand historical ambitions must be a supremely powerful military: more specifically, one possessed of a nuclear arsenal that can imperil and break the foreign enemies who protect and prop up what Pyongyang regards as the vile puppet state in the South, so that the DPRK may consummate its unconditional unification and give birth to its envisioned earthly Korean-race utopia. [Nicholas Eberstadt, Testimony before the Senate Foreign Relations Committee, January 31, 2017]

I might add: Pyongyang will soon pose a direct nuclear threat to the United States. It launched cyberterrorist attacks against us to censor our own freedom of speech. It built a nuclear reactor in a part of Syria now controlled by ISIS. It sells surface-to-air missiles to terrorists. It’s cooperating with Iran on missiles. It will sell any weapon to any bidder with the asking price. It has long demonstrated its utter disregard for human life. The answer, emphatically, is “no.”

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There are still plenty of items left on this list of options I posted last year, although I take some satisfaction from that fact that many of them have since been done, and we’re now waiting to see their impact. China’s latest sanctions violations on coal imports and cargo inspections are also openings for the new administration to offer strong responses.

Recent congressional hearings have also offered valuable guidance about what that policy should be. Once again, I’ll point to the testimony of former State and Treasury Department official Anthony Ruggiero, which should be required reading for anyone looking to make sanctions work. Ruggiero argues that we have to step up our investigation and enforcement efforts, target Kim Jong-un’s finances more strategically, and be willing to break some china along the way. Begging Beijing to help us is a fool’s errand (it won’t, at least not voluntarily). Our targets should instead be the Chinese banks and businesses that prop up Pyongyang, and that also need access to our financial system.

Also on the topic of sanctions, Victor Cha made this important argument:

The combination of the Treasury Department’s designation of the DPRK as a jurisdiction of “primary money laundering concern” under Section 311 of the PATRIOT ACT, the North Korean Sanctions and Policy Enhancement Act, and the sectoral measures sanctions under UNSCRs 2270 and 2321 comprise a new level of sanctioning. There will be many who criticize sanctions as being ineffective. Sanctions are the most maligned instrument in the diplomatic toolbox. The reality is that we don’t know whether sanctions work until they do. That is, only after the North returns to the negotiating table, or falters under pressure, or gives up its weapons, the policy community will point to sanctions and say they work. Until then, folks will say sanctions don’t work.

So we need to keep the pressure on and expand the scope. Sanctioning of North Korea’s slave labor exports and third-party entities that have willful involvement in DPRK insurance fraud schemes should be considered. Secondary sanctioning (discussed below) should also be considered. We also need to work harder on full enforcement of unilateral and multilateral sanctions. Sanctions enforcement should be pursued in conjunction with our allies and regional stakeholders as well as through international mechanisms. [Victor Cha]

Ironically, those who supported the economic subsidies (Kaesong, foreign tourism) that have undermined sanctions are the loudest voices claiming that sanctions have failed, or repeating the factually and legally false claim that years of strong sanctions haven’t worked. If you want to know why sanctions haven’t worked yet, it’s because (1) they were weak, and (2) until at least a year ago, economic subsidies from South Korea and China canceled out whatever limited effects they’ve had.

Then, what strategy do sanctions serve? Our goal can’t just be to force Pyongyang to come back to talks or promise us another unverifiable freeze.

If there is any chance at all that the North would ever entertain the idea of giving up its nuclear program, it would be only because the new administration has made it very clear that the Kim regime is facing a stark choice between keeping the nuclear arsenal and regime survival. [Sue Mi Terry, testimony before the House Foreign Affairs Committee, February 7, 2017]

As I explained here, sanctions can force Kim Jong-un to make difficult choices about allocating limited resources, catalyze corruption and indiscipline within the security forces, instigate inter-factional knife fights as resources dwindle, and convince him that he’s losing control. Anyone who wants to understand how sanctions fit into a broader policy, and what that policy should be, will not see it explained better anywhere than Terry did in her written testimony last week. She explains how sanctions further our medium- and long-term political objectives by weakening the regime’s domestic political support in tandem with information operations that pave the way for change and, ultimately, reunification without war. And as Terry explains, sanctions aren’t the only element of presenting that stark choice (she also argues for subversive information operations, strong alliances, and diplomacy).

Terry is probably right when she argues that while we can’t close off Pyongyang’s option to resolve the crisis diplomatically, “[i]n the final analysis, there is only one way that the threat from North Korean will truly come to an end: the current regime itself must come to an end.”

Another challenge for the United States is how to induce an internal debate among North Korean elites about the costs of a nuclear North Korea. Sanctions alone are likely to convince North Korean elites that their only options are to unite in support of Kim Jong Un and his nuclear policy or to risk regime failure and international retribution-that is to “hang together or hang separately.” [Scott Snyder, Testimony Before the Senate Foreign Relations Committee, January 31, 2017]

Unless, of course, we offer clemency to those who come forward and defect with valuable intelligence, or who refuse orders to fire on civilians, whether in North or South Korea.

For this reason, it is all the more important for senior officials around Kim Jong Un to know that there is an alternative pathway that can safeguard their survival. Given the absence of overt internal dissent within North Korea today, this strategy may also fail. But media reports of accounts by Thae Yong-ho, a high-ranking North Korean official who recently defected, suggest that dissenting opinions and discontent do exist among high-level North Korean elites. The United States and its allies should seek to communicate a clear message and guarantee to those around Kim Jong-un that there is a viable alternative path forward for North Korea if it abandons nuclear weapons and conforms to international norms, including on human rights.

Above all, however, any strategy that includes (or even tolerates) sanctioning and subsidizing the same target at the same time will fail under the weight of its own incoherence. Twenty years of engagement have made zero measurable progress toward the reform and peace that its backers promised us. On the contrary, those subsidies helped Pyongyang to nuke up, break sanctions, seal its borders, and consolidate a third generation of tyranny. No coherent policy has room for both sanctions and subsidies. It must be one or the other.

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Leaked U.N. report reveals record seizure of North Korean arms last August (updated)

The 2017 report of the U.N. Panel of Experts isn’t due to be published for another month, but a Kyodo News reporter has already obtained and published leaked excerpts. The focus of Kyodo’s story is the now-familiar (and unquestionably accurate) castigation of member state governments for not putting enough will or resources into the enforcement of North Korea sanctions, but I’d like to start with this revelation:

“An interdiction of the vessel Jie Shun was the largest seizure of ammunition in DPRK sanctions history,” according to the document. A source informed Kyodo News the Egyptian port was not the general cargo ship’s final destination, despite its strategic location near a number of regional conflict hot spots. However, the report said that seizures like it demonstrate “the country’s use of concealment techniques as well as an emerging nexus between DPRK entities trading in arms and minerals.” [Kyodo News, Seana K. Magee]

The M/V Jie Shun, IMO 851780, is a 2,825-tonne general cargo vessel that flies a Cambodian flag. Built in Japan in 1986, it previously sailed under the names Velox, Armon, and Northern Queen.

[As seen here in better days]

As recently as 2014, it was up for sale. Its current owner is Liaoning Foreign Trade Foodstuffs Co., Ltd. of 72 Luxun Lu, Zhongshan Qu, Dalian, China. That’s right next to the address listed in the Panel’s 2014 report for Dalian Sea Glory Shipping Company, which managed the suspected smuggling ship M/V Light. This is not a reputable neighborhood.

Shipping trackers last spotted the Jie Shun at “Skohna” (probably Sokhna), an Egyptian port on the Red Sea near the southern terminus of the Suez Canal.

Despite what the trackers say, the Panel’s report says the ship wasn’t headed for any port in Egypt. Egypt has been a buyer of North Korean missiles and missile parts, but not of large quantities of North Korean munitions, at least to my knowledge. Nope, this time, my top three guesses are Syria, Syria, and Syria:

[What do I win?]

Liaoning Foreign Trade also operates one other ship, the Chinese-flagged M/V Fu Yun 228, IMO 8888654. The small bit of good news is that if trackers still show the Jie Shun as stuck in Egypt, Egyptian authorities must have seized the ship as the resolutions require it to. Inshallah, Red Sea divers will soon have a nice new artificial reef, or the Somali Coast Guard will soon have a new Q-Ship for stalking pirates.

It’s unquestionably true that up to this point, Pyongyang has invested more effort in hiding its dollars and ships behind front companies and shell companies than we have in finding them. That’s why Anthony Ruggiero, who spent years at the Treasury and State Departments administering sanctions, asked Congress this week to give the feds more resources for these investigations.

Mandate additional resources to address North Korea’s activities. The North Korea Sanctions and Policy Enhancement Act of 2016 is a comprehensive law that provides a myriad of tools for the Trump administration to address the North Korean threat. It is important that Congress continue to address additional areas through legislation in the same overwhelmingly bipartisan nature, signaling to North Korea and China that focus on this issue will continue. Throughout my testimony, I have detailed the challenge we face with an adversary that seems to be one step ahead of us. Our entire approach to the North Korea issue needs to change. One area Congress can address immediately is providing additional resources to the Treasury Department, Justice Department, Intelligence Community, and other government agencies to investigate violations of the NKSPEA. [Anthony Ruggiero, Testimony before the House Foreign Affairs Committee, Feb. 7, 2017]

There are other, more immediate steps we can take, beyond those I recommended here. First, we should add the Jie Shun, Liaoning Foreign Trade Foodstuffs Co., Ltd., and (for good measure) the Fu Yun 228 to the U.N. designation list and the Treasury Department’s list of Specially Designated Nationals. Second, we should also demand that China expel any North Koreans involved in this transaction, freeze any accounts associated with the transactions or the parties to it, and prosecute any Chinese nationals involved.

[As Anthony explains, just after the 5-minute mark.]

For now, however, this is just the latest example of how China continues to be a part of the problem rather than a part of the solution. Almost weekly, we see fresh evidence that China’s cost-benefit calculation hasn’t changed. It’s time to use more forceful methods to shift that calculation:

The Treasury and Justice Departments’ actions in late September 2016 showed a troubling pattern of Chinese persons assisting North Korean-designated persons, including through the U.S. financial system. These transactions lasted six years, up to September 2015, making it hard to believe the Chinese government regulators were unaware of this conduct. It is important that Congress and the American people understand the extent of China’s efforts, or lack thereof, to combat money laundering, sanctions violations, and proliferation financing. I recommend that new legislation include specific sections on North Korea’s network within China. It should also address the broader issue of Chinese support for, and harboring of, North Korean nationals involved in prohibited conduct. In particular, the report could also focus on whether the financial institutions involved should have been designated or subjected to secondary sanctions. [Ruggiero testimony]

My next recommendation depends on whether the Cambodian government has retaken control of its shipping registry, as it promised to do last August, and whether it has de-registered the forty-plus North Korean ships it had reflagged, but is required by U.N. Security Council resolutions to de-register. For years, Cambodia’s shipping registry has been notorious for reflagging North Korean ships. What few of us knew until C4ADS informed us last year was that the International Ship Registry of Cambodia was “a joint venture between the Cambodian government and a South Korean company, the Cosmos Group.”

The seizure of the Jie Shun would have been around the same time as Cambodia promised to de-register rogue ships, and two months after South Korea very politely asked Cambodian dictator Hun Sen to enforce U.N. sanctions against Pyongyang. Good diplomacy always starts with a polite request, and also, it’s always backed by the prospect of ghastly and unspeakable consequences. That dual approach worked superbly the last time we tried it, in 2005, when Treasury officials Stuart Levey and Daniel Glaser went on their world Kim Jong-il Unplugged tour. If Cambodia didn’t act, it would make a damn good example for the likes of Tanzania, Sierra Leone, and other states that haven’t gotten the message about reflagging North Korean ships. And in the case of Cambodia, the Cosmos Group’s role gives us a willing South Korean partner with jurisdiction and a shared interest in shutting this dirty business down ppali-ppali.

The U.S. has an obligation to investigate how the financial transactions behind the shipment were denominated and processed — specifically, whether they were processed through the U.S. financial system. (Unfortunately, the seizure came before UNSCR 2321 banned the insurance of North Korean ships.) If the evidence shows that either the North Koreans or their Chinese partners misused our financial system to break the law, we should freeze and forfeit assets, issue indictments, and consider civil penalties or other appropriate enforcement actions against the banks involved.

Lastly, let’s not forget that under UNSCR 2270, China is supposed to be inspecting all of this North Korean cargo. The NKSPEA also provides a new legal tool for cracking down on ports that shirk that responsibility.

SEC. 205. ENHANCED INSPECTION AUTHORITIES.

(a) Report Required.—Not later than 180 days after the date of the enactment of this Act, and annually thereafter, the President shall submit to the appropriate congressional committees a report that identifies foreign ports and airports at which inspections of ships, aircraft, and conveyances originating in North Korea, carrying North Korean property, or operated by the Government of North Korea are not sufficient to effectively prevent the facilitation of any of the activities described in section 104(a).

(b) Enhanced Customs Inspection Requirements.—The Secretary of Homeland Security may require enhanced inspections of any goods entering the United States that have been transported through a port or airport identified by the President under subsection (a).

That means that if Dalian doesn’t comply with its requirements to inspect North Korean cargo, U.S. Customs and Border Protection might require more intrusive inspections of cargo coming from Dalian. Think of it as the shipping equivalent of a 311 action.

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Update: A reader writes that it’s just as possible that the weapons were headed for Hamas or Hezbollah. Yes, I suppose those are both plausible possibilities. North Korea is suspected of having sold arms to both groups in the past. Now that Hezbollah has a large contingent fighting in Syria, the easiest way to supply it would be by landing the ship at the Syrian ports of Tartous or Latakia. Supplying Hamas is a bit trickier, but would probably work something like this.

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Update 2: I want to take on the argument, suggested in the Kyodo report, that North Korea’s money laundering and smuggling networks are so well-hidden inside China that we couldn’t possibly uncover them. Yeah, how can we do that? We put resources on the problem, for once. We use the same methods we used to expose the equally sophisticated money launderers who worked for Iran, Al Qaeda, and the Cali Cartel. We do what C4ADS did, when two smart researchers with no classified access whatsoever exposed a sophisticated, well-hidden network of North Korean money launderers and smugglers operating from China. Just like the Justice and Treasury departments did when they added their law enforcement authorities to the mix and came up with an indictment and a civil forfeiture count that reached 5 individuals, dozens of front and shell companies, and 12 different Chinese banks. We do it like the U.N. Panel of Experts has done, year after year after year after year after year after year. If we’d simply investigate and/or designate the dozens of Chinese and other third-country entities exposed by the Panel’s open-source reports and their confidential annexes, we’d tear huge holes in that network. We do it by trying, for once, and by not being afraid to break some china along the way.

Finally, let’s not forget the role of human intelligence, which shows us why we don’t have to expose the entire network at once to damage the integrity of the whole thing. The number of North diplomats and money launderers who defected last year probably exceeded the numbers seen in any previous year. Every time a fund manager brings his laptop or some bank account numbers to U.S. or South Korean intelligence, we gain another invaluable clue about the dimensions of that network and who operates it. Apparently, we’ve done some damage, too.

“As sanctions against North Korea have strengthened, trading companies are turning to products that are not included in the sanctions list. The recent activity comes from a decision by the Ministry of Foreign Trade demanding that trading companies double their contributions,” a source in Pyongyang told Daily NK on February 1.

The North Korean authorities are increasing the amount of loyalty contributions to compensate for dwindling exports of weaponry, which had previously been a significant source of revenue. As a result, the companies have no choice but to explore alternative items for export. [Daily NK]

Every time we freeze or seize money in one part of the network, we make other parts of the network fearful that they’ll miss their kick-up quotas. There are some encouraging signs that sanctions can trigger defections, which in turn raise the burden on remaining parts of the network and provide intelligence to help us freeze even more money. Eventually, it all becomes a death spiral:

The undercurrents of desperation amongst the trading companies is largely due to Kim Jong Un’s use of fearpolitik. Some officials returning from abroad for the end-of-the-year review, he said, were dismissed for not completing their assignments, sparking fierce competition to complete the trade assignments set at the beginning of each new year.

“Some traders are complaining, ‘If you pull a rubber band too much, it will snap. This is why there are growing number of defections among dispatched workers,'” he added.

The executives in charge of North Korea’s international trading companies are expected to come under intense pressure. It remains to be seen whether this will spark an increase in high-level defections to South Korea or other countries this year. [Daily NK]

This also has ripple effects on the banks, who are our most valuable sources of financial intelligence, via the Know-Your-Customer rules, and the Suspicious Activity Reports and Currency Transaction reports they’re supposed to file. If Treasury puts out the word that we’re going to enforce those requirements strictly against North Korea — which is a 311 jurisdiction, after all — banks may step up their compliance out of fear of being exposed by defectors, and of paying the massive fines like those we imposed on banks that violated other sanctions regimes.

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China’s latest cheating on North Korea sanctions is a test for Trump

Like most people, I would prefer that the new President of the United States refrained from conducting diplomacy by Twitter. Without endorsing the medium, I gave a qualified endorsement to the message President Trump sent to China when he accused it of not helping to reign in His Porcine Majesty. Trump was right about this, of course. Over the last several years, the U.N., no less, has published a wealth of evidence that China has (almost certainly willfully) violated the North Korea sanctions it voted for in the Security Council. Here’s the latest example:

26. Decides … that the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, coal, iron, and iron ore, and that all States shall prohibit the procurement of such material from the DPRK by their nationals, or using their flag vessels or aircraft, and whether or not originating in the territory of the DPRK, and decides that this provision shall not apply with respect to:
. . . .
(b) Total exports to all Member States of coal originating in the DPRK that in the aggregate do not exceed $53,495,894 or 1,000,866 metric tons, whichever is lower, between the date of adoption of this resolution and 31 December 2016 …. [UNSCR 2321, Nov. 30, 2016]

Just eight weeks later, the inestimable Leo Byrne cites customs data showing that China imported twice the amount of North Korean coal permitted for the remainder of 2016:

Customs figures show Chinese traders imported over 2 million tonnes of coal in December, up from 1.9 million the previous month. North Korea’s received $168 million for the commodity, a figure over three times that outlined in Resolution 2321. [NK News, Leo Byrne]

So yesterday, a reporter asked the Chinese Foreign Ministry’s mouthpiece to explain herself.

Q: [I]t is stipulated in Resolution 2321 of the UN Security Council that the imported coal from the DPRK by 31 December 2016 should not exceed one million ton or 54 million US dollars. Statistics recently released by China’s customs shows that China’s volume of coal imports from the DPRK in December 2016 exceeded the cap. What is China’s comment on that?

A: On your first question, it is a shared obligation of UN member states to implement resolutions of the Security Council. According to Chinese laws, it is required for the Chinese government to issue a statement for actions taken to implement Resolution 2321. This is a regular practice of the Chinese side. The statement by relevant Chinese ministries is one such step. The list of dual use items and technologies annexed to the statement is a verbatim quote of the list in the resolution.

The mouthpiece is referencing this belatedly updated list of things Chinese companies aren’t supposed to export to North Korea, unofficially translated here, at NK Pro.

On your second question, let me point out that Resolution 2321 should be implemented in a comprehensive and balanced manner. And it is not only China who should implement the resolution. The resolution called for solving the issue of the Korean peninsula through political and diplomatic means. I would like to ask, what efforts have been made by other relevant countries? [ChiCom Foreign Ministry]

The mouthpiece implies that China’s compliance with the sanctions resolutions is conditioned on “other relevant countries … solving the issue of the Korean peninsula through political and diplomatic means.” But the resolutions impose no such obligation or condition. The argument is spurious. It’s also circular, because North Korea’s first demand in negotiations will surely be that we stop enforcing sanctions, meaning that China’s de facto position is that it won’t comply with sanctions unless we lift sanctions.

Specifically on your question, competent authorities of China issued a statement on 9 December, immediately after the adoption of Resolution 2321 by the Security Council, ordering the suspension of coal imports from the DPRK until 31 December 2016. The Chinese side have taken measures in line with the requirements of the resolution and fulfilled its own international obligation. [ChiCom Foreign Ministry]

China’s obligation under Resolution 2321 does not end with issuing a statement and then forgetting about it. Surely China, which can have Jingjing and Chacha at a dissident’s doorstep 20 minutes after an offending Weibo post, can’t expect us to believe that it can’t enforce its laws. Surely China, whose customs authorities know how to detect and hold up shipments when doing so serves Beijing’s interest in bullying its neighbors, can’t expect us to believe that it can’t enforce its customs laws. When confronted with evidence of a violation of a U.N. sanctions resolution China voted for eight weeks ago in a clear, blue question, China’s mouthpiece gave a vague, red answer. That answer shows contempt for the United Nations and the United States.

For eight years, Barack Obama mostly kowtowed in the face of a whole course of aggressive Chinese conduct. Obama’s passivity pleased many “China hands” in academia, but worried our military, shook the confidence of our allies, and yielded some grave setbacks for peace and security in an economically vital part of the world. The most menacing of these is Kim Jong-un’s alarming progress toward nuclear breakout. Beijing acts as if it does not understand the risk of war if sanctions fail, or the risk that this war would involve China. Either that, or China sees a nuclear North Korea as useful for China’s plans to dominate northeast Asia.

For all that was wrong with the Obama administration’s North Korea policy, the former President did lay down a marker in blocking the assets of the North Korean military-controlled companies responsible for most of the coal exports. To the extent that Chinese importers purchased from those designated suppliers or failed to limit North Korean coal imports as required under U.N. resolutions and Chinese law, the U.S. has the authority to freeze the Chinese importers’ dollars. Alternatively, it could invoke section 205 of the NKSPEA to increase the inspection of cargo arriving at U.S. ports from Chinese ports that facilitated violations of the coal cap. This is a test for the new Trump administration. We’re about to find out if Donald Trump’s tough talk is more than just talk.

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North Korean ship that sank last week may have been used for arms smuggling

A North Korean freighter with the not-entirely-Korean-sounding name of Chong Gen went to the bottom of the Tsushima Strait last week with nearly 5,720 tonnes* of rice aboard. The crew sent a distress signal and took to their lifeboats in time for the Japanese Coast Guard to rescue the entire crew of 26. All are reported safe.

Lucky them. Most North Korean ships that have arrived in Japan recently have carried only the dead.

Now, I’m no maritime expert, but 26 sounds like a very large crew. No doubt, the Japanese authorities, who are questioning the crew members, are wondering the same thing. So far, however, the Japanese are saying they don’t see anything out of the ordinary. This does not end our inquiry, however.

[Japan Coast Guard, via CNN]

Nampo is the port that serves Pyongyang, whereas Wonsan is a city for the poor, who will feel the loss of that rice most acutely.

A search of OFAC’s database for the ship’s IMO number (8862155) indicates that it isn’t designated by the Treasury Department, but this book implicates the Chong Gen in delivering multiple-launch artillery rocket systems to the port of Thilawa, Burma in 2010, in violation of a U.N. arms embargo that was already enacted in two separate resolutions (see also). Just over one year ago, Treasury designated (and froze the assets of) North Korea’s Ambassador to Burma under Executive Order 13687.

The investigative journalist (and legend) Bertil Lintner has written that the Chong Gen and other North Korean ships had previously been used to deliver weapons to Burma, returning with rice. None of the reports on the Chong Gen‘s sinking indicates that the ship had visited Burma in the weeks before its final voyage, but maybe one of you who has access to shipping databases can enlighten us.

For some interesting insights into the life of a North Korean merchant sailor, see this post by HRNK Insider.

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* Corrected, thank you.

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Treasury designates N. Korea’s Himmler & “Angel of Death,” & Kim Jong-un’s sister

On Wednesday, the Treasury Department designated seven North Korean officials under Executive Order 13687, and two ministries under Executive Order 13722 (the authority has legal implications, which I’ll touch on later in this post). Along with the designations, Treasury and State issued, respectively, a statement and a report explaining the designations.

“The North Korean regime not only engages in severe human rights abuses, but it also implements rigid censorship policies and conceals its inhumane and oppressive behavior,” said John E. Smith, Acting OFAC Director.  “Today’s action exposes individuals supporting the North Korean regime and underscores the U.S. Government’s commitment to promoting accountability for serious human rights abuses and censorship in North Korea.”

Today’s designations were issued pursuant to E.O. 13687, which targets, among others, officials of the Government of North Korea and the Workers’ Party of Korea.  As a result of today’s actions, any property or interest in property of those designated by OFAC within U.S. jurisdiction is frozen.  Additionally, transactions by U.S. persons involving the designated persons are generally prohibited.  The identifications of two entities as blocked were issued pursuant to E.O. 13722, which, among others, blocks the property and interests in property of the Government of North Korea and the Workers’ Party of Korea, including those two entities. [Treasury Dep’t]

The Hill and Yonhap both reported on the designations. The individuals designated included Kim Won-hong, Kim Il-nam, Kim Yo-jong, Choe Hwi, Min Byong-chol, Jo Yong-won, and Kang P’il-hun.

  • Kim Yo-jong is Kim Jong-un’s younger sister and Vice Director of the Propaganda and Agitation Department, which Treasury calls “North Korea’s primary agency responsible for both newspaper and broadcast censorship, among other things.” The PAD is also the business partner of the Associated Press. Although officials in both Seoul and Washington have played up Kim Yo-jong’s influence, I tend to doubt that a regime as patriarchal as this one has really entrusted functions as vital as propaganda and censorship to a 26-year-old woman.
  • Choe Hwi, also designated today, is another Vice Director of the PAD. But, acknowledging that no analogy is perfect, the real Goebbels of North Korea is probably Kim Ki-nam, who has many decades of experience in the field, and who was designated by Treasury earlier this year, also under EO 13687.
  • If Kim Ki-nam is North Korea’s Goebbels, its Himmler is Kim Won-hong, the Minister of State Security. The MSS (formerly the State Security Department until it was renamed recently) is responsible for the Gestapo that enforces internal security, and the Totenkopfverbände that guard its political prison camps.
  • Kang P’il-hun is Director of the General Political Bureau of the Ministry of People’s Security. The MPS is North Korea’s regular police force, but it is also much more. It runs local interrogation centers all over North Korea, refers some of those it arrests to the prison camp system, and previously ran (and perhaps currently runs) a camp of its own, the closed-and-recently-reopened Camp 18.
  • Kim Il-Nam is responsible for the Yodok political prison camp, or Camp 15, in South Hamgyeong Province, best known through the gulag memoir of Kang Chol-hwan, “The Aquariums of Pyongyang.”
  • Min Byong-chol is known locally as the “angel of death” for “his record of political inspections and purges.” Think of him as an internal enforcer, like Heinrich Müller, Nikolai Yezhov, or Lavrentiy Beria. Officially, his his title is Director of the Inspection Division of the Organization and Guidance Department.
  • Jo Yong-won is the Vice Director of the Organization and Guidance Department of the ruling Worker’s Party. The OGD has been firmly in charge in Pyongyang at least since the purge of Jang Song-taek in late 2013 — longer according to some experts. If anything, State and Treasury may be understating Jo’s importance. Jo is often photographed with Kim Jong-un during his “looking at things” tours, which is one of the indicators of an official’s importance.

Special thanks to a good friend of OFK, who will remain nameless, for providing additional background for this post.

Now, the weird part. Note how the seven individuals designated are noted as “DPRK2,” meaning Executive Order 13687. That’s a status-based EO that allows for the designation of any agent of the North Korean government or Workers’ Party. Treasury and State offer extensive, conduct-based justifications for the designations. There are certainly good public advocacy reasons for doing that, but legally, it would have been enough to say they were ruling party officials.

On the other hand, Treasury designated North Korea’s State Planning Commission and Ministry of Labor as “DPRK3,” meaning EO 13722, which partially implements the NKSPEA and is conduct-based (in this case, for human rights violations). Yet Treasury’s statement explaining the designations under a conduct-based EO only says it’s because they’re “agencies, instrumentalities, or controlled entities of the Government of North Korea,” which happens to be language ripped straight from EO 13687. Admittedly, the statement also says that the ministries have roles in allocating labor to the mining sector, which is subject to sectoral sanctions under EO 13722.

Anthony “the Beard of Knowledge” Ruggiero also finds the choice of EOs odd, and wonders if this is an effort to avoid the conditions for suspending and lifting sanctions in the NKSPEA. Overall, however, the choices of targets are good ones (if belated). One important objective of sanctions should be to de-fund and break down the system of control, and shift North Korea’s internal balance of power. Here’s what it would look like in practice if that half of the strategy actually works. Here’s how the other half would work.

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