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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WaPo: Trump’s Asia team leans toward sanctioning N. Korea’s Chinese enablers

For now, this is mostly leaks and whispers in a Josh Rogin column, but it’s encouraging.

Behind the scenes, however, the Trump transition is preparing its own pivot to Asia. As the team that will implement that policy takes shape, what’s emerging is an approach that harkens back to past Republican administrations — but also seeks to actualize the Obama administration’s ambition of enhancing the U.S. presence in the region. Transition officials say the Trump administration will take a hawkish view of China, focus on bolstering regional alliances, have a renewed interest in Taiwan, be skeptical of engagement with North Korea and bolster the U.S. Navy’s fleet presence in the Pacific. [….]

North Korea’s nuclear and missile programs are advancing quickly, and Trump has pledged to stop them. His team is considering secondary sanctions that would apply to companies that aid Kim Jong Un’s regime, which would create another point of tension with China. The details of several of the policies are not yet fleshed out. [Josh Rogin, WaPo]

Victor Cha, who cited this humble blog in congressional testimony recently to support the point that our North Korea sanctions are far weaker than frequently described, is among those under consideration for a senior post in the team. An op-ed Cha co-wrote with Robert Gallucci in the New York Times (a key passage of which is archived here, if you’re not a subscriber) also calls for increasing secondary financial sanctions against North Korea and emphasizing its crimes against humanity by citing the U.N. Commission of Inquiry’s report. Obviously, I won’t argue with the soundness of those ideas, and I’d like to see both of them become parts of our North Korea policy.

Of course, I’ve read rumors for years that various administrations have been considering those strategies; I’ve yet to see any of them actually pursue them. And even today, I seldom disagree with what Chris Hill* writes in his op-eds, but the policy he executed was so disastrous that the distrust he created still lingers — between the U.S. and Japan, between Congress and the State Department, and between the State Department and the Treasury Department. You can even lay some of the blame for the failure of U.N. sanctions on Hill. (* Update: I have no information that Hill is under consideration for any policy post, I’m only using him as an example.)

Admittedly, policy is easier to blog about in the abstract than it is to execute in a complex world of conflicting and shifting interests. And arguably, the decision to accept the cost of some broken china to disarm North Korea is the easy one. The hard questions are about how we would use the pressure sanctions are meant to create. What strategy are sanctions meant to serve? How precisely can we target sanctions to serve that strategy and mitigate harm to the North Korean people? Are we willing to keep pursuing sanctions if the regime starts to break apart, or if South Korea veers left? When will our leverage be sufficient to restart talks, and how will we know when that time comes? Exactly what sanctions relief would we be willing to grant for what concessions? Would we grant limited sanctions relief before achieving all of our objectives and without throwing away our leverage, and how can we do that? I’ve had some thoughts on those questions.

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Yun Byung-se, The Indispensable Man

Park Geun-hye, the cautious triangulatrix who belatedly became South Korea’s most subversive (to North Korea) president for two decades, is all but gone, and almost everyone in South Korea is applauding. None, however, have applauded with as much enthusiasm as those on South Korea’s far left, who fill a spectrum between anti-anti-North Korean and violently pro-North KoreanThe left now senses that it has an advantage headed into next year’s presidential campaign and hopes to end Seoul’s campaign of diplomatic and financial isolation of its renegade provinces in the North, and its encouragement of embarrassing and damaging defections by senior regime officials like Thae Yong-ho. But if the left hoped that the end of Park’s presidency would also mean the end of that campaign, Foreign Minister Yun Byung-se is dashing those hopes. These examples, which I’ve collected over the last three months, show Yun carrying right on where Park left off.

  • 9/27: In Seoul, Park asks the President of the Netherlands “to play an ‘active role’ in pressuring North Korea to end its nuclear ambitions and provocations through sanctions and diplomacy.”
  • 9/29: North Korea opens a new embassy in Belarus, but without an accredited ambassador.
  • 9/30: South Korea’s Vice Unification Minister visits Germany, in part “to discuss strategies for global coordination against North Korea’s nuclear program.”
  • 10/4: Yonhap reports that Seoul has asked the Bulgarian government to curtail North Korea’s abuse of the Vienna Convention, “generating hard currency through illicit real-estate dealings.” (UNSCR 2321 has since emphasized that diplomatic missions may not be used for commercial purposes.)
  • 10/6: Yun suggests that U.N. member states should downgrade or cut diplomatic ties with Pyongyang. (The State Department has also called on states to “downgrade or sever” diplomatic relations with the North.)
  • 10/12: Costa Rica’s President visits President Park in Seoul and promises to issue a decree implementing UNSCR 2270.
  • 11/1: Under international pressure, Indonesia cancels a visit by North Korean Foreign Minister Ri Su-yong
  • 11/2: Sudan’s Foreign Minister visits Seoul, meets with Yun, and says it has cut all military ties with North Korea.
  • 12/1: Yun says South Korea, Japan, and the U.S. will announce their own national sanctions, foreshadowing the latest round of Treasury Department designations.
  • 12/3: Immediately after the approval of UNSCR 2321 by the Security Council, Yun urges China to implement the new resolution faithfully. He also urged the incoming Trump administration  to “take over and implement the strong sanctions.”
  • 12/6: Yun says he’s scheduled to hold high-level talks with his counterparts from the U.S., China, and Russia on implementation of the sanctions, and adds, “The unprecedentedly powerful UNSC resolution, combined with individual sanctions by Seoul, Washington and Tokyo, will corner North Korea into a situation that it cannot circumvent.”
  • 12/16: Visiting Yun in Seoul, Hungary’s Foreign Minister promises to support sanctions against North Korea.

South Korea is not only vowing to continue its campaign, it is now starting to claim that it’s putting the North under severe financial and diplomatic strain. You can find the most detailed case for that claim here. It’s worth reading in full, but take it with a grain of salt.

On the optimistic side of the ledger, there is an alleged internal North Korean document exhorting diplomats to strengthen ties to “non-aligned” states, traditionally some of its best trading partners and arms clients. This interview (in Korean) with Thae Yong-ho adds recent direct evidence that sanctions have caused financial problems for the North Korean embassy in the U.K. Thae’s description of life as a North Korean diplomat adds further evidence to my observation that North Koreans overseas who can’t kick up enough tribute to their bosses — perhaps because of sanctions — worry about being punished or purged. That may make them attractive targets for recruitment to provide even more financial information, or to defect.

One could also read Pyongyang’s campaign to improve its foreign trade structure as an effort to get around trade sanctions it didn’t need to evade before. Its raising of taxes on its people may be an effort to make up for lost foreign revenue, although that connection isn’t entirely clear, nor would it be a departure from past practice. Either way, Pyongyang pays a morale penalty for those levies.

Not everything has gone South Korea’s way, however. North Korea’s arms clients in Africa, some of which have long-standing commercial and ideological ties to Pyongyang, have been stubborn targets. For example, despite Uganda’s claim that it would end its military training contracts with North Korea — UNSCR 2270 requires member states to do so immediately — it turns out that Uganda is merely choosing not to renew those contracts.

This blog has also followed Namibia’s illogical and self-serving justifications for its arrangements with North Korea.Despite claims by the Namibian government that it would end its cooperation with sanctioned North Korean entities, that relationship apparently continues. The Treasury Department’s recent designation of its principal North Korean partner, Mansudae Overseas Project Group, a front for KOMID, may make that cooperation more difficult for Namibia and the many other African countries where Mansudae operates. It will send a message to Windhoek that it must enforce the U.N. resolutions, confiscate the factory, and send the KOMID and Mansudae representatives home. For example, the South African insurance company Old Mutual insured some of Mansudae’s work in Namibia. It may hesitate to continue providing that service now. We’ll need to do more of this to give Yun the support he needs.

Then there is the case of Angola, which after a meeting with South Korea’s Second Vice Foreign Minister, said that it supports South Korea’s position on the sanctions, but hasn’t exactly enforced them to the letter since then. The fact that Seoul is dangling an agreement “to boost ties in trade, investment and development” may help. More on Yun’s extensive travels to make UNSCR 2270 stick, here and here, via Marcus Noland.

Reports that Poland and Oman had stopped employing North Korean slave labor may also have been premature. Even Thailand has allowed a new North Korean restaurant to open.

While I understand the importance of showing South Korean audiences that sanctions can work, the stories I linked in this post, and my posts here, here, and here, show a more mixed picture than Seoul’s optimistic assessments. The reality is more a case of two steps forward, one step back, with South Korea making significant gains, but not fast enough, and without enough fire support from the U.S. State and Treasury Departments to put steel on the harder targets.

The question that increasingly preoccupies me is whether it’s already too late. And given the rising talk of preemptive strikes — if only to buy time — will South Koreans be willing to accept the risks those strikes would entail? Stated differently, did Barack Obama and the chaos that rules the streets of Seoul squander our last chance to disarm North Korea peacefully?

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The Rime of the Uninsured Mariner

Ah! Well a-day! What evil looks
Had I from old and young!
Instead of the cross, the albatross
About my neck was hung.

— Samuel Taylor Coleridge, The Rime of the Ancient Mariner

If last week’s posts on U.N. security council resolution 2321 and the recent Treasury Department designations have had a common theme, it’s that Treasury’s reasonably strong designations have done much to redeem a relatively weak U.N. resolution, and to warn Chinese banks and companies about the risks of sanctions-busting. Those warnings won’t mean much for long if the new Trump administration’s foreign policy team shows apathy or inattention to sanctions enforcement, but for now, in several cases, U.N. and U.S. sanctions have been two great tastes that taste great together.

Take the case of shipping insurance, one of the key elements of the success of Iran sanctions in pressuring Tehran to return to nuclear negotiations. One regard in which the U.N. resolution and the Treasury designations could complement each other especially well is UNSCR 2321’s ban on insuring North Korean ships, and the U.S. designation of the Korea National Insurance Corporation. First, the U.N. language:

“22.  Decides that all Member States shall prohibit their nationals, persons subject to their jurisdiction and entities incorporated in their territory or subject to their jurisdiction from providing insurance or re-insurance services to vessels owned, controlled, or operated, including through illicit means, by the DPRK unless the Committee determines on a case-by-case basis that the vessel is engaged in activities exclusively for livelihood purposes which will not be used by DPRK individuals or entities to generate revenue or exclusively for humanitarian purposes; [UNSCR 2321]

Two days after the Security Council approved this resolution, the Treasury Department blocked the Korea National Insurance Corporation. The basis for the designation was not, strictly speaking, to implement UNSCR 2321, but because it “is reported to generate substantial foreign exchange revenue that is used to support the regime in North Korea.” According to the U.N. Panel of Experts, KNIC is also associated with North East Asia Bank, which Treasury also designated the same day it designated KNIC.

The European Union actually blocked KNIC last year, also for proliferation financing. That Europe acted first may owe something to the fact that KNIC bilked European insurers Lloyds and Allianz (among others) out of millions of dollars in a reinsurance fraud scam. Regrettably for Lloyds and Allianz, their idiot lawyers failed to notice, until it was too late, that their reinsurance contracts with KNIC bound them to North Korean law (!) in case of disputes.

KNIC is an insurer of North Korean ships, but it may or may not be the only North Korean maritime insurer. KNIC’s web page — a hilarious masterpiece of North Koreanness — says it sells marine insurance, and markets a brand called “Golden Sea” to those drawn to a “SPECTACULAR SCENERY OF A GOOD CATCH OF FISH.” The 2015 report of the U.N. Panel of Experts, however, named another company, the Korean Shipowners’ Indemnity and Protection Association, as the insurer of the Chong Chon Gang, the Ocean Maritime Management ship that was seized in Panama in 2013. My informal inquiries lead me to believe that KSPIA is probably a subsidiary of KNIC, but I don’t have solid proof of this.

A 2013 report by Hugh Griffiths of SIPRI cited shipping sanctions as a potentially effective pressure point against North Korea, citing the example of a ban on insuring Islamic Republic of Iran Shipping Lines vessels. Shipping is also a vulnerability for North Korea, though probably not to the same extent it is for Iran. The regime monopolizes the cargo and the revenue of its merchant fleet, and sometimes uses it to carry cargo (weapons, drugs) that third-country shippers wouldn’t agree to carry. 

Although North Korea’s maritime insurers are likely part of a sanctions-proofing strategy intended to reduce its reliance on foreign insurers, it still relies on other nations for registration, bunkering services, and port access. In the same sense that you can’t buy stuff or get paid if correspondent banks in the U.S. won’t touch payments that have your name on them, you can’t operate ships if no one will insure or flag them, or let them dock, as Iran learned. 

Just weeks after the United States and the United Nations imposed new rounds of sanctions on Iran, Tehran’s ability to ship vital goods has been significantly curtailed as some of the world’s most powerful Western insurance companies cut off Iranian shippers out of fear that they could run afoul of U.S. laws, the insurers say. [Washington Post]

Like banks, insurers are sensitive to the legal and reputational risks associated with sanctions. According to the Post, U.S. secondary sanctions on Iranian shipping “forced ports and freighting companies across the globe to reevaluate their Iranian business,” and denied “dozens of Iranian vessels that transport crude oil, industrial equipment and other goods and supplies” to and from Iran access to insurance. It’s likely that other foreign companies are also insuring North Korean ships, or (more likely) selling reinsurance to KNIC or KSPIA. For example, North Korea (among other sanctioned states) recently used a New York-based insurance company, Navigators, which was consequently fined $271,000 by the Office of Foreign Assets Control.

“Iranian-flagged ships are facing problems all over the world as they currently have no insurance coverage because of the new sanctions,” said Mohammad Rounaghi, deputy manager of Sea Pars, an Iranian company that provides services for international ship owners and maritime insurance companies. “Basically, most ports will refuse them entry if they are not covered for possible damages.” [Washington Post]

In Iran’s case, it took a few years for the impact of shipping sanctions to show their full potential. Initially, the managing director of Islamic Republic of Iran Shipping Lines said that the “sanctions have not affected us much.” By 2013, the head of IRISL conceded that sanctions cut its revenue by half. India continued to buy oil from Iran using a rupee-denominated payment system, but at a steep discount and in steadily declining volumes. In January of 2016, the Obama administration lifted shipping sanctions against Iran as part of its nuclear deal, but insurers have been slow to re-engage with Iranian shippers, fearing that the U.S. could “snap back” the sanctions.

Sanctions also caused insurers to stop underwriting imports by Iran, most importantly of gasoline. Despite being an oil producer, Iran has little domestic refining capacity. In North Korea’s case, there has been some speculation that it might import oil from Iran, although China continues to supply its needs via a cross-border pipeline. According to a recent report, China has resupplied North Korea’s air force with jet fuel, which would be yet another case of China flagrantly violating U.N. sanctions (in this case, UNSCR 2270, paragraph 31).

There were also gaps in the enforcement of shipping sanctions against Iran, as noted by Claudia Rosett. Iran’s methods of evading shipping sanctions — changing ship names, re-registering, and re-flagging — will sound familiar to North Korea watchers. It is often (correctly) argued that North Korea has learned evasions skills while under U.S. and U.N. sanctions, but it is also true that Iran’s tactics have taught the U.S. and its allies some lessons that will be useful against North Korea. 

For example, UNSCR 2321 gives the 1718 Committee the authority to direct member states to de-register, impound, seize, or deny entry to specific North Korean ships if it has reasonable grounds to believe that those ships are involved in breaking U.N. sanctions.  Unfortunately, the 1718 Committee has sometimes been slow to designate entities even when the grounds are more than “reasonable.” One lesson is that if the 1718 Committee process is to be effective, the designation process must be more efficient than it has been before.

A second lesson from Iran is that shipping sanctions work better against a small number of big ships than against a large number of small ones. A review of any shipping tracker reveals that the vast majority of North Korea’s shipping runs between its ports and Chinese ports across the Yellow Sea. North Korea may be better positioned to shift some of that trade to short-haul shipping to China, or by relying on its (admittedly decrepit) roads and railroads for its exports. The NKSPEA anticipates this and provides for a policy response to it — cargo coming from Chinese ports that fail to enforce the inspection requirements of UNSCR 2270 may be subjected to more intrusive inspection when it enters U.S. ports.

A third lesson is that sanctions need an assist from diplomats, and vice versa. In March, UNSCR 2270 banned the registration and reflagging of North Korean ships, but in practice, progress toward canceling the registrations of North Korea’s ships has been uneven. Panama has complied; Mongolia and Cambodia are in the process of complying; Tanzania reflagged a series of North Korean ships shortly after sanctions passed but promised to de-register them after the registrations became an international embarrassment. Sierra Leone, Tuvalu, and other nations have given no indication that they’re complying.

So far, I’ve seen no evidence that the State Department has invested any diplomatic capital in asking other states to cancel the registrations of North Korean ships. South Korea has led the way in pressing other states to comply with U.N. sanctions, but the current political paralysis in Seoul and the transition in Washington mean that enforcement efforts could flag. To a lesser extent, Japan has begun to step forward to fill the diplomatic void. If and when the new Trump administration engages on this issue, it will find that diplomacy works better when it’s backed by a credible threat of secondary sanctions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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The U.S. may (finally) be serious about capping North Korea’s coal exports

For almost three months after North Korea’s fifth nuclear test, the U.N. Security Council remained deadlocked over how to respond, with the U.S. and its allies pressing to limit Kim Jong-un’s access to hard currency and China trying to shield its belligerent protectorate from the consequences of its behavior.

Among the most hotly debated questions was how to limit North Korea’s coal exports to China, one of His Porcine Majesty’s most important sources of hard currency. Although UNSCR 2270, passed in March after the fourth nuke test, banned most of Pyongyang’s mineral exports, there was a gaping loophole allowing exports of coal, iron, and iron ore for “livelihood” purposes. Unfortunately, it soon became clear that “livelihood” translated into Chinese means “whatever.” The exception soon swallowed the rule, and coal exports did not fall; they rose … by a lot. By September, China’s coal imports from North Korea had risen 12.8 percent over the same period last year, to a record high. The Obama administration clearly felt that China was cheating. (See also my posts from March, July, and October and Stef Haggard’s post from yesterday.)

The eventual compromise the U.S. and China reached in UNSCR 2321 was disappointing, to say the least. Rather than take any plausible steps to ensure that Pyongyang really used its coal money to provide for the livelihoods of its hungry people, the resolution simply capped coal exports at $400 million or 7.5 million metric tons a year, whichever is less. (In 2015, North Korea exported $1 billion worth of coal to China) On paper, Chinese power companies were also prohibited from buying any amount of coal from entities associated with North Korea’s WMD programs.

The flaws in this “solution” are obvious. How will we know how much coal North Korea exported, and at what price? By relying on Chinese customs statistics? How will we know which North Korean entities really sold the coal? And more fundamentally, given that cash is fungible and North Korean despots have consistently prioritized their arsenals and their own high lifestyles over the survival of their people, how can anyone verify how the world’s most financially opaque society spent the money? If China really gave a whit about the “livelihoods” of North Koreans — in fact, it holds the lives of North Korean men, women, and children in utter contempt — it would have agreed to pay for “livelihood” coal in the form of food, or to the World Food Program. An unverifiable cap is a license to cheat.

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But Treasury’s announcement last week of bilateral sanctions against certain North Korean coal exporters, who Treasury believes “may benefit the Government of North Korea or the Workers’ Part (sic) of Korea,” could go far to swallow the “livelihood” cap exception to the coal ban that swallows the rule.

OFAC designated Daewon Industries and the Kangbong Trading Corporation for having sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea, metal, graphite, coal, or software, where revenue or goods received may benefit the Government of North Korea or the Workers’ Part of Korea.  The Kangbong Trading Corporation’s parent is the Ministry of People’s Armed Forces.  Daewon Industries also operates in the energy industry in the North Korean economy, and may be subordinate to the Munitions Industry Department, which is sanctioned in UNSCR 2270, designated by the U.S. pursuant to E.O. 13382, and responsible for overseeing the development of North Korea’s ballistic missiles, including the Taepo Dong-2. [U.S. Treasury Dep’t Press Release]

With that action, Treasury’s clear message to Chinese buyers is that certain North Korean sources are off limits, cap or no cap. The recent example of the Dandong Hongxiang indictment and forfeiture complaint hovers over all of this, posing a credible threat that Chinese buyers could have their dollar assets frozen. And in case anyone thinks Dandong Hongxiang was a one-off, our diplomats have said it isn’t.

The United States has warned China it will blacklist Chinese companies and banks that do illicit business with North Korea if Beijing fails to enforce U.N. sanctions against Pyongyang, according to senior State Department officials. The tougher U.S. approach reflects growing impatience with China and a view that it has not strictly enforced existing sanctions to help curb Pyongyang’s nuclear program, which a U.S. policy of both sanctions and diplomacy has failed to dent.

U.S. Deputy Secretary of State Antony Blinken gave the message to Chinese officials in meetings in Beijing in October after North Korea conducted its fifth and largest nuclear test, the officials said. U.S. National Security Adviser Susan Rice and Secretary of State John Kerry stressed the importance of choking off financial flows to Pyongyang during a meeting with Chinese State Councilor Yang Jiechi in New York on Nov. 1. [Reuters]

There are some early signs that Chinese industry may have gotten that message, although it’s typical for Chinese companies to slow their trade with North Korea temporarily after the U.N. passes new sanctions. As I’ve pointed out here more than once, there is undeniable evidence that China has violated North Korea sanctions frequently and flagrantly for years. China will not wait long to resume its cheating and test our resolve. With demand for North Korean coking coal high, we’ll need a strong deterrent to enforce sanctions. If our President-Elect has done anything right, he has sent a clear (and apparently calculated) message that China’s sensitivities will not prevent him from acting decisively to protect U.S. interests. After all, it’s not as if our sensitivities have had much visible effect on China’s behavior.

This wasn’t the only energy sanction Treasury imposed last Friday:

OFAC designated the Korea Oil Exploration Corporation for operating in the energy industry in the North Korean economy.  The Korea Oil Exploration Corporation is a state-controlled enterprise of the North Korea Ministry of Oil.  The Korea Oil Exploration Corporation has reportedly worked to establish contracts with Iranian oil entities, in part to supply crude oil to two refineries in North Korea. [U.S. Treasury Dep’t Press Release]

Among others, that’s probably bad news for James Passin, a hedge fund manager who gambled his shareholders’ money on a refinery and oil exploration in North Korea. U.N. sanctions ban exports of aviation and rocket fuel to North Korea, but not crude. Until recently, China continued to export petroleum products to North Korea. (For the record, I oppose banning exports of gasoline, diesel, and heating oil to North Korea, for humanitarian reasons.)

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The Obama administration’s designation of the North Korean companies consolidates a U.S. shift to a harder line on sanctions enforcement, reflecting a bipartisan consensus for tougher action in Congress. It’s also satisfying to me personally, because the administration has adopted the strategy I advocated here in October.  Note that the language in the Treasury Department’s press release (“revenue [that] may benefit the Government of North Korea or the Workers’ Part of Korea”) does not match the language of UNSCR 2321 (“entities that are associated with the DPRK’s nuclear or ballistic missile programmes or other activities prohibited by [applicable U.N.] resolutions”), because the administration relied on the domestic legal authority of Executive Order 13722 instead:

Sec. 2. (a) All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of the following persons are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in: any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:

   (i) to operate in any industry in the North Korean economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to be subject to this subsection, such as transportation, mining, energy, or financial services;

   (ii) to have sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea or any person acting for or on behalf of the Government of North Korea or the Workers’ Party of Korea, metal, graphite, coal, or software, where any revenue or goods received may benefit the Government of North Korea or the Workers’ Party of Korea, including North Korea’s nuclear or ballistic missile programs;  [EO 13722]

Those provisions, in turn, implement sections 104(a)(8) and 104(b)(1) of the North Korea Sanctions and Policy Enhancement Act. They may have also reflected Treasury’s interpretation of the coal export ban as passed in March, in UNSCR 2270. U.N. resolutions don’t enforce themselves. They require U.N. member states to implement their sanctions through legislation. Member states that want U.N. sanctions to work benefit from a U.N. imprimatur to globalize sanctions enforcement. Each level of authority needs and complements the other.

Tactically, it was wise of the administration to wait for the (undoubtedly difficult) negotiations with China to conclude before it acted. The clear message it sent at the conclusion of that negotiation is that, for the time it has left, it will hold China to its word. Let’s hope the next administration is equally serious.

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What the Treasury Department’s blocking of Air Koryo means

Last week’s North Korea sanctions designations by the U.S. Treasury Department’s Office of Foreign Assets Control — commonly known as OFAC — go far to explain why U.N. Security Council Resolution 2321 took so long to negotiate and pass. There were many reasons why I panned the terms of that resolution last week, including new and not-improved coal export limits, and the U.N.’s failure to designate North Korea’s state airline, Air Koryo.

Friday’s OFAC designations — which block any of the targets’ assets in the United States, and more importantly, any dollar assets that move through the U.S. financial system for international transactions — plug many of the holes UNSCR 2321 left. Treasury has sent a strong signal that when China blocks swift and effective consequences for North Korea’s provocations, the U.S. is (at last, at least for now) prepared to join with its allies and go beyond the United Nations. This almost certainly means that the U.S. made no sub rosa agreement to stay its hand.

I. There was strong evidence that Air Koryo had violated U.N. sanctions for years.

U.N. reports alone provided ample evidence to support the designation of Air Koryo. For years, the U.N. Panel of Experts that oversees (non-)compliance with U.N. sanctions had called Air Koryo out for lending its aircraft to the North Korean air force for military purposes, for arms smuggling, and for suspicious financial transactions. In 2014, for example, the Panel reported that Air Koryo was, for all intents and purposes, an arm of the North Korean military, and cited NK News’s reports that Air Koryo Il-76s were sometimes repainted for military exercises and shows. It published photographs of one Air Koryo Il-76 after an air show, with camouflage still showing through the white paint of its civilian livery.

141.  As previously indicated by the Panel, Air Koryo and all airports or airfields within the Democratic People’s Republic of Korea are controlled by the Korean People’s Air Force through its Civil Aviation Bureau. Reportedly, all personnel are members of the air force and all in-country maintenance is conducted by Air Force engineering staff.  The absence of boundaries between Air Koryo and the air force was further highlighted by the 27 July 2013 military parade during which three military Ilyushin (Il) 76 flew over Kim Il Sung square (see figure XXV). [UN POE]

Then, there is this language from the 2014 report, suggesting that Air Koryo may have been running an elaborate money laundering scheme, one that foreshadows its likely sanctions evasion strategy:

178.  An example of a transaction being financed in an unusually complex manner was an Air Koryo contract in 2012 to purchase new aircraft.  Payments were structured through eight Hong Kong, China-registered companies, which asserted that they were trading partners of Air Koryo and were wiring funds they owed it. The resolutions do not prohibit the purchase of civilian passenger and cargo aircraft. The Panel, however, was dubious of the explanation that debts were the source of the funds; some companies appear to be recently formed shell companies. It also finds remarkable the coincidence of all eight firms owing significant amounts to Air Koryo at the time funds were contractually due to be paid to the seller of the aircraft. The names of shells and activities of others appear to share a connection with gold trading. The Panel is suspicious that the Democratic People’s Republic of Korea may be using or considering the use of precious metal sales on credit terms to create “accounts payable”. Such sources for funds would not necessarily show as being under its control and even could be swapped with other firms to further distance its connection and thereby better evade sanctions and enhanced due diligence by banks. [UN POE]

There were also regular reports (and photographic evidence) that North Korean officials and couriers used Air Koryo to import luxury goods and smuggle bulk cash, in violation of U.N. sanctions. The 2016 Panel of Experts report published photographs of a consignment of SCUD missile parts shipped from North Korea to Egypt aboard an Air Koryo flight. In 2015, the Panel made this conclusion:

120. Given the evidence of military use, the Panel considers that providing financial transactions, technical training, advice, services or assistance relating to the provision, maintenance or use of Air Koryo’s cargo aircraft could constitute a violation of the embargo on all arms and related materiel as defined by paragraph 10 of resolution 1874 (2009). [UN POE]

Although it’s apparent that China blocked a U.N. designation of Air Koryo in UNSCR 2321, it’s also apparent that experts appointed to the panel by other nations saw ample justification for a designation of Air Koryo, and had been pushing for one for years. Pyongyang also used Air Koryo to transport slave laborers abroad and back, including the flight that brought home 100 mutinous workers from Kuwait, almost certainly to a very dark fate. Belatedly, UNSCR 2321 expressed “concern” about this exploitation, albeit with non-binding language.

That’s why OFAC’s designation of Air Koryo, two days after the U.N. failed to do so, was anything but “unilateral.” That matters, because we will need the cooperation of other states to make Air Koryo sanctions effective. For example, South Korea’s own designation of Air Koryo will have little direct effect, because Air Koryo doesn’t fly to South Korea, but (depending on how South Korea’s political crisis resolves) South Korean diplomats may soon call on Malaysia, Singapore, Thailand, Kuwait, and other countries to join the ban. (Singapore, an important North Korean trading partner, doesn’t have its own independent SDN list for North Korea sanctions; it just adopts the U.N. list.) The EU will probably also cooperate. Even before the OFAC designation, it had banned most Air Koryo planes over safety concerns.

If anyone in this story acted unilaterally — aside from North Korea, of course — it was China, in blocking Air Koryo’s designation despite all of the incriminating evidence. I don’t doubt that China will try to help Air Koryo continue operating with Renminbi transactions, although it remains to be seen whether Chinese banks will risk handling them. But with each new North Korean provocation, China will find itself increasingly isolated and pressured to yield to the consensus. That’s how Progressive Diplomacy should work.

Now, every venue that gives Air Koryo landing rights will come under diplomatic pressure to stop doing so. Expect Air Koryo’s itinerary and Pyongyang’s tourist income to continue to ebb, but past history (more on that below) suggests that Pyongyang will find ways to keep Air Koryo flying, even if only at a punishing financial loss. Viewed that way, sanctions won’t only be costly if they destroy Air Koryo. They may be even more costly if they don’t.

II. How U.S. sanctions will affect Air Koryo’s operations.

OFAC didn’t just designate Air Koryo last Friday; it also designated its offices and all its individual aircraft — well, almost all. Compare Treasury’s list of designated Air Koryo aircraft to Table 9 from the 2015 U.N. Panel of Experts report, and you’ll see that Treasury’s list is three planes short of the POE’s list — specifically, one Tu-134 and two Il-62s. Did Treasury spare the three remaining aircraft for some reason? Did it simply lack full identifying information about them? Probably not. First, note that the three aircraft are among the oldest in Air Koryo’s fleet. A more likely explanation comes from Paragraph 117 of the 2014 POE report, which says that Air Koryo bought two of its Il-62s from Cuba in 2012 and cannibalized them for spare parts. OFAC probably saw no point in designating two old hangar queens. It’s likely that the remaining Tu-134 aged out, too.

How will the OFAC designation affect Air Koryo? Let’s start by establishing its baseline. Two years ago, the Panel of Experts offered this summary of Air Koryo’s itinerary:

139.  The numbers of air carriers operating scheduled flights and routes to or from Pyongyang Sunan International Airport remain very limited. However, the number of flights per route has changed since May 2013. The number of weekly rotations to Beijing has increased from six to eight, with five rotations operated by Air Koryo and three by Air China, the only foreign airline regularly serving the Democratic People’s Republic of Korea.  Air Koryo now also operates two weekly rotations to Vladivostok. The number of rotations to Shenyang is unchanged (twice a week), while the number to Kuala Lumpur decreased (from twice to once a week). The status of its weekly rotation to Bangkok is unknown. This flight and others to Kuwait City, Moscow, Nanjing, Shanghai and Yanji, China, are most likely operated on an ad hoc and/or seasonal basis. [UN POE]

This is not the first time the Treasury Department has designated a rogue state’s flag carrier. Treasury designated Syrian Air in 2013 for smuggling weapons, and the EU soon followed suit. Syrian Air kept flying to the Gulf states with the help of front companies, money laundering, and bulk cash smuggling. Treasury designated Iran Air in 2011, after years of U.S. export controls made it difficult for the airline to buy spare parts. In 2010, the EU banned some Iran Air craft over safety concerns. After its OFAC designation, Iran Air’s flights to Western Europe had to make fuel stops in Eastern Europe, but the airline limped along until President Obama lifted its designation earlier this year. The 1998 designation of Sudan Airways, along with “financial troubles and mismanagement,” eventually reduced it to just six working (but aging) aircraft. In 2015, the U.S. government fined EgyptAir for leasing two 737s to Sudan Airways. But then, Sudan Airways’s two-letter flight code, “SD,” has long been said to stand for “sudden death.”

This history suggests that Pyongyang will try to keep its flag carrier flying, even if at great expense and inconvenience, to show its defiance and maintain its prestige. But like Iran Air and Sudan Airways, Air Koryo was already straining to maintain a fleet of aging aircraft before its OFAC designation. If North Korea runs an airline as ineptly as it runs, say, its food supply, over time it will be forced to drop routes and flights, which Chinese air carriers will try to pick up. Currently, Air China is the only other airline with regular flights to North Korea. (Spring Airlines had expressed interest in starting flights to Pyongyang, but later shelved that plan.) These airlines will have greater dollar exposure and more reluctance to risk ferrying luxury goods or slaves. They will feel more constrained by UNSCR 2321’s mandate to inspect all checked baggage to and from North Korea for, say, bundles of cash, stashes of gold, or big screen TVs.

Air Koryo may try to collect fares and buy parts in non-dollar currencies, but past history suggests it will simply try to evade the dollar sanctions. This will come with great costs and inconveniences. As we learned from the Dandong Hongxiang indictments, it’s almost impossible to operate in the global economy without dollars, and evading dollar sanctions requires working through shady middlemen who sometimes charge commissions of more than 20 percent. The more layers of protection you want, the more middlemen you need, and each layer adds to that cost. It will be hard, but still possible, for Air Koryo to keep flying with its dollar accounts frozen and its capacity to acquire spare parts and new aircraft curtailed. (UNSCR 2321 bans North Korea from purchasing or leasing new vessels and helicopters, but not fixed-wing civilian aircraft.) The operations of a national flag carrier aren’t easily concealed. Air Koryo will have to market itself to sell seats and operate profitably. Every destination where its planes land will come under investigative and diplomatic scrutiny. 

III. How the designation of Air Koryo will affect the North Korea tourist industry.

Much of the media interest in the designation of Air Koryo has focused on how the designation will impact tourism to North Korea — specifically, tourism to North Korea by Americans and Europeans. That interest, in turn, probably derives from the inexplicably popular idea that (overwhelmingly) white people who travel to North Korea will shine their gentle, warming rays on the local savages by “open speech and simple an hundred times made plain, to seek another’s profit and work another’s gain.” ICYMI:

For some people, visiting North Korea is like dating Madonna — plodding a tired, well-worn, loveless, and morally ambiguous path that gives some people an inexplicable feeling that they’ve entered an unexplored place. Except that Dennis Rodman and countless others already did. 

Designating Air Koryo will undoubtedly reduce Pyongyang tourist revenue, but it’s hard to say by how much. Yonhap has published an estimate that in 2014, tourism poured $43 million into North Korea. Some experts have told me that estimate sounds high, but Sheena Chestnut Greitens (who is, due to unrelated developments, about to become the First Lady of Missouri) previously cited an unnamed South Korean expert’s “high estimate” of $100 million. How much of this income is from Air Koryo’s ticket sales is anyone’s guess. The overwhelming majority of tourists who visit North Korea are Chinese who may find it more convenient to fly Air China or take the train.

Air Koryo’s designation will have a greater impact on Europeans and Americans, who pay a premium to travel to North Korea. Uri Tours, one of the companies that sells group tours of North Korea to slummers, inept evangelists, prospective hostages, and other unrequited masochists turns out to be a business partner of North Korea’s missile-part-smuggling, money-laundering, slave-ferrying airline.

Uri Tours is the exclusive General Sales and Ticketing Agent of Air Koryo in the Americas. We service tourists, business travelers, corporations, foreign workers and government officials to provide expedient Air Koryo ticketing in advance of your trip. We take credit card payment and we can offer same day ticketing.

Air Koryo is North Korea’s only airline and has a history of over 50 years in flight. Air Koryo operates internationally scheduled flights between Pyongyang, China (Beijing, Shenyang and Shanghai), Russia (Vladivostok), Thailand (Bangkok), and Kuwait. It also operates charter flights to and from Malaysia (Kuala Lumpur), Singapore and a handful of other countries. Domestic flights to Mount Paekdu and Mount Chilbo (and soon Wonsan) are also operated by Air Koryo. [Uri Tours]

Uri Tours reacted to OFAC’s designation of its North Korean partner with a blog post that tells us that as of last week, it was still in the denial stage.

Do these new sanctions affect tourism?

E.O. 13722 does not prohibit U.S. persons from engaging in transactions ordinarily incident to travel to or from any country. This means that U.S. persons can travel to North Korea. You are also still permitted to book tours to North Korea with a U.S. tour operator. It is our position that Uri Tours’ travel activities are covered under the IEEPA exemptions and moreover, we were an existing tour service to North Korea before E.O. 13722 which prohibits new investment in North Korea by a U.S. person. [Uri Tours]

To unpack Uri’s “position,” begin with OFAC’s specific legal authority for the designation of Air Koryo, Executive Order 13722, which authorizes sectoral sanctions against North Korea’s transportation industry (along with mining, energy, and financial services). Taking Uri’s arguments in reverse order, it claims that because its business relationship with Air Koryo predated the OFAC designation, its relationship is not affected. But section 1(b) of EO 13722 states as follows:

The prohibitions in subsection (a) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order or pursuant to the export control authorities implemented by the Department of Commerce, and notwithstanding any contract entered into or any license or permit granted prior to the effective date of this order. [EO 13722]

If Uri Tours doesn’t have a lawyer, this would be a good time to invest in one. If Uri Tours has a lawyer, this would be a good time to invest in a better one. The penalties for violating the IEEPA include 20 years in one of these

Uri also cites an OFAC FAQ, Number 464, and characterizes it as opining that Americans are free to travel to North Korea for tourism. In fact, the FAQ only provides guidance on humanitarian travel (which is exempt from sanctions under a general license that doesn’t apply to tourism). The FAQ was published on March 16, 2016, the day after the President signed EO 13722, but long before the designation of Air Koryo. It says nothing about tourist travel.

Uri makes a stronger argument when it cites our old friend, the International Emergency Economic Powers Act, which creates the legal authority for sanctions executive orders and designations, but withholds (in section 203(b)(4)) “the authority to regulate or prohibit, directly or indirectly . . . any transactions ordinarily incident to travel to or from any country.” But if Uri Tours thinks the U.S. can’t designate an airline because of section 203(b)(4), I’ve already shown you ample precedent to the contrary. Whether an individual U.S. tourist can book an Air Koryo flight is an interesting question I’ll leave to the Treasury Department to resolve in a future FAQ, but good luck booking that flight if no bank will process your fare payment. Uri’s suggestion that 203(b)(4) allows it to go right on transacting with a blocked entity seems dangerously wishful, but Uri’s legal risk isn’t my concern. It misrepresents the law at its own peril. It misrepresents the safety and ethics of travel to North Korea at yours.

Clearly, 203(b)(4) doesn’t exempt airlines from the reach of nonproliferation sanctions. Just as clearly, Treasury makes a distinction between blocking one airline’s assets and a travel ban. Do proliferation sanctions that have incidental effects on travel exceed the authority of 203(b)(4)? I’d guess not, but I’ll let OFAC answer that for itself. But then, the fact that Treasury currently lacks the authority to impose a travel ban doesn’t mean that Congress won’t simply impose one, mooting Uri’s argument. Meanwhile, travel to North Korea all you want on a Chinese airline. All that’s stopping you is your intelligence and your conscience.

~   ~   ~

In the end, the biggest winners from OFAC’s designation of Air Koryo will be Air Koryo’s passengers, and not just the slaves among them. One of them recently related his near-death experience when an Air Koryo crew ran up and down the aisle of his flight, shouting “no problem! no problem!” as the cabin filled with smoke, the plane plunged toward the earth, and the passengers wept for their dear lives. In that story, I saw a fitting microcosm of, and metaphor for, the entire North Korean condition. That was one of their newer planes, too. But if you really want to hear the definitive analysis of how Air Koryo’s designation affects the North Korea tourism industry, ask Otto Warmbier. Unfortunately, he wasn’t available for comment at post time.

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Why Seoul’s blacklisting of Air Koryo & Dandong Hongxiang matters

South Korea is the first of the Free Three (the U.S., South Korea, and Japan) to announce independent multilateral sanctions on North Korea following the approval of UNSCR 2321. Some of the measures, such as the blacklisting of Choe Ryong-hae and Hwang Pyong-so, will probably mean almost nothing until some future left-wing president tries to give one of them a ticker-tape parade along the Chongro.

An extension of South Korea’s ban on ships that have entered North Korean ports within the last 180 days will do more, by forcing shipping companies to choose between the modest trade with North Korea and the much more significant trade with Japan and South Korea. With North Korea’s own ships already under rising pressure even pre-2321, and now facing a loss of access to insurance, North Korea may soon find itself increasingly isolated from its export markets.

South Korea’s blacklisting of Air Koryo, while not directly significant by itself (Air Koryo doesn’t fly to South Korea) may foreshadow a corresponding action by the U.S. Treasury Department, which would freeze North Korea’s national airline out of the dollar system and seriously crimp its operations. (Update: That turns out to have been a pretty good guess. OFAC just released a new round of designations that includes North Korean banks, slave labor merchants, the Korea National Insurance Corporation, and Air Koryo. I’ll have more to say after work.) It could also clear the way for South Korean diplomats to lobby middle powers like Malaysia, Thailand, Kuwait, and Singapore to deny Air Koryo landing rights. That would be a severe blow to Pyongyang. South Korea’s diplomatic campaign against North Korea’s foreign clients has been highly effective this year.

The most important and courageous move, however, was this one:

In particular, Dandong Hongxiang Industrial Development and four of its executives were included on the list, marking the first time that a Chinese firm is facing South Korea’s unilateral sanctions.

The company is under investigation on suspicions that it exported aluminum oxide — a nuclear bomb ingredient — to the North at least twice in recent years. In September, the U.S. blacklisted it along with its owner and other company officials.

With the latest action by Seoul, a total of 79 individuals and 69 entities will be subject to sanctions in connection with the North’s nuclear programs. The government announced a blacklist in March as a follow-up move to the UNSC’s Resolution 2270 adopted in the wake of the North’s fourth nuclear test in January.

Any financial transactions with them will be prohibited, while their assets in South Korea will be frozen. The blacklisted people will also be banned from entering the country, which is seen as a symbolic action given that there are no exchanges between the two Koreas. [Yonhap]

This could be the first sign that the three allies, acting outside the U.N. and beyond the reach of a Chinese or Russian veto, are forming a coalition to combine their economic power behind secondary sanctions against Pyongyang. If Japan joins in this, it will mean that the Chinese trading companies that prop up His Corpulency’s misrule will now face not only the freezing of their dollar assets, but the loss of their trade relationships with the two most important non-Chinese markets in northeast Asia. If those Chinese trading companies think they can mitigate the risk of secondary sanctions by insulating themselves from the dollar, Seoul has just added an additional layer of risk for those that continue to trade with Pyongyang. If the Free Three have coordinated their sanctions well, Tokyo will soon add its heft to that risk. Trading companies’ shareholders, officers, and bankers may find that risk increasingly unacceptable.

Beijing knows that while Dandong Hongxiang is itself a dead letter, this sort of Progressive Diplomacy represents a dangerous precedent for its interests. I expect it to react furiously. Even a year ago, I could not have imagined Park Geun-hye antagonizing South Korea’s greatest trading partner this way. Today, with all the noise about impeachment and the North Korean crisis, the Chinese reaction could be crowded out of the headlines. But with Park having conceded that she cannot hold onto power for long, she has nothing to lose.

Not only does Park have no reason not to burn bridges, she may have her own reasons to punish China. If she’s at least as paranoid as I am, she may suspect China, or its North Korean dependent, of directly or indirectly supporting the media frenzy that led to her downfall. It seems plausible in the age of Wikileaks that foreign governments give clandestine support to media hostile to leaders who oppose their interests. She may even suspect them of having planted the tablet that first broke the scandal. Personally, I see no direct evidence of it, nor do I think it’s more than 20 percent likely, but I’ve yet to see anyone explain (or even inquire into) the remarkable coincidence by which a discarded device just falls into the lap of a hostile press and topples a head of state. It seems easier to pull off than, say, throwing Wisconsin to Trump.

Either way, Park Geun-hye isn’t going quietly, and she’s gambling that the actions she takes on her way out the door will have the support of a future President Trump. No matter how much the Hankyoreh rages, that will make those actions even harder for her successor to undo than for her to do. What we may be seeing here is the first brick in a multinational sanctions coalition in which the members concentrate their collective power against Pyongyang’s enablers. For now, the Free Three are the core of that coalition, but with skillful diplomacy and time, that coalition may soon include other middle powers, other issuers of convertible currencies, and key members of an increasingly fractious European Union.

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Yonhap: U.S., ROK & Japan to impose coordinated sanctions independently of U.N.

With reaction to UNSCR 2321 ranging from the skeptical to the unfavorable, U.S. and South Korean diplomats have been practicing their skills at porcine cosmetology this week. But if the generals in Pyongyang are already quaffing Hennessey to celebrate the latest advance for the byungjin policy, that may be premature. The Security Council may not have the last word on North Korea’s September 9th nuke test after all:

South Korea, the United States and Japan are preparing to announce their own sanctions on North Korea at the same time in a joint action to maximize their impact to the communist country, Foreign Minister Yun Byung-se said Thursday.

“Basically, (the three countries’ independent sanctions) will be announced concurrently or at a very similar time,” Yun told Yonhap News Agency, referring to the nations’ follow-up measures to the United Nations Security Council’s adoption of Resolution 2321. South Korea is set to unveil its own set of new sanctions on Friday. [Yonhap]

My two greatest concerns with 2321 are, first, that the surprisingly high coal export limits are a license to cheat that may actually raise the amount of coal Pyongyang can export, and second, that within the negotiations with China over the resolution was a sub rosa agreement by the U.S. to abstain from using the power of the dollar against Chinese banks and businesses that are propping up His Supreme Corpulency. This report doesn’t address the first concern, but it may palliate the second.

Obviously, how much the new bilateral sanctions would palliate my concern depends on what the sanctions are, and Yun didn’t say much about that, except that “[b]ilateral sanctions prepared by the U.S. side may be strong enough to hurt North Korea more than the recent UNSC resolution.” This article, however, gives some vague hints at the South Korean actions. Yun also didn’t say exactly when the new sanctions would be announced, because the different countries have different “internal procedures.”

I can certainly imagine what kind of sanction would have that sort of effect. So can the Obama administration, and so can the U.S. House and U.S. Senate, whose most vocal members and committee chairs are going to be pushing for just that for at least two more years. That the allies appear to be practicing Progressive Diplomacy is also excellent news.

I may not miss Park Geun-hye as much as I’d miss Yun Byung-se. I certainly hope he stays on in the banana republic that South Korea has recently become, but then, who am I? I’m writing this from Washington, D.C.

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The U.N.’s new North Korea resolution wasn’t worth the wait

Lest anyone think I’m blindly criticizing the Obama administration as it tries to cover its exit and legacy, start with my favorable comments on UNSCR 2270. That resolution might have been the baseline for a genuinely effective global sanctions program, but the text of the new resolution the Security Council will vote on tomorrow arguably lowers the high bar set by 2270. Indeed, because of our independent authority to enforce 2270 in tandem with our allies, we would have been better off with no resolution at all than a weak one.

Although the text contains some useful provisions, including a ban on shipping insurance and the expulsion of North Korean bank operatives, many of the nominally tough provisions are full of loopholes. For example, how many North Korean diplomats must each country expel? What prevents North Korean diplomats, now limited to one bank account each, from simply putting those accounts in the names of “private” trading companies?

The ban on North Korea using real property abroad for non-diplomatic purposes could, depending on how it’s interpreted, require it to shut down the Chilbosan Hotel, its Chinese base of operations for cyberattacks. And anyone who might have fantasized about reopening Kaesong or the success of Rajin should read paragraph 32 carefully.

The veiled threat in paragraph 19 to suspend North Korea’s U.N. privileges is interesting, but ultimately empty. China and Russia would veto any such move.

The new designations in the annexes are weak, mostly consisting of mid-level officials who will be easy to replace. The absence of Air Koryo, the Korea National Insurance Corporation, and Mansudae Overseas Project Group from the list are big disappointments.

But the biggest overall disappointment may be the text’s lack of hard, clear, enforceable follow-the-money provisions. There is no new requirement for member states to track and report beneficial ownership by North Korean nationals, which would have been a potential windfall of financial intelligence on North Korean money laundering and sanctions evasion.

Many of the provisions — such as the ban on dual-use items, helicopters, and technical assistance — were already prohibited under any reasonable interpretation of UNSCR 2270. Russia, India, and other states have violated those prohibitions.

The addition of two items — rugs and china — to the luxury goods list is laughable.

The most talked-about provision, the new cap on North Korean coal exports, will be difficult to monitor and enforce. How will the U.N. Panel of Experts really know what minerals China is importing, in what volumes, or at what prices? Even if they are enforced, the cuts in coal exports are not deep enough to create the kind of financial crisis in Pyongyang that will force it to reconsider its nuclear weapons program. Pyongyang exports $1 billion worth of coal in a typical year. This text would cut that amount in half. If you’d asked me in March to guess what “livelihood purposes” means, I’d have said it sets a much lower cap than what the Chinese extracted from us. (Update: Also, I’d have said that for “livelihood purposes” to be anything but a farce — a license to cheat, really — it would have required the Chinese to pay the North Koreans in food instead of dollars. But now, Pyongyang and Beijing can safely conspire to starve the North Korean people, while using the profits of their trade to terrorize Koreans on both sides of the DMZ.) Arguably, the Chinese won the right to sell North Korea more coal than we’d have allowed to pass through our financial system under the new U.S. sanctions law and executive order. For the sake of getting China to sign another piece of paper, we threw away that leverage.

Meanwhile, most of North Korea’s other revenue sources are untouched by any enforceable provisions (the text merely expresses “concern” about North Korea’s slave labor exports). A modest exception is a ban on the sale of North Korean crew services.

What hovers over all of this is that Chinese banks and businesses — encouraged by Beijing — have willfully and persistently cheated on the sanctions right up to this very minute. The new resolution would not have restated UNSCR 2270’s requirement to inspect checked baggage and cargo at land borders if China has not failed to enforce those provisions to begin with.

What’s needed much more than new measures is a stark demonstration to Chinese banks, businesses, and ports that those who cheat will suffer the same fate as Banco Delta Asia and Dandong Hongxiang. President Obama has decided to sacrifice the greater need, which is enforcement, for a lesser need, a new resolution. To the very last, this administration’s North Korea policy is much more tongue than tooth. At such moments, I sympathize with Donald Trump’s criticism that this administration doesn’t excel at negotiation. We’ll soon see if he can do any better.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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If China is gambling on Trump to blunt N. Korea sanctions, it could lose bigly*

By all outward appearances, President Obama never really had a coherent North Korea policy. While pursuing a deal that Pyongyang either didn’t want or wouldn’t keep, it reacted to each nuclear test by building on John Bolton’s work and nominally tightening the sanctions the U.N. initially imposed a decade ago, in Resolution 1718. The idea, apparently, was to deter Pyongyang by threatening its plans to develop Hamhung and Chongjin, something it no more intends to do than the Confederacy intended to institute a slave literacy campaign. Under President Obama, sanctions were always incremental, were never well-enforced, and never seemed to be part of any plausible broader strategy.

Still, if only to make a display of doing something after each test, the U.S. would expend much diplomatic energy on haggling with China (and Russia — let’s not forget Russia) over the terms of a new resolution. In due course, the Security Council would approve it, and for three or four months, everyone would pretend that this time was different before returning to business as usual.

As of today, 74 days have passed since September 9th, when North Korea conducted its fifth nuclear test, yet there is still no agreed draft resolution. For those keeping score, that’s the longest delay yet between a test and a resolution (the previous record of 56 days was set earlier this year, after the fourth nuclear test).

Three weeks ago, The Wall Street Journal reported that the P-5 were close to a deal on “[a] new sanctions package … that more effectively blocks the regime’s overseas funding sources,” and might narrow a “livelihood purposes” loophole that effectively nullified a ban on North Korea’s coal exports (see also). The U.S. side was also pushing China to agree to “crack down” on North Korea’s slave labor exports.

Meanwhile, Bureau 39 continues to rake in millions of dollars from higher coal prices, at the expense of military-controlled trading companies (but see this contrary report that coal prices are actually falling).

Reports today say that talks between the U.S. and China are in “their final stages,” but we’ve heard that before, and we still have no word that the two sides have agreed on a draft resolution. A few days ago, Obama had his last meeting with Xi Jinping. The meeting produced little more than a pro-forma agreement that the Korean Peninsula should be nuclear-free, a statement that increasingly becomes moot for North Korea as it gains relevance for South Korea. One of Obama’s priorities for that meeting was to push China to crack down on North Korea. If the result isn’t a significantly tougher resolution within a week, we can probably conclude that President Obama failed to achieve that goal.

That would lend credence to reports that China is stalling talks on a new resolution, perhaps until Obama leaves office. According to those reports, China is still smarting over the U.S. indictment of flagrant sanctions cheat Dandong Hongxiang Industrial Development (while sparing the banks that facilitated the violations). It may be calculating that a President Trump will be more focused on economic issues and won’t want to start off by antagonizing China over a low-priority issue like North Korea. That would be a big gamble.

trump-casino

If so, China may be miscalculating. Although the President-Elect has yet to name several key members of his national security cabinet, what we know so far doesn’t suggest that he’s likely to adopt a soft line or make North Korea a back-burner issue. The most talked-about contenders for Secretary of State are Mitt Romney and … John Bolton (enough said?). James Mattis, who recently spoke to the President Elect about North Korea and other issues, didn’t earn the nickname “Mad Dog” by calling for agreed frameworks. (Update: My favorite Mattis quote: “I come in peace. I didn’t bring artillery. But I’m pleading with you, with tears in my eyes: If you fuck with me, I’ll kill you all.”)

There is also direct evidence of what those close to President Elect Trump have said about North Korea policy. In a meeting with South Korea’s deputy National Security Advisor Cho Tae-yong, Michael Flynn, the selectee to be the next National Security Advisor, called the U.S.-South Korea alliance “vital” and said the new administration would make North Korea a priority. At the time, Flynn did not specify how, but Cho later said that Trump would adopt “stern measures,” and that his aides see “no momentum” for dialogue with North Korea. Flynn was previously quoted as saying, “We should not let the current North Korea regime … exist for a long time.” 

Despite Trump’s loose talk of talks with His Porcine Majesty, one Trump advisor, former congressman Pete Hoekstra, has already ruled them out for “the near future.” Heritage Foundation ex-President and Trump advisor Edward Fuelner has specifically said that the U.S. would impose a secondary boycott on Chinese firms that are propping up Pyongyang financially.

Even before Election Day, we knew that the next president could clash with China over North Korea. The result of the election doesn’t seem to have diminished the likelihood of that. I increasingly incline to the view that either the current President or the next one should signal to the Chinese that if they don’t agree to and enforce tough new sanctions, we’ll walk away from talks over a new resolution and act on our own. That strategy would use a combination of progressive diplomacy and the thinly veiled threat of Executive Order 13722 sanctions to get foreign governments to enforce UNSCR 2270. President Obama knows what he needs to do, but lacks the will. China would be ill-advised to assume the same of President Trump.

~   ~   ~

* Update: I couldn’t resist changing the title.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Democratic People’s Republic of Korea (DPRK)

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

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

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

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

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

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

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

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

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