Via Yonhap, we learned last week that Rep. Matt Salmon (R, Ariz.), the Chairman of the House Asia-Pacific Subcommittee, has introduced a bill to cut North Korea off from the “specialized financial messaging services” that banks use to send wire transfer orders around the world. The industry leader for financial messaging is SWIFT, whose headquarters is in Brussels, but which also has operations in Geneva and Manassas, Virginia. If you don’t know what SWIFT does and why it matters, I’ll refer you to this post.
“What we can do is deny them access to services designed to quickly and easily transfer money worldwide. Without access to these services, we can force the North Koreans to purchase supplies and receive support in the way typically favored by state sponsors of terrorism: shipments of anonymous, small denomination bills.” [Yonhap]
You may be able to run a mid-size drug cartel that way, but not a country with a population of 23 million and a large, mechanized army. Although a SWIFT cutoff would be based on a different legal authority from the authority Treasury used against Banco Delta Asia in 2005, Yonhap compares the proposed legislation to BDA.
Should the legislation be enacted, it would have powerful impacts on the North, possibly similar or even greater than the 2005 U.S. blacklisting of a Macau bank for doing business with Pyongyang.
By designating the bank in the Chinese territory, Banco Delta Asia (BDA), the U.S. not only froze $24 million in North Korean money held in the bank, but also scared away other financial institutions from dealing with Pyongyang for fear they would also be blacklisted.
The measure hit Pyongyang hard, and reports at the time said North Korean officials had to carry around bags of cash for financial transactions because they were not able to use banks. The sanctions were later lifted in exchange for a denuclearization agreement that later fell apart.[Yonhap]
A better analogy would be the effect SWIFT sanctions had on Iran’s economy more recently.
Without SWIFT, global trade and investment would be slower, costlier and less reliable. [….]
The earlier SWIFT ban is widely seen as having helped persuade Iran’s government to negotiate over its nuclear programme. The ban was one of the first sanctions Tehran asked to be lifted, points out Mark Dubowitz of the Foundation for Defence of Democracies, a Washington-based think-tank. Though some of the banks blocked from SWIFT managed to keep moving money by leasing telephone and fax lines from peers in Dubai, Turkey and China, or (according to a Turkish prosecutor’s report) by using non-expelled Iranian banks as conduits, such workarounds are a slow and expensive pain. And the sanctions prompted Western banks to stop conducting other business with the targeted banks. [The Economist]
Keep reading that article to understand some of the good reasons to exercise great restraint in using SWIFT as a sanctions tool. I agree with those reasons; I just happen to believe that there are two cases compelling enough to be deserving exceptions — Iran and North Korea. (In the case of Russia, I’m not yet convinced that this is the right tool; I’d rather see us arm and train the Ukrainians.)
As of posting time, the text of H.R. 6281 was not yet available at Congress.gov, but I’d expect it will bear some resemblance to section 202 of the original introduced version of H.R. 1771, the North Korea Sanctions Enforcement Act, a later version of which the President signed into law in February as H.R. 757, the North Korea Sanctions and Policy Enhancement Act (Public Law 114-122, codified at 22 U.S.C. Chapter 99). The bill already has nine original co-sponsors, including three Democrats.
“The SWIFT system which is what I think you are referring to is not a U.S. system, and therefore not under our direct control. I believe it’s an EU system up housed [sic] in Brussels,” Daniel Russel, the Assistant Secretary of State for East Asian and Pacific Affairs at the U.S Department of State said, when asked by how the U.S. administration planned to further penalize North Korea. [NK News, Dagyum Ji]
I’m all for doing things diplomatically if that achieves our objective. No doubt, our diplomats’ work has been made easier by the conduct of the North Koreans themselves, who are suspected of hacking SWIFT to rob its client banks of $80 million and laundering the loot through casinos in the Philippines (Rodrigo Duterte, call your office). Russel’s written testimony is here.
The necessity of far-reaching financial sanctions rose to the surface after the North was suspected to be connected to Bangladesh Bank heist back in May.
“We are in discussions with our partners, including the EU, about tightening the application of sanctions and pressure, including and particularly to deny North Korea access to the international banking infrastructure that it has abused and manipulated in furtherance of its illicit programs,” Russel said.
“I think that our hope is that we will in fact ultimately be able to reach an agreement that would further restrict North Korea’s access.” [NK News, Dagyum Ji]
If this bill doesn’t pass in this Congress and diplomacy can’t achieve the same result, I’m sure it’ll be back in the next Congress. In fact, for reasons I’ll explain below, it might be back even if the EU enacts a SWIFT ban. With the arrival of a new U.S. administration and an election year in South Korea, there will be no shortage of provocations to help pass it. North Korea loves to act up during election years. It makes certain kinds of people write op-eds calling for talks and concessions.
More recently, however, Kim Jong-un’s election-year antics have made him one of Washington’s most effective lobbyists — for new sanctions laws.
This post by Stephan Haggard has sparked some debate as to whether SWIFT is still servicing North Korean banks. According to Haggard’s post, SWIFT’s processing for North Korean banks fell from 50,000 a year in 2011 to a mere 5,000 a year by 2012. Haggard is always very careful with his sourcing and relied on published SWIFT data, but for reasons I shouldn’t share here, I don’t believe the statistics are accurate. I can’t rule out the possibility that SWIFT cut the North Koreans off in mid-2013 or later, however. By then, UNSCR 2094, paragraph 11, prohibited SWIFT from servicing (at the very least) U.N.-designated North Korean banks.
But in the end, whether North Korea is still using SWIFT or not, H.R. 6281 is still useful. If SWIFT is still providing services to North Korean banks, H.R. 6281 can give the Treasury Department and our diplomats more leverage to persuade the EU and SWIFT to cut the North Koreans off now. If SWIFT isn’t providing services to North Korean banks, someone else is. It would make sense that North Korea’s hacking of SWIFT software to steal from foreign banks was both a way to make money and retribution for a SWIFT cutoff.
Either way, North Korean banks need financial messaging services. One of the strongest arguments against the overuse of SWIFT sanctions is that they might give a less responsible service a competitive advantage. If some less responsible competitor has emerged to take on North Korea’s financial messaging business, then H.R. 6281 would enable the Treasury Department to either “reason with” that upstart service or sanction it to extinction. In which case, the potential rise of a SWIFT alternative turns one of the strongest arguments against H.R. 6281 on its head.
It took a few weeks for the Senate Foreign Relations Committee’s Asia Subcommittee to put a hearing together after North Korea’s fifth nuclear test, but when that hearing finally happened on Wednesday, I actually found myself feeling sorry for the State Department witnesses, Danny Russel, the Assistant Secretary Of State at the Bureau Of East Asian And Pacific Affairs, and Daniel Fried, the State Department’s Coordinator for Sanctions Policy. A few years ago, they might have gotten away with showing up unprepared, with index cards filled with stock phrases. For example, after Chris Hill’s confirmation hearing, I wrote, “The degree to which the ‘august’ senators on the Committee have paid no attention to the conduct of policies they are charged with overseeing is depressing and stupefying, and yet it all somehow still makes for dreadfully dull viewing.” Thankfully, this Senate — or rather, this part of it — is a very different and much better body.
Under the leadership of Cory Gardner, at least one part of the Senate is doing policy oversight right. You can watch the whole thing here, and although it’s two hours long, it will hold the interest of anyone interested enough in North Korea policy to read this site. Do what I did and watch it in increments as time permits.
The main headline from the hearing is that the State Department officials said thatthey areinvestigating more Chinese companies for sanctions violations, but it’s clear from the questions that the senators will not be placated by the sacrifice of mere goats anymore. Their mood is of equal parts alarm and fury — both in front of and behind the scenes, and among both Republicans and Democrats — that Chinese banks are breaking our laws, and that this administration is letting them get away with it. As they did before the hearing, they want the administration to sanction the Chinese banks that launder Kim Jong-un’s money.
By now, everyone should have expected Republicans like Gardner and Rubio to question State about that. State should have known by now that both men would be well-prepared and unsparing in their criticism. The intellects of both men, and good behind-the-scenes work by the staff — including arms control experts and one with extensive sanctions administration experience at the Treasury Department — ensured that they would quickly sift away talking points and cut directly to the issues. Gardner mentioned at one point that the senators were given a common set of briefing materials. It showed in both the insightfulness and focus of the questions, and in the bipartisan unity of their questions’ thrust. I’ve never worked in the Senate, so I wouldn’t know if that’s standard procedure there, but past hearings I’ve watched didn’t run this well. Gardner himself was in complete command of both the material and the room, and gave every appearance of being a man with limitless potential. Indeed, all of the senators were well-prepared. All, regardless of their party or tribal affiliations, asked good or excellent questions.
In the end, however, no one can hurt you more than the people who love you. At 58:17, Senator Menendez began questioning Fried by arguing for secondary sanctions against Chinese banks. He then embarked on a well-prepared, determined, and lawyerly cross-examination of Fried about this. Pressured by Menendez’s questioning and clearly unsure of his material, Fried told Menendez that Dandong Hongxiang was a bank (not true). I don’t think Fried was lying, but he didn’t have command of the facts, and when he got out of his depth, he swam into a rip current. Menendez pinned Fried down on his answer. Then, when his time expired, he went back and pulled Treasury’s announcement, probably talked to his staff, and confirmed that this wasn’t true. At 1:35:30, Menendez returned, rearmed. This, ladies and gentlemen, is what it’s like to have a bad day in the United States Senate.
SEN. MENENDEZ: Mr. Fried, I pride myself on my preparation for these hearings, so I went back to your office after your answer, and I looked at OFAC’s statement of Monday. You said in response to my question we’d sanctioned a bank on Monday. Well, I read from OFAC’s statement that they imposed sanctions on Dan-ong Yonhwang (sic) Industrial Development Company and four individuals. Now, is thatcompany a bank?
A/S FRIED: Sir, it is a financial — it is not a bank — it is the financial company that worked with a sanctioned North Korean bank.
SEN. MENENDEZ: All right, that’s different than saying you’d sanctioned a bank.
A/S FRIED: Yes, sir.
SEN. MENENDEZ: You did not sanction a bank on Monday.
A/S FRIED: Uh, we sanctioned a fi — a Chinese, uh, financial corporation.
SEN. MENENDEZ: All right, well, that’s different than a bank. Let me ask you this. How many banks — banks — has the administration sanctioned as it relates to North Korea?
A/S FRIED: Uh, a nu — do you mean banks in general or Chinese banks?
SEN. MENENDEZ: Chinese — let’s talk about Chinese banks.
A/S FRIED: A number — no Chinese banks.
SEN. MENENDEZ: No Chinese banks.
A/S FRIED: Not in China. We have umm —
SEN. MENENDEZ: That’s my point. That’s the point I was trying to drive at earlier. You have sanctioned no Chinese banks at the end of the day, and they are probably the major financial institutions for North Korea. What this company, as I understand, did was make purchases of sugar and fertilizer on behalf of a designated Korean bank. It’s a trading company, not a financial company. So, when I take testimony as a member of this Committee, I need to make sure that testimony is accurate, because I make decisions based upon it. And I must say that the information you gave me is not accurate. It was not a bank. This was a trading company. And finally, I got the answer that I wanted to hear, which is what I knew, that you’ve sanctioned no Chinese banks that relates (sic) to North Korea. And it is our hesitancy to do so that that takes away one of the major instruments possible to change Chinese thinking. I’m all for persuasion if you can achieve it. But when you can’t, and North Korea continues to advance its nuclear program in a way that becomes more menacing — and its miniaturization and its missile technology — I don’t know at what point we are going to continue to think we can stop them when in fact they’re pretty well on their way. And we allow them to continue to do so. And we don’t use some of the most significant tools that we have. So I’m disappointed that you didn’t give me the right information.
I hold no ill will toward Mr. Fried, but I literally cheered as Menendez calmly bored right to the truth of the matter. Yet on another level, watching this was deeply depressing. Menendez, for all his troubles — and I hope he’ll soon put those behind him — clearly showed us how valuable he is to his state and his country. If the Democrats retake the Senate, I hope he’ll be Committee Chairman again. Markey — watch for him to emerge as a liberal advocate for human rights in North Korea — wisely counseled restraint on South Korea’s military threats. Rubio, who had personally read and commented intelligently on an earlier version of the NKSPEA, had also read and understood C4ADS’s report and its implications. Any one of these senators would have been a better choice as President than the choices before us now. What I can’t help asking myself today is how we elect such good senators, yet such awful presidents.
In the years after the passage of the North Korean Human Rights Act, those who had worked hard to pass that law watched the State Department slow-walk it to a full stop, with Congress seemingly powerless to make it follow the law. That may have been to State’s short-term advantage, but its long-term cost was to plant in many of us a deep distrust of the State Department. We learned that passing a law is only the first step — that laws need robust enforcement mechanisms and a permanent, bipartisan constituency to make sure the executive enforces them. Hence, section 103 briefings, the first installment of which came due just as Kim Jong-un tested his fifth nuke. This Subcommittee is taking full advantage of those oversight provisions. Pray that continues to be the case in the next congress.
I’ll give The Wall Street Journal the final word, if only to make the point that this issue isn’t going away, and that the next POTUS will come under withering pressure to do what this one has not done — enforce our laws.
An invaluable report published last week by South Korea’s Asan Institute and the U.S.-based Center for Advanced Defense Studies found that Hongxiang Industrial and its parent company conducted some $532 million in North Korea business from 2011 to 2015. To put that into perspective, South Korean officials have estimated that the North’s main nuclear facility at Yongbyon cost less than $700 million to construct. [….]
In addition to neutralizing Hongxiang, these sanctions are aimed at persuading other Chinese companies to cut off Pyongyang lest they suffer the same fate, as when the U.S. sanctioned Macau-based Banco Delta Asia for about a year starting in 2005. This is the best hope for squeezing Kim hard enough that he might halt his nuclear drive. But China opposes such measures because it fears that squeezing too hard might cause the collapse of its client state.
Chinese trading firms and especially banks are likelier to cut off Pyongyang if the U.S. follows up promptly with further sanctions. One good sign is that the State Department’s Daniel Fried suggested Wednesday to Congress that more penalties are coming for Chinese firms.
Less promising is that in unsealing its indictment Monday the Justice Department said “there are no allegations of wrongdoing” against the banks involved in Hongxiang’s sanctions-busting. So despite imposing billions of dollars in penalties on a range of European banks for violating sanctions on Iran and others in recent years, the Obama Administration is signaling that Chinese banks aiding North Korea are untouchable.
In an open letter this month to President Obama, 19 Senators led by Colorado’s Cory Gardner quoted our Aug. 19 editorial (“North Korea’s Sanctions Luck”) on the evidence, compiled by United Nations experts, that the Bank of China “allegedly helped a North Korea-linked client get $40 million in deceptive wire transfers through U.S. banks.” That’s one of many examples. [WSJ]
If the House and Senate staff believe the administration has held back on specific targets, such as the Bank of China or any of the 12 banks named in the DHID forfeiture complaint, their next step should be to send the President a section 102(a) letter, which triggers a mandatory investigation, and possible designation.
Just as theywere in 2005, banks are the key pressure points. It’s the banks, not shadowy Chinese trading companies, that are most easily influenced to run away from the legal risks associated with North Korea, and that hold the bulk of Kim Jong-un’s assets.
Yet increasingly, the smartest experts on North Korea’s economy are speculating that China and its banks are being even more unhelpful than most North Korea watchers had imagined. Both Steph Haggard and Nick Eberstadt have raised suspicions that someone — most likely, someone in China — is subsidizing Pyongyang and actively undermining financial sanctions, as shown by the surprising resilience of its currency, even after the closure of Kaesong, and in spite of the fact that North Korea is nominally running a substantial trade deficit. The subsequent exposure of DHID’s role does much to validate suspicions that that support is coming through Chinese financial institutions, in dollars.
But this hidden source of resiliency is also a vulnerability. To Bill Brown, dollarization of the palace economy has helped Pyongyang stabilize that economy in the short term, but also contains longer-term dangers (I’ll let you read about them at his post rather than try to explain them here). The key point is that Pyongyang may be more dependent on the dollar than at any point in its history. Can Pyongyang adapt by further limiting its exposure to the dollar system? If that was a real option for Pyongyang, it would have exercised it either after the Banco Delta Asia episode or since then. As the Justice Department said, Pyongyang needs dollars because sellers take them.
Which is to say, China’s banks are helping Kim Jong-un win his race to nuclear breakout, and by doing so, they’re making a nuclear war on China’s doorstep more likely.
~ ~ ~
Now that I have your attention, I must bore you with some banking law. If you just can’t stand it, skip ahead to the next section. I’m about to set the table for why the 12 Chinese banks named in yesterday’s civil forfeiture complaint — and the Bank of China, which was implicated in a criminal case in Singapore last year — skated, and shouldn’t have.
Under U.S. anti-money laundering (AML) law, banks are expected to know the law, the sanctions regulations, and enough about their customers to know who’s legit and who’s using them to launder money or break sanctions. They’re supposed to have compliance programs in place, including trained compliance officers to identify and report suspicious activity, and special software to identify blocked persons who appear on Treasury’s list of Specially Designated Nationals (“the SDN List”). A key part of this compliance program is called “Know Your Customer,” which is self-explanatory in principle but can be complicated in its application.
If you’re interested — and let’s face it, you probably aren’t — the Treasury Department’s Office of Foreign Assets Control, or OFAC, has published enforcement guidelines in 31 CFR Part 501, Appendix A, laying out a schedule of fines based on the number and amount of transactions that broke the sanctions regulations, and the willfulness and egregiousness of the violations. What’s slightly more interesting is that OFAC publishes its settlements against banks that violate sanctions laws. A comparison to how similarly situated European banks have been treated puts the Chinese banks (and Treasury) in a very unfavorable light.
OFAC has often imposed steep fines against banks that didn’t even violate the sanctions regulations intentionally. For example, in March 2015, Paypal settled a penalty case with OFAC for $7.6M after violating multiple sanctions regulations through “reckless disregard” in its sanctions compliance before self-reporting its violations. In August 2015, UBS AG paid OFAC a $1.7M settlement for 222 payments to persons blocked for terrorist connections. UBS AG self-reported, but only after learning that OFAC was investigating the payments. UBS had a sufficient compliance program in place; it just interpreted the law incorrectly, concluding that certain investment-related transactions on behalf of a designated client weren’t blocked (wrong). In February, Barclays Bank paid OFAC a $2.5M settlement for processing 159 transactions, totaling just over $3M, for a person blocked under the Zimbabwe Sanctions Regulations, masked behind entities that did not appear on the SDN list. The violation was the inadvertent result of faulty compliance verification software. The bank did not self-disclose. Either way, OFAC expects banks to have effective compliance programs. As excuses, bad software and bad lawyers won’t cut it. Self-disclosure mitigates the penalty, but it’s not a defense.
Willful violations, on the other hand, can be extremely costly. In March 2015, Commerzbank paid OFAC a $258M settlement for processing 1600 transactions in violation of the Iran, Sudan, Burma, Cuba sanctions regulations. The bank stripped transaction data out of the wire transfers to conceal their nexus to sanctioned persons from their correspondents. In October 2015, Crédit Agricole Corporate and Investment Bank paid OFAC a $330M settlement for processing over 4,000 transactions in violation of Sudan, Burma, Cuba, and Iran sanctions regulations. Once again, OFAC found that Crédit Agricole and its predecessor banks stripped data out of the wire transfers.
In the case of the 12 Chinese banks named in yesterday’s forfeiture complaint, their AML compliance procedures were, at best, inexcusably sloppy. They serviced international transactions for shell companies that were registered in the British Virgin Islands or the Seychelles, and that listed fictitious addresses in Hong Kong office towers. Yeah, but who among us hasn’t done that as a youthful indiscretion? For those of you in the banking industry, the obvious answer is any banks whose Know-Your-Customercompliance programs do their due diligence and have kept up with strict new beneficial ownership rules in the EU and the U.S., especially since that whole Panama Papers thing, and especially for jurisdictions subject to U.N. sanctions and section 311.
And it’s not like much due diligence should have been necessary, given that Ma boasted openly that her customers were from “the DPRK elite group” and was an outspoken proponent of the trade that propped Pyongyang up.
To add further to the banks’ culpability here, some of the shell companies used the same Tortola, B.V.I. address as DCB Finance Limited, which was exposed for its role in sanctions violations when the Panama Papers went public (surely compliance software should have caught this!). According to the forfeiture complaint, “[a]s recently as June, July and August of 2016, nearly $8 million has transited through U.S. correspondent bank accounts related to three DHID front companies,” so some of this conduct is very recent. If nothing else, it adds more fuel to what Bill Newcomb and I have said about invoking additional beneficial ownership disclosure and record-keeping rules for North Korea.
In the case of the Bank of China, however, it got away with the AML equivalent of murder. Like Commerzbank and BNP Paribas, its employees stripped data out of wire transfers and willfully deceived their U.S. correspondents. There’s simply no defending Treasury’s failure to take enforcement action, given that BoC’s conduct was willful and egregious, unlike the other banks that simply got sloppy.
For OFAC’s penalties to be consistent, all 13 of these banks’ compliance officers ought to be collecting documents and reviewing affidavits with their lawyers right now. Instead, by saying that “[t]here are no allegations of wrongdoing by the U.S. correspondent banks or foreign banks that maintain these accounts,” the Justice Department sent a very different message to the Chinese banking industry.
That’s why tomorrow’s hearing in the Senate Foreign Relations Committee should not let up on what Senator Gardner and Senator Corker have demanded. They should not accept China’s reported arrest and investigation of Ma Xiaohong, its reported (and belated) investigation of KKBC executives, or its actions to stop North Korean trade representatives from leaving the country as signs that China is serious about enforcement at last. The DHID ships that have been impounded will be released in due course. A reported bribery investigation into the Dandong customs office that passed Ma’s wares into North Korea is self-serving from China’s perspective; China would rather package this as an anti-corruption investigation than admit that it bowed to U.S. pressure. China is not sharing information with DOJ and Treasury about its investigation, and U.S. officials don’t believe China’s actions are coordinated with theirs. More recently, China has lashed out at the U.S. for enforcing its laws:
China’s Foreign Ministry on Tuesday voiced its disapproval of U.S. actions against the businesswoman, Ma Xiaohong, and her Hongxiang Industrial Development Co. a day after Washington announced criminal charges and sanctions against her and the trading company for allegedly acting as financial fronts for North Korean companies on U.S. blacklists. “We oppose efforts by any country to use their domestic laws to impose ‘long-arm jurisdiction’ over Chinese entities or individuals,” ministry spokesman Geng Shuang told a news briefing, in response to a query on the U.S. actions against Hongxiang Industrial. [WSJ]
That’s some chutzpah, coming from a government that just unilaterally claimed the whole South China Sea and lost an international arbitration testing the merits of its claims, or that bullies Seoul with unilateral sanctions when the latter tries to defend itself from Beijing’s rabid dog. The real unilateralism is yielding to global consensus, voting for U.N. resolutions, and failing to enforce them. Unilateralism is claiming a sovereign right to misuse a distant nation’s financial system to break its laws and threaten its security. Maybe next time, U.S. authorities shouldn’t fly to Beijing to share their investigative findings, and all the sources and methods that approach may have compromised. Maybe they should just file indictments, freeze assets, and let Xi Jinping read about them in The Global Times. U.S.-China relations may have to get worse before they can get better. They may have to get worse to prevent them from becoming catastrophic. Predators need limits.
Instead, we should take China’s actions as signs that Beijing will do as little as it can get away with doing, but will acquiesce to its enforcement obligations if we attach a high enough cost to its tolerance of North Korea’s violations. We should seek to divide the self-interest of the banks in avoiding penalties and maintaining their dollar access from the interests of the Chinese government, which is to make mischief, drive the Americans out of Asia, and end up dominating both Koreas by default. We should take note of reports that North Korean trading company executives fear repercussions for getting caught. The administration should exploit those fears and divisions, turn as many of those executives as it can, and find out what they know. Above all, it should heed the conclusion of C4ADS, the plucky little NGO that showed it how good investigation works:
With the right resources and political will, it can be possible to significantly disrupt the DPRK’s illicit overseas earnings, and in the process raise the cost of its brazen proliferation activity. As the DPRK grows increasingly dependent on its overseas networks, it creates an opportunity for the international community to leverage their financial intelligence tools to squeeze the regime’s illicit activity. While actors inside North Korea can operate with impunity, abroad they are subject to international norms. A single shipment can require significant documentation and effort, including maintaining corporate entities, processing cross-border payments, or acquiring insurance or bank letters of credit, all of which necessarily leave paper trails that can be followed. By exposing these risk points and peeling away the infrastructure of DPRK illicit overseas networks, the cost and difficulty of operating abroad could rise dramatically.
Following the money is likely to be the most effective means for the international community to coerce the Kim regime toward concessions and a cessation of their nuclear program. Getting there, however, will require significantly expanded efforts to continually investigate, monitor, and act against DPRK entities as they further evolve to evade sanctions. This report aims to build a foundation for this effort. [C4ADS]
A surprising finding? North Korea’s network isn’t really all that big.
A key finding from the UN Panel of Experts was the observation that “While [DPRK] networks appear complex, their key nodes consist of a limited number of individuals and intermediaries…. Although shell companies can be swiftly changed, the individuals responsible for establishing and managing them have remained, often for years.” [C4ADS]
I’ll give Stephan Haggard the penultimate word.
What these reports show clearly is that the “sanctions don’t work” litany is deeply misleading. This trope assumes a hardy North Korean regime ready to resist any pressure no matter how intense. That is simply not the story; rather, the story is that North Korea has not been forced to make any adjustments because it has been able to conduct business largely if not wholly as usual. How does that show that sanctions don’t work? [WTT]
Yes, some Chinese trading companies may indeed run away from North Korea because of the DHID indictments. Those that don’t will probably jack up their commissions from 20 percent to 30 percent, which is itself a sanctions cost for Kim Jong-un. But any casual reader of U.N. Panel of Experts knows that North Korea’s network of enablers in China, though it is finite, is also much more extensive than this. If this indictment is just a beginning, it’s a good one. I have no objection to starting with smaller targets to scare bigger ones. But if this is all we do, North Korea’s network will recover quickly. One way or another, if we mean to prevent war, we must send a clear message to the Chinese banking industry that there will be no more business as usual with Kim Jong-un.
~ ~ ~
(Edited after publication to include China’s reaction to the indictments.)
As of yesterday, and for the first time ever, the U.S. Treasury Department has frozen the assets of Chinese entities for violating North Korea sanctions, and the Justice Department has indicted them for sanctions violations, conspiracy, and money laundering. The company in question is the Liaoning Hongxiang Group of companies, of which Dandong Hongxiang Industrial Development Company Limited, or DHID, is the largest component. The individuals are Hong Jinhua, Luo Chuanxu, Zhou Jianshu, and Ma Xiaohong, the CEO of the Liaoning Hongxiang Group.
All were first implicated by the remarkable investigative work of the Center for Advanced Defense Studies and the Asan Institute, which is wonderful and also troubling, in that it should not have been left to a small nonprofit research group with funding from a South Korean think tank to do the work that the Treasury and Justice Departments should have done — protecting such core U.S. security interests as global nonproliferation, the integrity of the financial system, and freedom of speech in our own towns and neighborhoods. It is wonderful and disturbing that two very young and very bright people with a tiny budget and no security clearances have now done more damage to the financial networks that sustain His Corpulency’s misrule than the Obama administration did on its own in eight years. (Full disclosure: I met with C4ADS a few times since they started work last fall, to help them focus and target their investigation.) Here is how they did it.
To map these growing overseas networks, this report used open source databases, including corporate registries; court filings; Equasis maritime database records; customs and trade data provided by Panjiva, a customs trade data aggregator; and real time data on ship activities provided by Windward, a maritime data and analytics platform. The compiled information was consolidated using Palantir’s Gotham network analysis platform.
In Part I, we focused on building bulk datasets on companies, individuals, and ships. By using corporate and tax registries in East Asian countries, we were able to identify significant points of convergence across seemingly disparate networks and identify 562 ships, companies, and individuals within one degree of separation from known DPRK illicit and regime entities.
In Part II, we identified key nodes from our expanded dataset for a more in depth investigation. We focused, in particular, on one Chinese trading conglomerate that has conducted over $500 million of trade with the DPRK in the past five years. Within this network, we were able to identify its subsidiary and affiliated entities that have transacted an additional $300 million with sanctioned Burmese and North Korean entities, helped maintain the cyber infrastructure of the DPRK, and traded in various goods and services that raise serious non-proliferation concerns. [C4ADS]
The researchers also pulled and read court filings in China, Japan, and Hong Kong to uncover what appear to be significant pieces of North Korea’s overseas financial support and shipping networks. Typically for criminal networks, the North Koreans mix legal and illegal business to conceal their illicit activity and disguise the origin of their profits. The result is that some businesses “are likely to be inadvertently facilitating North Korean illicit activity,” while others, like DHID, do so willingly. I won’t try to do justice to C4ADS’s report here; just read the whole thing. Among its findings —
The report uncovered 248 companies, mostly registered in Hong Kong, that operate North Korea’s shipping fleet, much of it concealed behind shell companies and flags of convenience.
Liaoning Hongxiang Group is directly responsible for operating 10 of those ships, which import North Korean coal and help Pyongyang get around the “livelihood” loophole in UNSCR 2270.
DHID’s parent company, the Liaoning Hongxiang Group, helped to run the Cambodian ship registry, which Cambodia is currently in the process of nationalizing. C4ADS found that Cambodia in the principal registrar of reflagged North Korean ships. UNSCR 2270 prohibits the reflagging of ships owned, controlled, or crewed by North Korea.
DHID’s annual trade volume with North Korea was more than twice that of the Kaesong Industrial Complex, and more than enough to fund North Korea’s nuclear program.
DHID may have facilitated North Korean exports to the United States, which would violate Executive Order 13570.
DHID has an equity stake the Bank of Dandong, which has previously been implicated in handling money transfers to North Korea, in violation of U.N. sanctions.
The Liaoning Hongxiang Group’s Vice Chairman had dealings with a sanctioned Burmese tycoon, Tay Za, who also bought a nuclear reactor from North Korea.
DHID entered into a joint venture with the Korea National Insurance Corporation, which defector Kim Kwang-jin has accused of insurance fraud, and which has been designated by the EU for the freezing of its assets for proliferation-related activities.
DHID’s parent company is a key facilitator of North Korea’s cyber architecture, which North Korea used in cyberattacks against SWIFT; against South Korean banks, nuclear power plants, and news media organizations; and against Sony Pictures. The empty brackets are for Chinese characters that WordPress can’t read:
Companies associated with the Liaoning Hongxiang Group provide services that are critical to the underlying cyber architecture of the DPRK, including the country’s primary email relay service, facilities from which hackers are alleged to operate, and IT firms producing software with possible military and regime applicability as will be discussed in this section. The Chilbosan Hotel [ ] in Shenyang, one of Liaoning Hongxiang’s joint ventures with the DPRK,117 is alleged to be the staging area for Bureau 121, a group of North Korean hackers.118 119 The source of the allegations is a North Korean defector, Kim Heun Kwang, a former computer science professor in Pyongyang, who escaped from North Korea in 2004 and gave detailed testimony on Bureau 121, a group that began large-scale operations in China in 2005.120 The group is reported to be comprised of about 1800 “cyber-warriors” and is considered the “elite of the military.”121 It has been widely reported that Bureau 121 may have been responsible for the 2014 Sony hack.122 The Chilbosan Hotel is majority owned by the North Korean Pyongyang Economic Exchange Society [ ], 123 which controls a 70% share of the company.124 The remaining 30% is owned by Liaoning Hongxiang Group member Dandong Hongxiang Industrial Development Co. Ltd.
The Chilbosan Hotel also shares a physical address with a company called Silibank.127 128 Silibank is an email relay service that charges for sending and receiving email through servers that connect from the DPRK, through China, and then to the outside world. Established in September 2001, Silibank is reportedly the DPRK’s first ISP provider,129 charging for its service in USD for each kilobyte sent.130 The company’s domain, silibank.com, is currently registered to a Chinese company called Liaoning Zhongtian Real Estate Development Co. [ ].
And finally, C4ADS found a link between DHID and North Korea’s WMD-related procurement operations:
Information found on Dandong Hongxiang Industrial Development Group shows that in several online classified ads and databases, Dandong Hongxiang sold products that could qualify as potential military and nuclear dual use products under the U.S. Department of Commerce Bureau of Industry and Security export restrictions.105 These goods included at least four dual use products: 99.7% pure aluminum ingots,106 aluminum oxide (Al2O3), ammonium paratungstate (APT), and tungsten trioxide (WO3).107 Information discovered using Panjiva customs records shows that Dandong Hongxiang Industrial Development Group sent two shipments of aluminum oxide worth a total of $253,219 to the DPRK as recently as September 2015.108 Classified ads posted by Shenyang Hongyang Fine Cermaics Co., which according to the Chinese business registry is owned by a Chinese national named Ma Xiaohong ???, listed “industrial spaceship” as a potential application for aluminum oxide (further investigation is required to confirm if they are the same individual).109 110
We cannot definitively identify the end-user of such goods, but there are clear dual use applications for the products listed. According to a leaked government cable, North Korea has sought to aquire aluminum ingots in the past. The cable further states that “these commodities have dual-use applications for the products listed. According to a leaked government cable, North Korea has sought to aquire aluminum ingots in the past. The cable further states that “these commodities have dual-use applications and could possibly be linked to the North Korean nuclear program.”111 Ammonium paratungstate and tungsten trioxide are byproducts of separating tungsten from its ore.112 A U.S. patent filed in 2010 states that tungsten trioxide is one of several oxidizing agents appropriate for use in a missile design with increased aerodynamic stability.113 According to the U.S. Nuclear Regulatory Commission, aluminum oxide is a component used to resist corrosion in gas centrifuges during uranium enrichment.114 In April 2013, a British company discovered that a firm they had been sending aluminum oxide to had links to the Iranian government’s nuclear program and immediately “ceased transactions. The article stated that “Aluminium oxide is an important material in gas centrifuges used to enrich uranium.”115 [C4ADS]
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Strictly speaking, the Treasury and Justice Departments sanctioned and prosecuted almost none of this conduct. Let’s turn to the Treasury Department designations first. The “NPWMD” means the assets were frozen under Executive Order 13382, which makes any transaction that facilitates North Korea’s WMD procurement not only sanctionable, but punishable with criminal penalties under section 206 of the International Emergency Economic Powers Act, or IEEPA.
“Today’s action exposes a key illicit network supporting North Korea’s weapons proliferation,” said Adam J. Szubin, acting Under Secretary for Terrorism and Financial Intelligence at the U.S. Department of the Treasury. “DHID and its employees sought to evade U.S. and UN sanctions, facilitating access to the U.S. financial system by a designated entity. Treasury will take forceful action to pressure North Korea’s proliferation network and to protect the U.S. financial system from abuse.”
OFAC designated China-based DHID for acting for or on behalf of North Korean-based KKBC. Specifically, DHID used an illicit network of front companies, financial facilitators, and trade representatives to facilitate transactions on behalf of KKBC. Ma Xiaohong, Zhou Jianshu, Hong Jinhua, and Luo Chuanxu were designated for acting for or on behalf of DHID.
KKBC was designated by OFAC under E.O. 13382 and the UN pursuant to UN Security Council Resolution (UNSCR) 2270 for providing financial services in support of the previously designated entities Tanchon Commercial Bank and the Korea Hyoksin Trading Corporation. Both of those entities were designated pursuant to E.O. 13382 and UNSCR 1718 for their roles in North Korea’s WMD and missile programs. [Treasury Department press release]
As a result of Treasury’s designations, all dollar-denominated assets of the five targets are frozen, and U.S. persons are prohibited from doing business with them.
Not to be outdone, the Justice Department has unwrapped an early Christmas present by unsealing an indictment of Hong, Luo, Ma, and Zhou, and DHID for conspiracy, money laundering, and IEEPA violations, for helping a sanctioned North Korean entity circumvent sanctions. That’s about as much as you’ll see about proliferation in these indictments; the only link to proliferation is the money DHID moved for a North Korean bank that had been sanctioned for proliferation. The Justice Department also filed a civil forfeiture action against 25 bank accounts belonging to DHID, deposited in a who’s-who of Chinese banks. Want to know the names of the Chinese banks? You know you do.
China Merchants Bank
Shanghai Pudong Development Bank
Agricultural Bank of China
Bank of Communications Co. of China
Bank of Dandong (as predicted)
China Construction Bank
Guangdong Development Bank
Industrial & Commercial Bank of China
Bank of Dalian
Bank of Jinzhou
Hua Xia Bank
China Minsheng Banking Corporation
Contrary to what some news reports have written, a forfeiture action does not freeze assets; if effectively confiscates them. The ownership interest of the person who thought he owned the assets is legally extinguished if the government proves that assets are “involved in” illicit activity.
The banks themselves have no standing to challenge the forfeiture unless they can prove that they’d already closed the accounts. Typically, the feds will use 18 U.S.C. 981(k) to take an equivalent amount to the asset right out of the foreign bank’s U.S.-based correspondent account. It’s up to the foreign bank to make itself whole by taking an equivalent sum from the account holder, something that account holders usually agree to in the fine print of their account-holder agreements.
The actions are venued in the District of New Jersey because the Chinese banks that serviced DHID and the numerous shell companies it set up used Standard Chartered Bank and Deutsche Bank as their U.S. correspondent banks, and both banks based their dollar-clearing operations in New Jersey. I’ve explained how this works a few times before, but DOJ explained it well in its forfeiture complaint.
32. An interbank, also known as a correspondent bank, is a financial institution that provides services on behalf of another financial institution. It can facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of another financial institution. Correspondent banks are able to support international wire transfers for their customers in a currency that their customers normally do not hold on reserve. Correspondent banks in the U.S. facilitate these wire transfers by allowing foreign banks, located exclusively overseas, to maintain accounts at the correspondent bank in the U.S.
33. To obtain goods and services in the international market place, as North Korea must, it needs access to U.S. dollars as some international vendors require purchases to be made in U.S. dollars. As a result, North Korean entities, including designated entities such as KKBC, need access to the U.S. financial system.
The New Jersey venue is interesting, in that most correspondent banks operate in New York. (I wonder if that means we can expect to see another indictment in the Southern District of New York one day soon.)
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Although news reports have said that the indictment was for aiding North Korea’s WMD programs, that’s only indirectly true. The crux of the government’s case is that after August 2009, when Treasury designated Korea Kwangsong Banking Corporation (KKBC) for WMD proliferation and blocked its access to the dollar system, DHID stepped in to serve as KKBC’s workaround and to launder its money. (Broadly defined, money laundering means moving or spending money that is “involved in” certain specified unlawful activity, whether as proceeds or as an instrumentality.) I’m often asked at this juncture why the North Koreans don’t just use Renminbi. I’ll let the Justice Department answer that.
35. Following the KKBC’s designation as an SDN by the U.S. Department of the Treasury in August 2009, DHID began working to find ways to conduct trade on behalf of KKBC despite the U.S. sanctions. One means of doing so was to use Chinese currency rather than U.S. dollars to conduct commodities transactions, so as to avoid sending money through the U.S. in violation of IEEPA. In July 2010, the City of Dandong, China highlighted press reports of a pilot program between DHID and KKBC to allow Chinese Renminbi (RMB) transactions to facilitate trade between China and North Korea.
36. North Korea’s trading needs, however, cannot be met using only Chinese currency. As a result, KKBC has continued to access the U.S. financial system to facilitate the purchase of goods in violation of U.S. sanctions. KKBC has done so by using DHID and its front companies.
In other words, what I said before — North Korea uses the dollar because that’s what sellers want, and also because (as I’ll explain later) Pyongyang is dollarizing to stabilize its economy.
When KKBC wanted to buy something in dollars — in this case, sugar and urea (used for fertilizer and explosives, and also, ewww) — it would place an order with DHID, which then bought the merchandise at a substantial mark-up — as much as 23 percent, through any one of 22 different front companies or shell companies it set up for just that purpose. That’s the kind of premium that, at least according to our friends in the FBI, people only charge to take the risks associated with breaking the law. Ma and DHID were initially well-positioned to charge these commissions due to Ma’s connections with Jang Song-thaek. Only when the guns of Jang’s firing squad fell silent, Ma’s business kept right on booming.
DHID and KKBC kept a ledger where KKBC would credit or debit DHID’s dollar account in KKBC in Pyongyang. The most suspicious transactions — those that involved a North Korean nexus — were all kept off the wires. Instead, DHID set up a whole series of shell companies, mostly registered in the British Virgin Islands or the Seychelles, and listing fictitious addresses in Hong Kong.
And how did DOJ find all of this out? Much of it obviously began with the C4ADS-Asan investigation, but there is much evidence in the indictment and forfeiture complaint that C4ADS didn’t write about. And why sugar and urea instead of, say, aluminum oxide? I can only speculate that those transactions were the easy ones to prove. Prosecutors prefer to charge the conduct that’s easiest to prove, especially if some of the other transactions with more jury appeal might also require proving up a longer, more complex chain of shell companies and beneficial owners.
All of which is our cue for a round of “Panama Papers Bingo,” which will allow you to read fun stuff about theshellcompaniesnamedin theindictment and theircorporate officers. By all means, leave a comment if you find something interesting in there, although I may hold your comment unpublished for a while for legal reasons.
Although the forfeiture action doesn’t say how much money was in the 25 accounts, it describes multiple transactions in the millions of dollars, including one that was for around $11 million. It wouldn’t surprise me if we learned that the total was well over $25 million, the amount that was blocked (but not forfeited) in the case of the Banco Delta Asia action.
Anyway, now you know why we wrote a section on “forfeiture of property” into the NKSPEA. Originally, we tried to create a special fund to pay for North Korea sanctions enforcement, broadcasting, and humanitarian purposes. Because that funding provision ended up on the cutting-room floor, the Justice and Treasury Departments will put the forfeited money into their respective forfeiture funds and use the money to pay for law enforcement operations. Where, as here, DOJ and Treasury worked the case together, they’ll typically work a deal for splitting that money up between them.
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So what will the impact of all of this be? Financially speaking, DHID and Ma aren’t likely to survive the experience. Because 80% of DHID’s business was North Korea-related, His Porcine Majesty will probably feel a significant impact. DOJ’s indictment quotes a DHID powerpoint presentation that claims that as of 2012, DHID handled 20% of the volume of Sino-North Korean trade, and claims that DHID’s business was growing at 30 percent each year. I have no way of knowing if that’s true or not, but my guess is that these figures are exaggerated for shareholder consumption. After all, DHID was willing to file a false certification with a certain Panama-based law firm — any guesses, kids? — denying that it had any links to North Korea (exhibit 3).
The greater effect may be the in terrorem impact this action will have on companies like the 88 Queensway Group that had dealings with sanctioned North Korean entities and felt untouchable, possibly because they thought their Chinese political connections would protect them from Uncle Sam. Ma herself was a made member of the Chinese Communist Party, and Sam Pa was a former Chinese spy. Equally well-connected figures may feel less invincible today.
The bad news? Not only the fact that no Chinese banks are facing indictments for facilitating Hongxiang’s willful, long-standing money-laundering scheme, but also, the fact that in its press release, the Justice Department said that “[t]here are no allegations of wrongdoing by the U.S. correspondent banks or foreign banks that maintain these accounts.” I’ll discuss that in more detail in tomorrow’s post.
For a few years now, I’ve heard that hedge fund investor, TV provocateur, and crackpot Jim Rogers has been urging his audiences to invest in North Korea. A few years ago, that advice might not have done much worse than condemn your soul to eternal damnation and bankrupt you, the way it bankrupted (or nearly bankrupted) Orascom Telecom and any number of otherinvestorswhopreceded it.
Since at least March, however, Rogers’s advice has been malpractice on a whole new level. Following the passage of a new U.S. sanctions law, the Treasury Department explicitly banned new investment in North Korea. It has also done much to jeopardize existing ones by imposing sectoral sanctions on North Korea’s banking, transportation, and mining industries. Perhaps, then, it’s time for Mr. Rogers to find a new way to attract attention. After all, the bans on investment are punishable as violations of the International Emergency Economic Powers Act, with 20 years in prison term and a $1 million fine.
“If we all bought North Korean currency, we’d all be rich someday,” Rogers said. [Business Insider]
No, Jim, you won’t be rich. You might get three square meals a day, courtesy of the taxpayers. Also, you might be warm. After North Korea redenominated its currency in 2009, North Koreans burned piles of the stuff. Even the North Korean government prefers the dollar to its own currency. North Korean market traders prefer dollars and Renminbi.
In short, Rogers is seeing the controversial country open up, which he says makes it a good bet.
Here’s the relevant excerpt from the Q&A explaining why:
“Well, North Korea today is where China was in 1981. Deng Xiaoping started opening up in ’78. Most of us, including me, either weren’t aware of it or if we were aware of it. We ignored it, didn’t pay any attention. North Korea is doing that now.
“There are 15 free trade zones there now. You can take bicycle tours of North Korea, if you want. You can take movie tours. I’m sure if [Kim Jong Un’s] father were alive, he’d hang him. If his grandfather were alive, he’d torture him and then hang him, you know, for some of the things he’s doing. I mean, you go to North Korea now, you see these astonishing restaurants with white tablecloths, cutlery, candles. I mean, this is North Korea we’re talking about. Chefs. It’s happening.”
He added that his lawyer told him he couldn’t invest.
So we eventually come to the fact that Rogers’s own lawyer told him of the investment ban. I’ve previously described North Korea as the Trump University of foreign investment, and you’d think that on so many levels — financial, moral, and legal — no responsible advisor would point an investor there. Maybe Rogers’s next question for his lawyer should be about the penalty for solicitation of a felony.
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Update: The only solicitation offense I see in title 18 is for soliciting a crime of violence. So I guess it’s Rogers’s viewers who bear all of the risk by taking his advice.
The Obama administration’s single greatest North Korea policy failure in eight years has been its failure to apply the kind of secondary sanctions that proved so effective against North Korea a decade ago. Some of that blame lies with the bad advice the President has received from certain think tanks, which has made its way into the State Department and the National Security Staff. After every North Korean nuke test, attack, or other outrage, a nothing-we-can-dochorus of China-friendly scholars and State Department retirees steps up to misinform gullible, ill-informed reporters that we have no options but appeasement, because the Chinese government will never push North Korea to the brink of collapse.
Yet for years, a Panel of Experts appointed by the U.N. Security Council has published extensive evidence implicating Chinese banks, businesses, nationals, and state-owned companies for a pattern and practice of violations that can only be willful, as I’ve argued here and here (see the U.N. POE’s reports from 2010, 2012, 2013, 2014, 2015, 2016). We have a North Korea problem because China, which has recently emerged as an accomplished bully when it comes to our allies, denies that it has the means to influence Kim Jong-un.
And in fact, we have pushed North Korea to the brink of collapse before, without the cooperation of the Chinese government, by threatening the Chinese banks that hold North Korea’s slush funds with fines, penalties, and even the denial of access to the dollar-based financial system. U.N. Panel of Experts reports prove that most of those funds are denominated in dollars and wired through the U.S. financial industry. No bank can afford to defy such a threat, and Kim Jong-un couldn’t last long without that cash.
This year, Congress finally lost its patience with the Obama administration’s passivity and drift and passed the North Korea Sanctions and Policy Enhancement Act, which mandates sanctions against third-country (read: Chinese) enablers of North Korea’s proliferation, arms trafficking, and money laundering. The bipartisanship of the vote (418-2 in the House, 96-0 in the Senate) was a minor political miracle in a polarized Congress in an election year, regarding an issue that had itself polarized Washington in previous years. Congress’s clear mandate to the administration was that it must break the link between Kim Jong-un’s regime and the hard currency that sustains his regime and legitimizes his rule.
Even before North Korea’s fifth nuclear test, Congress had begun to express its frustration at the Obama administration for failing to enforce the new law. It’s not that we don’t know who Kim Jong-un’s bankers are, either. In 2013, the Chosun Ilboreported that the Treasury Department had identified hundreds of millions of dollars in North Koreans slush funds in banks in Shanghai. In January, Bonnie Glaser testified as follows before the House Foreign Affairs Asia Subcommittee:
In 2013, US and South Korean authorities uncovered dozens of overseas bank accounts worth hundreds of millions of dollars that were linked to top North Korean leaders, which they proposed including in UN sanctions lists, but Beijing refused. China has also strongly opposed levying sanctions on high-level North Korean officials such as the head of the North Korea’s agency responsible for conducting its nuclear tests. [link]
That same month, the New York Times reported, “The Treasury Department has identified similar institutions used by Mr. Kim’s son, the current leader, Kim Jong-un.” In February, the U.N. Panel of Experts implicated dozens of North Korean and third-country entities in China, Africa, the Middle East, and elsewhere in Asia. The Center for Advanced Defense Studies will soon publish a report implicating a large Chinese conglomerate in violating U.N. sanctions against North Korea; that report will also cast suspicion on the Bank of Dandong for handling some of its transactions.
There’s plenty more where that came from in The Panama Papers. No doubt, there’s plenty more stored away in the laptops, cell phones, and human intelligence being collected from the North Korean diplomats and slush fund managers who’ve defected in Southeast Asia, Russia, China, and Europe recently. Which is to say, it’s not for lack of intelligence or lack of means that the Obama administration refuses to shut down Kim Jong-un’s access to the financial system. It’s solely due to a lack of political will.
In the wake of the test, China’s latest failures to enforce U.N. sanctions — and the Obama administration’s failure to enforce the law against Chinese banks and companies — has drawn a sharp reaction from Congress.
The House Asia Subcommittee has already held one hearing since the latest test, in which four separate witnesses recommended that the Obama administration apply secondary sanctions. Ed Royce, Chairman of the Foreign Affairs Committee, has been sharply critical of the administration’s failure to enforce the law.
But much of the discussion in Washington focused on the North Korea Sanctions and Policy Enhancement Act. Passed by Congress and signed by Obama earlier this year, it gives the Obama administration, among other things, new authority to sanction any individual who “imports, exports, or re-exports luxury goods to or into North Korea” or “engages in money laundering, counterfeiting of goods or currency, bulk cash smuggling, or narcotics trafficking that supports the government of North Korea or its senior officials.”
Rep. Ed Royce (R-Calif.), who chairs the House Foreign Affairs Committee and led the push for more sanctions authority, said Obama’s policies are “falling short” by not imposing sanctions on Chinese companies and banks.
Royce referenced a leaked U.N. report that accused China of lax enforcement and “cites evidence that Pyongyang moved tens of millions of dollars through a Singaporean branch of China’s biggest bank to evade sanctions,” according to a report in Foreign Policy magazine.[Politico]
Small correction to Politico — the U.N. report is publicly available.
The report found that North Korea “has been effective in evading sanctions and continues to use the international financial system, airlines and container shipping routes to trade in prohibited items.” [Politico]
The Senate Foreign Relations Committee will hold a top secret briefing on the administration’s enforcement efforts today, and a letter signed by 19 Republican senators is a strong indication that the staffers will ask the right questions in that briefing. Last week, Senator Cory Gardner (R, Colo.), the Senate’s leading advocate of a tougher North Korea policy, assembled the group of senators, who signed this letter to President Obama. It’s a long quote, but worth reading.
On February 18, 2016, you signed into law the North Korea Sanctions and Policy Enhancement Act of 2016 (P.L. 114-122), but your Administration’s implementation of this legislation has been disappointing. While we commend the designation of North Korea as a jurisdiction of “primary money laundering concern” and the designation of top North Korean officials, including Kim Jong Un, as human rights violators, these actions only scratch the surface of the sanctions authorities provided to you under the new law.
First and foremost, you must begin to designate entities that are assisting the North Korean regime, especially those based in China — the country with which North Korea currently conducts an estimated 90% of its trade and that has historically served as Pyongyang’s largest military and diplomatic protector.
As you know, Section 102 of P.L. 114-122 mandates, not simply authorizes, investigations against all entities, no matter where they are based, “upon receipt by the President of credible information indicating that such person has engaged” in illicit conduct outlined in the legislation.
As the Wall Street Journal wrote in an editorial on August 18, 2016: “The promise of secondary sanctions is that they can force foreign banks, trading companies and ports to choose between doing business with North Korea and doing business in dollars, which usually is an easy call…But this only works if the U.S. exercises its power and blacklists offending institutions, as Congress required in February’s North Korea Sanctions and Policy Enhancement Act. The Obama Administration hasn’t done so even once.”
As the Wall Street Journal further noted, for instance, the Administration has not acted on information from the United Nations Panel of Experts report in March 2016 that the Bank of China “allegedly helped a North Korea-linked client get $40 million in deceptive wire transfers through U.S. banks.”Moreover, there is ample evidence of increased North Korean efforts to evade sanctions with help from China-based entities.According to the New York Times report on September 9, 2016, “To evade sanctions, the North’s state-run trading companies opened offices in China, hired more capable Chinese middlemen, and paid higher fees to employ more sophisticated brokers, according to Jim Walsh and John Park, scholars at MIT and Harvard.”
We respectfully ask you to immediately provide written answers to the following questions:
1) Has the Administration received credible evidence that entities based in China are engaging in illicit activities outlined in P.L. 114-122? If so, what is the status of these investigations?Why have no Chinese-based entities been designated to date?
2) Do you believe that China is in full compliance of UN Security Council Resolution 2270 and all preceding U.N. Security Council resolutions regarding North Korea?Please provide a detailed account of China’s compliance or non-compliance and what actions, if any, have been pursued at the U.N. for China’s non-compliance.
3) Why has the Administration not designated any entities for malicious cyber-enabled activities, as required by Section 209 of P.L. 114-122?
4) Does the Administration believe that the multilateral enforcement of UNSCR 2270 and its own enforcement of P.L. 114-122 has had a credible and measurable impact on North Korea’s regime ability to obtain luxury goods?
5) Is North Korea’s state-owned Air Koryo airline involved in any activities outlined in Section 104 of P.L. 114-122 and if so, has the Administration initiated an investigation for the designation of Air Koryo under the law?If not, why not?
6) What actions has the Administration taken to discourage the North Korean forced labor camps and trafficking of North Korean workers?Is the Administration pursuing any designations for entities that are assisting in “the operation and maintenance of political prison camps or forced labor camps, including outside of North Korea”, as required by Section 104(a)(8) of P.L. 114-122? If not, why not?
Mr. President, we must send a strong message to Beijing that our patience has run out and exert any and all effort with Beijing to use its critical leverage to stop Pyongyang.As Secretary Ash Carter stated on September 9, following the latest nuclear test:“China shares important responsibility for this development and has an important responsibility to reverse it. It’s important that it use its location, its history and its influence to further the denuclearization of the Korean Peninsula and not the direction things have been going.” [full text here; link added by me]
The Hill, which also covered the letter, lists the names of the signatories.
The letter was signed by Republican Sens. Cory Gardner (Colo.); John Boozman (Ark.); Shelley Moore Capito (W.Va.); Tom Cotton (Ark.); Ted Cruz (Texas); Steve Daines (Mont.); Deb Fischer (Neb.); Johnny Isakson (Ga.); Jerry Moran (Kan.); David Perdue (Ga.); Jim Risch (Idaho); Jeff Sessions (Ala.); Pat Roberts (Kan.); Mike Rounds (S.D.); Marco Rubio (Fla.); Ben Sasse (Neb.); Richard Shelby (Ala.); Dan Sullivan (Ark.); and Roger Wicker (Miss.). [The Hill]
Separately, Senator Ted Cruz (R, Tex.) and Kelly Ayotte (R, N.H.) also called on the administration to hit Kim Jong-un’s Chinese enablers with secondary sanctions.
Not to be outdone, Senate Democrats introduced a resolution condemning the test and calling for the U.N. to approve more sanctions against North Korea. Although the resolution highlights the passage of the NKSPEA in its findings, it stops short of criticizing President Obama for failing to enforce it. Hillary Clinton, on the other hand, offered some veiled-but-cryptic criticism of the President’s policy:
In a further effort to distance herself from current policy, Clinton also called for a “rethinking” of America’s strategy toward North Korea during a news conference in New York. Sanctions are “not enough,” she said, proposing an “urgent effort” to pressure Beijing into cracking down on Pyongyang. [Politico]
Will the administration finally act? I suspect not. Instead, it is running out the clock. Instead, it is negotiating yet another resolution with China, which China will also fail to enforce. As long as those negotiations continue, the administration probably won’t want to provoke China with secondary sanctions. And to be sure, there are loopholes in the current resolutions that should be closed, new sanctions that should be imposed, and new designations that should be made.
But in the end, all of North Korea’s profits from exporting coal, gold, weapons, and slaves ultimately end up in banks, mostly in China. If we freeze the accounts where those earnings are deposited, and from where the proceeds are spent, it won’t matter how much earnings potential those revenue sources have in the next two years. We could nullify North Korea’s profits from any gaps in the sanctions, and effectively enforce the sanctions that already exist, by beginning an earnest effort to penalize Kim Jong-un’s accomplices in the banking industry. Which is why, when China balks at passing a tough new resolution, our diplomats should not be afraid to walk away and act in concert with their allies in Japan, South Korea, Europe, Canada, and Australia. It would be far better to enforce the sanctions we have now than to enforce nominally tougher sanctions poorly.
for the sanctions geeks, the latest Treasury/FINCEN advisory, in which North Korea seizes the top spot from Iran as a money laundering risk. If nothing else, it’s a useful reminder that North Korean banks’ cutoff from the financial system — the single most important sanction yet imposed on North Korea — still hasn’t become final and taken effect. It will take some time for us to see and assess the effects of that. And if that’s not geeky enough for you, you may be interested in FINCEN’s new rules on beneficial ownership disclosure, which could impact North Korea indirectly.
video of today’s hearing before the House Foreign Affairs Committee’s Asia Subcommittee, featuring Victor Cha, Bruce Klingner, Sue Mi Terry, and David Albright. The big takeaway was that Chairman Salmon will propose legislation to cut North Korea off from “financial messaging services,” which either means SWIFT or whatever less responsible actors are filling that void for North Korea these days.
By now, diplomats at the U.N. have begun wrangling over the shape of the next North Korea sanctions resolution (let’s hope they at least vote before North Korea’s next nuclear test). Meanwhile, efforts to enforce the last resolution have lost momentum. With regard to both banking and shipping sanctions, the Obama administration doesn’t appear to have done much to encourage other U.N. member states to comply.
I’ve said before that following the money matters most, but North Korea’s transportation sector is another important pressure point. North Korea has long used its merchant fleet for smuggling drugs and weapons, and it has evaded law and sanctions enforcement by relying on reflagging — the registration of its ships under flags of convenience. States known to reflag North Korean ships include Panama, the Republic of the Marshall Islands, Tanzania, Sierra Leone, Cambodia, Mongolia, Kiribati, Tuvalu, Belize, and the Republic of Palau.
In March, the U.N. Security Council approved Resolution 2270, paragraph 19 of which requires U.N. member states to de-register ships that are “owned, operated or crewed by” North Korea. The U.S. Treasury Department followed this by imposing sectoral sanctions on North Korea’s transportation industry under Executive Order 13722. So by now, no one should be reflagging North Korea’s ships, right?
Shortly after the resolution passed, Yonhap reported that an unnamed U.N. member state had canceled the registrations of North Korean ships, but just four days after UNSCR 2270 passed, Tanzania reflagged the notorious, U.N.-designated North Korean smuggling shipDawnlight (now sailing as the First Gleam). The Dawnlight was previously operated from Singapore, which has since pledged its full cooperation with enforcing UNSCR 2270. The ship is now operated by a Marshall Islands based shell company, Sinotug Shipping.
As Claudia Rosett pointed out, the North Korean-flagged ships that are making regular voyages between North Korea and Iran probably aren’t being inspected as required.
Two North Korean ships, designated by the Security Council as the Jin Teng and the Jin Tai, have switched registrations from Sierra Leone to Belize. Worse, UNSCR 2270 requires members states to confiscate designated ships on arrival, but the ships have since landed in the Philippines, Japan, Vietnam, China and Indonesia. In the case of the Philippines, the authorities initially seized the Jin Teng, but China lobbied the U.S. to have its designation removed. Both ships are now operated by a China-based entity called Blue Ocean Ship Management.
Cambodia, the top registrar of flags of convenience for North Korea’s shipping fleet — ironically, through the Busan-based Cosmos Group — claims to have suspended reflagging operations pending a nationalization of the reflagging procedure. The suspension was not specific to North Korea, and I’ve seen no reports that it has de-registered North Korean ships. That the South Korean government has no recourse to influence the conduct of a company based in Busan is perplexing. Seoul has lobbied other governments to enforce sanctions; maybe it ought to set a better example itself.
In August, a month after Park Geun-hye visited Mongolia, the Joongang Ilboreported that “The Mongolian government cancelled contracts with 14 North Korean ships to operate under its flag of convenience.” NK News’s Leo Byrne suggested that the ships may have switched their registrations to Togo, Cambodia, Sierra Leone, Kiribati, or particularly, Tanzania. Byrne specifically found that Tanzania had registered four new North Korean ships since the approval of USNCR 2270. The list of compliance reports required under UNSCR 2270 shows no report for Tanzania, although there is a lag time between submission and publication of the reports. Last week, Byrne reported that that Tanzanian-flagged, North Korean-crewed Jin Long had caught fire off the Chinese coast, and traced its management to a shell company in Hong Kong.
What measures would help enforce the sanctions? One is old-fashioned diplomacy. I’ve seen almost no reporting at all that our diplomats have lobbied U.N. member states to comply with UNSCR 2270. Contrast this with 2006, when Treasury Department officials went on a world tour, warning bankers and finance ministers to steer clear of North Korean funds.
A third option would be for the next UNSC resolution to simply deny landing rights to vessels owned, operated, crewed, or flagged by North Korea. If North Korea didn’t have a shipping industry at all, it would have to rely on third-country shippers, who would be more averse to the risk of sanctions violations.
If all else fails, the Obama administration must be willing to use EO 13722, or section 104 of the North Korea Sanctions and Policy Enhancement Act, to impose secondary sanctions on ship registries that don’t comply with UNSCR 2270.
So desperate are we to avoid a Cold War (or worse) in the Pacific that throughout the Obama years, we’ve pretended that China hasn’t been waging one unilaterally the whole time. Meanwhile, China has seized the South China Sea, bullied our allies with spurious territorial claims, whipped up anti-American rhetoric to persecute human rights activists, and effectively quit enforcing sanctions against North Korea despite signing on for a nominally tough new resolution in March.
Evidence, you ask? Start with this new Australian report showing that China isn’t enforcing the U.N.’s new cargo inspection requirements at all. China still hasn’t stopped buying minerals like gold and titanium, which is isn’t supposed to buy in any quantity. Coal and iron imports, which are supposed to be limited to “livelihood” purposes, fell sharply in the first quarter of this year, only torise again in the second. Chinese online vendors have even been selling North Korean coal. China continues to sell kerosene (read: jet fuel) in violation of a U.N. ban. Sanctioned North Korean ships have been seen leaving port. One, the Victory 2, has made regular calls in Chinese ports. Others have been seen hovering just off the Chinese coast. A China-based company, Blue Ship Management, continues to operate two sanctioned North Korean ships. More than 800 agents of North Korea’s Reconnaissance General Bureau, which was designated in UNSCR 2270, continue to operate on Chinese soil, mostly hunting for defectors and policing overseas workers. Et cetera, et cetera, et cetera, and so forth.
These are the wages of our weakness toward North Korea and China. The new realization that North Korea could be just two years away from having a second-strike capability to hit our West Coast with nuclear weapons has raised the danger of nuclear war to their highest level since 1962, as I predicted it would a year ago. Unfortunately, the President has been poorly served by his National Security Staff and State Department, which have counseled him to hold back on holding China accountable for enabling the steady rise of this threat. China’s friends in Washington, and others who should know better but don’t, are fond of saying there’s nothing we can do about this. But we know what scares and moves China — secondary sanctions. Congress gave the President the authority (and a mandate) to impose them because China’s violations of sanctions against North Korea are nothing new. They have been so longstanding and so flagrant as to eliminate any other possibility but a deliberate, willful policy.
Even before the last nuclear test, there was a growingsense that President Obama had failed to hold North Korea’s Chinese enablers to account for those violations, despite having so recently signed a new legal mandate to do so. Even before that test, President Obama had said he would seek to toughen sanctions in response to North Korean missile test, and revealed his irritation with China after its rude treatment of him, and after getting an earful of its unreasonable objections to THAAD:
“China continues to object to the THAAD deployment in the Republic of Korea, one of our treaty allies. And what I’ve said to President Xi directly is that we cannot have a situation where we’re unable to defend either ourselves or our treaty allies against increasingly provocative behavior and escalating capabilities by the North Koreans,” Obama said at a news conference in Laos after the East Asia Summit.
“And I indicated to him that if the THAAD bothered him, particularly since it has no purpose other than defensive and does not change the strategic balance between the United States and China, that they need to work with us more effectively to change Pyongyang’s behavior,” he said, according to a White House transcript. [Yonhap]
And even before that test, the Chairman of the Foreign Relations Committee had called on the President to enforce the North Korea sanctions law he has signed just seven months ago, including by imposing secondary sanctions on Chinese entities. Similar reactions came from Paul Ryan and Ed Royce, the Chairman of the House Foreign Affairs Committee (HFAC).
China has to understand that we will sanction those banks again, those Chinese banks that are transferring the hard currency…We need to use these powers that now the administration has under the bill that I authored – that’s been signed into law by the President – to tell China, ‘No, there will be secondary sanctions on any economic activity you are engaged in with North Korea.’ Because our goal right now is to shut [North Korea’s] economy down so they cannot continue to expand this nuclear weapons program.” [CNN]
HFAC’s Asia Subcommittee has already scheduled a hearing for Wednesday afternoon. Even before the hearing was announced, I predicted that it would be contentious — this is an election-year embarrassment the administration and Hillary Clinton don’t need. Now, freshly humiliated by North Korea’s latest nuclear test, the administration is suggesting that it’s finally ready to seek new U.N. sanctions, possibly to close existing loopholes (probably the “livelihood” exception to the coal and iron ore import ban) and ban fuel exports to North Korea. The Washington Post reports that the U.S. and South Korea may also push to ban North Korean labor exports, which will hurt North Korea’s ability to launder money by giving it less “legitimate” income for co-mingling and hiding illicit income. More importantly, the administration is saying that it’s finally ready to follow the law and enforce the sanctions that already exist.
“We will be working very closely in the Security Council and beyond to come up with the strongest possible measure against North Korea’s latest actions,” said U.S. envoy Sung Kim on Sunday.
“In addition to action in the Security Council, both the U.S. and Japan, together with the Republic of Korea, will be looking at unilateral measures, as well as bilateral measures, as well as possible trilateral cooperation,” he said, referring to South Korea by its official name. [Reuters]
So much for the idea that this time is different — that China had finally lost patience with North Korea. In an epiphany that I thought would never come to Washington, Hillary Clinton (of all people) has articulated why — China has been using North Korea as a “useful card” to divide U.S. forces in Asia and the Pacific (left unsaid: while China seizes the South China Sea and surrounds Taiwan).
“Up until relatively recently, I think (China was) under the impression that they could control their neighbor and they didn’t want to crack down because they saw it as a useful card to play,” Clinton said.
“If (North Korean leader Kim Jong-un) gets a little crazy, maybe the South Koreans will move toward (China) a little bit; he gets a little crazier, maybe they can make some deals with the Japanese about things they want. It was a strategic calculation,” she said. [Yonhap]
Separately, Clinton called the North Korean nuclear and missile programs “a direct threat to the United States” that we “cannot and will never accept,” which is welcome news at a time when some people are seriously suggesting that we can and must.
Clinton, a former secretary of state, also said that she supports President Barack Obama’s calls for strengthening the existing sanctions and impose additional measures.
“At the same time, we must strengthen defense cooperation with our allies in the region; South Korea and Japan are critical to our missile defense system, which will protect us against a North Korean missile,” she said.
“China plays a critical role, too, and must meaningfully increase pressure on North Korea — and we must make sure they do,” she said.[Yonhap]
“North Korea’s fifth nuclear test, the fourth since Hillary Clinton became Secretary of State, is yet one more example of Hillary Clinton’s catastrophic failures as secretary of state,” Trump communications aide Jason Miller said in a statement.
“Clinton promised to work to end North Korea’s nuclear program as secretary of state, yet the program has only grown in strength and sophistication,” he said. [Yonhap]
It’s grim vindication this morning to see my prediction from two months ago now validated. This bomb appears to have had a higher yield than those that preceded it, and may show progress toward miniaturization. I’d already posted my recommendations for how to respond to this test, back in July. For the U.N. Security Council, the response should include new rounds of designations and the closing of sanctions loopholes. I hope Samantha Power will also push for bans on North Korea’s exports of food and labor.
For the administration, the answer is simpler — it should enforce the law the President signed in February. Ed Royce, the Chairman of the Foreign Relations Committee, has now added his voice to Senator Bob Corker’s prescient call for just that.
“The North Korean regime’s continued belligerence demands a strong and swift response. The United States cannot accept a nuclear North Korea that threatens America and our foreign partners with mass destruction. That’s why, earlier this year, Democrats and Republicans in Congress joined together to help impose unprecedented new sanctions on the Kim regime. Sadly, however, it is clear the Obama administration’s enforcement efforts are falling short.
“Most notably, the administration has yet to impose sanctions on any of the many Chinese companies and banks that, according to a recent U.N. report, continue to support the North Korean regime. This must change. We’ve seen before that China will only comply with sanctions if Chinese banks face real consequences for doing business in North Korea.
“The United States and our foreign partners should also act quickly to sanction North Korea’s state-owned airline. Air Koryo continues to flagrantly violate the ban on luxury goods and has been implicated in the proliferation of SCUD missile parts. At the same time, the administration must also work with European governments to better block luxury items – including cars, watches, and liquor – from reaching North Korea’s repressive ruling elite.
“Aggressive sanctions enforcement, along with a renewed focus on stopping the North Korean regime’s export of slave labor, is key to cutting off the cash needed to sustain Kim Jong Un’s power, and his illicit weapons programs. Today’s detonation wasn’t just about testing nuclear technology. It was also about testing America’s resolve. Now is the time for this administration to act.” [link]
Yes, there are more sanctions we can add that would confront Pyongyang with a clear choice between disarmament and extinction. Banning North Korea from SWIFT seems especially likely to be effective, and overdue. For the safety of our citizens alone, we’re long overdue for a tourist travel ban. And because the evidence is overwhelming that North Korea sponsors terrorism, the State Department should at least stop lying to the American people and denying that.
I don’t blame President Obama for the fact that Kim Jong-un is a psychopath. I blame President Obama for not recognizing that Kim Jong-un is a psychopath, and for not recognizing the implications of that. Above all, I blame President Obama for not enforcing the law he signed in February, after the fourth nuke. Wasting eight critical years without agreeing on or implementing a North Korea policy may not stand out as one of this administration’s greatest foreign policy failures yet, but that’s only because it sits alongside his failure to support the Green Revolution in Iran, his non-response to the Syrian genocide, the fall of Anbar, the rise of ISIS, and a refugee crisis that threatens to destroy the European Union and its liberal social order.
No wonder Obama, sensing the weakness of his position, is now calling for “serious consequences” for North Korea. He holds the power to impose them now, but it sounds like he’s about to send Samantha Power back to the Security Council to bicker with the Chinese over the next resolution, too. He can enhance her bargaining power by sanctioning the Bank of China for laundering Kim Jong-un’s money, and by having someone in the Treasury Department leak a report that the Bank of Dandong is under investigation for the same. If we’re serious about avoiding war in Korea, we must be willing to shake the foundations of the Chinese banking system.
Park Geun-hye, on the other hand, gets it, however belatedly, and seems to realize exactly what’s at stake here. Her shrewd diplomatic and psychological warfare against Pyongyang has probably done far more damage to Kim Jong-un than anything Obama has done yet. She should now move beyond loudspeakers and open a second front in the information war for the hearts and minds of the North Korean people. As her opening act, as soon as the atmospheric conditions are favorable for good TV reception in Pyongyang, she should put Thae Yong-ho on the air to deliver a revolutionary manifesto to the Pyongyang elites. She should build a row of cell phone, AM radio, and TV towers on the mountaintops all along the DMZ. Then, she ought to get behind a guerrilla engagement strategy to undermine the regime’s control over the countryside.
For now, the calls in Seoul for nuclear armament and preemptive strikes are probably just talk, but they’ll continue to grow. The economic and security frameworks of the whole region are in greater danger than most of us realize.
As I said all along, the U.S. and South Korean election years almost guaranteed that this test would happen. I’ve also said that in the short term, sanctions would aggravate His Corpulency and force him to react. Anyone who knows anything at all about sanctions knows that they would take at least year or two to show significant impact, and that’s assuming they’re enforced. Unfortunately, they haven’t been — despite the fact that a string of high-profile defections has probably yielded more fresh financial intelligence about where Kim Jong-un’s money is than we’ve had in years. It’s long past time we used it.
~ ~ ~
Update: To be clear here, I have no knowledge that the Bank of Dandong is under investigation or isn’t, but the BoD has been mentioned in previous reports as a holder of North Korean funds, and I expect to see more reporting in the coming weeks buttressing the case that they should be investigated.
Senator Bob Corker’s office issued this statement today:
CHATTANOOGA, Tenn. – U.S. Senator Bob Corker (R-Tenn.), chairman of the Senate Foreign Relations Committee, released the following statement today after reports that North Korea fired three medium-range missiles as the Group of 20 economic summit was underway in China.
“It is highly discouraging that China does little as North Korea continues to test and develop its missile and nuclear programs,” said Corker. “China wants the international respect due a country of its size, yet it refuses to responsibly address a growing threat to stability in its own region and has failed to fully implement United Nations Security Resolution sanctions. Meanwhile, the Obama administration continues to drag its feet, with lackluster implementation of the new sanctions authority Congress provided earlier this year under the North Korea Sanctions and Policy Enhancement Act.”
On February 10, the Senate unanimously passed the North Korea Sanctions and Policy Enhancement Act of 2016 following a day of legislative floor action led by Corker. To date, no Chinese entities or individuals have been sanctioned under the new authorities provided by Congress. Click here for more information on the bill, which was developed by the Senate Foreign Relations Committee. [Sen. Bob Corker]
Well, partially. Let’s not forget to give Ed Royce his due credit for writing and passing the first version on the House side, but it’s also true that without the SFRC staff and Senator Gardner in particular, this bill would still be stuck in the House. Brokering the February compromise in the Senate must have been very difficult work indeed, given the complex Senate rules.
Clearly, the Senate committee staff have also noted the concerns I noted here. Now, the failure to designate Chinese entities by itself might be excusable — temporarily — if the administration simply doesn’t know where Kim Jong-un’s money is. That has become a hard defense to accept at face value, for reasons I explained in the previous link, and here. It would also be excusable if quiet diplomacy could immobilize the funds without needless unpleasantness, but although there are some hints that North Korean diplomats and overseas workers are under some financial duress, pretty clearly, most of those funds are not yet immobilized.
I continue to predict that the section 103 briefing is going to be tense and difficult for the administration. The odds of some very contentious election-year hearings increase with each new provocation from Pyongyang, and particularly if President Obama returns from Beijing empty-handed.
Have you ever heard the late Christopher Hitchens speak about his visit to North Korea, and how he promised himself that he would not use the “1984” cliche? “Eventually,” Hitchens said, “They make you do it.” I believe it was sometime around 2007 that I made the same promise to myself about the Hans Blix scene in “Team America” when speaking of the U.N.’s response to North Korea’s increasingly brazen behavior. It has become another cliche, but they also make you do it.
This week, Samantha Power went to the Security Council and said this:
The DPRK’s missile tests help it to threaten the territory of even more countries in the region, whether through its land-based missiles or now via its recently tested submarine-launched ballistic missiles.
Once the DPRK has the capability to do so, we know what they intend to do with these missile systems, because they have told us. They are explicit: they intend to arm the systems with nuclear weapons. Kim Jong Un said this himself yesterday, according to the DPRK’s official news agency. [….]
The Security Council must remain unequivocal and united in condemnation of these tests, and we must take action to enforce the words we put on paper – to enforce our resolutions.
Meanwhile, at the State Department, words words words or something. At least the White House made a feint at meeting the test posed by Power’s last clause when it refused to rule out more sanctions, but there aren’t any signs that it means to impose any, either. Contrary to the overwhelming evidence, spokesman Josh Earnest (whose name is an oxymoron) said that the U.S. and China have worked “cooperatively in a coordinated fashion” to “steadily ratchet up” the pressure on North Korea. Unless Earnest really means that we’re cooperating with Beijing because we’ve capitulated to it, this is just more bullshit.
Despite the evidentiary and analytical challenges of calculating North Korea’s trade with China, the best evidence we have suggests that China continues to exploit the “livelihood” loophole for coal and iron ore exports to prop up Kim Jong-un’s rule. Despite the importance of drawing distinctions between trade that feeds the North Korean people and trade that props up the regime, bilateral trade hasn’t fallen much overall, and the small decline may owe more to China’s sagging economy than to its enforcement of sanctions. To make up for the drop in the coal trade and falling prices, China is sending more tourists to North Korea and accepting more slave labor from North Korea, including those formerly employed at Kaesong. Beijing is also engaging in public displays of affection with Pyongyang to show how much more worried it is about South Korean missile defense than it is about North Korean missiles.
China’s recent purchase of North Korean fishing rights was unconscionable and inhumane. It took away a source of food that should fill the markets that feed North Korea’s poor, and replaced it with another source of unrestricted cash for the ruling class in Pyongyang. By doing so, it arguably violated the U.N. Security Council resolutions.
To state what should be obvious, Kim Jong-un is politically invested in his weapons programs and won’t change his behavior unless the world can unite to coerce that change. Evans Revere, a recovering engager whom I probably wouldn’t have cited approvingly a few years ago, is almost certainly correct when he says, “The only way to get North Korea’s attention is to put at risk the one thing that North Korea values more highly than its nuclear weapons. That’s the future existence of the regime.” Revere now concedes that positive incentives haven’t worked on Pyongyang, and with North Korea “rapidly improving its ability to deliver nuclear and other weapons toward specific targets accurately,” we can’t rule out the possibility that it “might seek to use nuclear weapons to blackmail one or more of its neighbors.” Well, yes.
Japan and South Korea are both calling for more sanctions to prevent this outcome, but it’s fairly clear that the Obama administration isn’t pushing for any, and is mostly concerned with avoiding any sort of crisis before it slinks out of town, after having wasted eight critical years. South Korea’s foreign and defense ministers will visit Washington in October to make their case for “specific measures” again. Seoul thinks this may be its last chance to prevent North Korea from reaching nuclear breakout and subjecting it to the slow strangulation of nuclear blackmail, and I suspect that they’re probably right about that. Hopefully, when President Obama met with President Park instead of the President of the Philippines, she made that case forcefully. Nothing less than South Korea’s survival as a democracy depends on it.
With our time quickly running out, the idea of settling for a piece of paper from the U.N. is madness. Although the U.N. statement hints at “significant measures,” a Japanese diplomat is quoted as saying that “many council members supported the idea of further measures,” but “fell short of a consensus.” So presumably, China continues to be unhelpful and obstructionist, the Obama administration continues to be weak and indecisive, and no further resolutions will be forthcoming until Pyongyang does something else, like another nuke test. And perhaps, not even then.
~ ~ ~
As for what sanctions we should impose now, I posted my own wish list in July. It includes:
(1) the designation of North Korean entities, such as Air Koryo, the DPRK Central Bank, and North Korea’s state insurance companies, all of which are facilitating sanctions violations;
(2) the closing of loopholes left over from UNSCR 2270, including the “livelihood” loophole for coal and iron ore exports; and
(3) new measures, including a ban on labor and food exports by North Korea, and a requirement to disclose beneficial ownership by North Korean nationals to the Panel of Experts.
In the case of Air Koryo, there’s no question that it flagrantly violates the luxury goods ban; journalists have tweeted photographs of huge flat screen TVs being loaded aboard its flights. The U.N. Panel of Experts has implicated Air Koryo in the proliferation of SCUD missile parts, and notes that the dual civilian and military use of some of its aircraft could itself constitute a violation of the arms embargo. The Panel of Experts has also noted that Air Koryo holds a number of suspicious debts to recently formed shell companies, implying that Air Koryo is involved in money laundering or sanctions evasion. According to South Korean press reports, Air Koryo is also used to ferry bulk cash to evade U.N. sanctions.
As for concerns that Air Koryo also engages in legitimate civilian business, I would respond that if Air Koryo were to be designated, third-country airlines would take over its routes, because Pyongyang needs to have air commerce of some kind. The same can be said of North Korea’s financial, shipping, and insurance industries. Pyongyang has repeatedly used all of these state-owned industries for sanctions evasion and proliferation. If those industries were sanctioned and shut down, then third-country airlines, insurers, ships, and banks — which would presumably have more incentives to follow the law — would take up the slack. That would make it much more difficult for Pyongyang to violate U.N. sanctions.
Above all, however, U.N. member states must be willing to use their national laws to impose secondary sanctions on entities — especially Chinese entities — that knowingly help Pyongyang violate U.N. sanctions. This is now a requirement under U.S. law, and I remain concerned that the Obama administration isn’t following it. Without secondary sanctions — and most critically, the strict enforcement of secondary financial sanctions against North Korea’s bank accounts in China and elsewhere — North Korea will find ways around the sanctions, because plenty of Chinese companies will be willing to help it find those ways. Are we serious about global nonproliferation, the security of the world’s most economically vital region, and the protection of the democratic system of our treaty ally in South Korea? I’m searching in vain for any evidence that we are.
The defection of North Korean Deputy Ambassador Thae Yong-ho two weeks ago has tolled a ghoulish vigil in which bloggers, op-ed writers, and academics have speculated about the longevity of His Porcine Majesty. Some of them still read a long lifeline on his palm. South Korean President (and master troll) Park Geun-hye, on the other hand, sees “serious cracks” in the regime and says that the cohesion of the oligarchs is “collapsing.”
“The North Korean regime is taking no account of the people’s lives, while it oppresses the people with continuous rule by fear,” she said. “Recently, even the elite in the North is collapsing and high-profile figures are increasingly escaping their homeland and defecting to foreign countries. As the signs of serious cracks emerge, the regime’s instability is growing.” [Joongang Ilbo]
Park has several advantages over the rest of us. She probably has a good idea of what the seven North Korean diplomats who’ve defected this year — plus any other senior defectors we don’t know about yet, and those who defected in recent years — have said in their NIS debriefings. She probably has some idea of what the NIS found in their laptops and cell phones. Of course, it’s possible that she and the NIS are sexing up or spinning those reports, so the rest of us do what we do best — we speculate.
Christopher Green insists that Thae’s defection means “nothing” for the regime’s stability because Thae isn’t central to the regime’s power structure, other defections didn’t shake the regime’s stability before, and the psychological impact on the proles will be slight. Andrei Lankov acknowledges that the rise in high-level defections is significant, wisely doesn’t claim to know whether the regime will collapse in months or years, but less wisely, is very certain that the defections have nothing to do with sanctions. In an article that’s worth reading for its opening anecdote alone, Mark Fitzpatrick posits that “[s]uch defections reflect fissures in the regime,” but questions whether they “may also signal an impending regime collapse.” John Lee offers the most bearish interpretation of Kim Jong-un’s future, writing that North Korea “is just a spark away from an uncontrollable conflagration.”
In no particular order: I share Lee’s hope, but not his predictive confidence. Green’s is a dangerously tendentious prediction for uncertain times, and as we’ll see below, it didn’t take long for events to supersede it. I can’t quite reconcile Fitzpatrick’s view with itself; a regime like North Korea’s can’t be both riven by fissures and stable. I’ll meet Andrei halfway and admit that multiple factors are probably contributing to the recent defections, including the fear of political purges, self-interest outweighing a decaying ideology, low pay, lack of confidence in regime leadership, concern for their children, the loss of income from sanctions and South Korean diplomatic pressure, and officials’ fears that Pyongyang will hold them responsible for the loss of that income or for the defections of colleagues. Other analysts and South Korean officials think sanctions are also a factor, and the coincidence of events suggests that they’re right:
Both experts said that the implementation of recent UN Security Council sanctions may have been one determining factor in understanding the recent flurry of diplomatic defections.
Jeong said the salaries of DPRK diplomats are not high, meaning many of them have to make ends meet by sharing apartments, for example. And such personal economic difficulties may have pushed some of them to defect, he said.
“As the international community has strengthened sanctions against the North and surveillance of North Korean diplomats has increased, they can no longer make foreign currency as they did in the past,” Cheong said, citing old tactics such as the selling of counterfeit cigarettes or liquors.
Heightened pressure from the North Korean regime may have also driven them to the brink, the Korea University professor said.
“Kim Jong Un has had trouble in securing government funds after (the latest) sanctions, making the North’s foreign economic activities hard,” said Lim. “So, he has increased the pressure on diplomats abroad in charge of funds management.” [NK News, Dagyum Ji]
But if much of the conventional wisdom still predicts stability, conventional wisdom has a poor predictive history.
[Everything is absolutely fine.]
Most experts thought the regimes in East Germany, Romania, Albania, Libya, and Syria were as stable as Lehman Brothers, right up to the moments when each of those “stable” regimes fell. Most Sovietologists failed to predict the collapse of the East Bloc and the Soviet Union. Status quo bias is a powerful thing. The conventional analyst who predicts that the status quo will go on looks smart every day — until the day when he suddenly doesn’t. The unconventional analyst who predicts doom looks like a lunatic every day until the day when he suddenly looks like a prophet. The only day history remembers is that last one.
But prediction is a fool’s errand. Great events often start with infinitesimal and unpredictable ones — an official’s misunderstanding of an order, or the courage of one forgotten man in a crowd. Wise analysts do not predict such things. At most, they interpret a regime’s political and financial health from whatever vital signs are known. Once, the North Korean regime had a very strong political body. Since Kim Il-sung’s death, that body has decayed steadily. We don’t know enough to diagnose the disease or assess the progression of the atrophy, but defections by diplomats, like the desertion of soldiers, are contrary to the protagonists’ interests in normal times, and are not normal events. They suggest that the regime is unhealthy, but they are only symptoms. In North Korea, most of the vital signs are unknowable. Even then, they can’t predict when some infection kills a vulnerable host.
Sometimes, it is easier to alter the course of history than it is to predict it.
The view that comes closest to my own is that of Stephan Haggard, who thinks that the recent defections could cause a financial crisis, which could lead to regime collapse. Haggard points to reports claiming that some of the defecting diplomats and officials have taken tens of millions of dollars with them — amounts which may seem small by most nations’ standards, but which are indispensable to Pyongyang when it’s under rising pressure from U.N. sanctions, the loss of its Kaesong income, and complaints that its labor exports violate the rights of the workers. The reports, however, are anonymously sourced, and they’ve been inconsistent about what (if any) amounts the diplomats absconded with.
Whatever the amounts, however, I agree that these defections could cause a financial crisis in Pyongyang. I just agree for a different reason.
A North Korean diplomat stationed in Russia defected last month, a local source said Thursday, amid a series of defections from the communist country to seek a new life in South Korea.
The diplomat from Pyongyang’s trade representatives under its consulate general in Vladivostok could have possibly defected with family, according to the source who asked not to be named. [….]
The diplomat is known to have been in charge of covering trade issues while sending necessary goods back to North Korea, according to the source. [Yonhap]
Following Yonhap’s report, New Focus International confirmed what I’d suspected — that North Korea’s former trade representative in Vladivostok was not only a purchasing agent for Pyongyang but a Bureau 39 fund manager. Vladivostok isn’t in Europe, so I’ll assume he isn’t the same person as the Europe-based slush fund manager whose defection was also recently reported (perhaps that person was the Bulgaria-based diplomat referred to here). Another Moscow-based trade rep defectedin July. Then, there’s the recently reported defection in China of the man who controlled North Korea’s slush funds in Southeast Asia. All told, Seoul says at least seven North Korean diplomats have defected this year alone. Separately, “informed sources” have told Yonhap that ten North Korean diplomats defected in 2015, including another Bureau 39 fund manager based in Singapore. This doesn’t include the colonel in the Reconnaissance General Bureau who defected last year, the high-ranking North Korean banker who defectedtwo years ago, or the diplomat based in Ethiopia who defected in 2013.
Pyongyang’s response to the defections — recalling diplomats to punish them for the defection of colleagues, recalling the families of diplomats back to Pyongyang, dispatching more security agents to surveil diplomats, and reshuffling or recalling embassy staff — risks pushing other diplomats to the breaking point.
If most of these reports of defections are roughly accurate, the NIS, CIA, and Treasury probably have a more complete map of Kim Jong-un’s bank accounts, assets, and financial networks around the world than at any time in North Korea’s history. (Ironically, Thae Yong-ho, who was posted in the capital of a U.N. Security Council member and U.S. ally with a strong regulatory and legal system, may be the least likely of these men to contribute much to that map, beyond the financing of his own embassy.)
So far, the Obama administration has abstained from taking any public action to block those funds. Its increasingly apparent failure to do this has already attracted criticism in the media, and the more Kim Jong-unprovokes in the coming months, the louder that criticism will become. It’s certain to come up at a now-overdue briefing to Congress on the implementation and enforcement of the new North Korea sanctions law. The more attention Kim Jong-un attracts, the more likely it is that Congress will demand hearings on what Treasury has done to enforce the law. Knowing this should make some bankers very nervous.
I’m no expert, but I don’t see how this could be a coincidence.
A North Korean official managing money for North Korean leader Kim Jong-un in Europe has disappeared, raising speculation that he might have defected with a large amount of state funds, a local media report said Friday.
Citing anonymous sources, major local daily newspaper the Dong-A Ilbo reported that the official in charge of money management for the so-called No. 39 office of the Workers’ Party vanished in June. The office is known for running money for Kim’s regime.
The North Korean official is currently staying in an unidentified European country. He and his two sons are also under the protection of local authorities, the report claimed.
The media report, which has not been independently verified, said that he disappeared with hundreds of billions of won that had been under his management. He was reported to have worked in the same European country for the past 20 years. [Yonhap]
For those of you keeping track, in the last year, that’s one banker from Russia, one diplomat from Russia, a colonel in the Reconnaissance General Bureau, the number two guy at the embassy in London, and possibly the general who runs Pyongyang’s money laundering operations in Southeast Asia. For reasons I explained here, I also believe we know a great deal about the location of North Korean slush funds in China.
According to informed sources, 10 North Korean diplomats defected to the South last year, but the number had reached almost the same level in the first half of this year. Of these defectors, most came from the North’s overseas missions in Europe, with some coming from Southeast Asian countries. [Yonhap]
As I said about Thae Yong-ho’s defection: trends that can’t continue, don’t. By now, there can be little doubt that if U.S. and South Korean intelligence agencies are cooperating, they must know where a large portion (if not the majority) of North Korean slush funds are. Of course, the North Koreans will be scrambling to move that money today. As they do, nervous bankers around the world will be filing Suspicious Transaction Reports. Gleeful regulators will tent their fingers and cackle watching them make stupid mistakes. This is a rare opportunity — too rare to waste.
It’s always rewarding to know that someone is reading my screeds:
The promise of secondary sanctions is that they can force foreign banks, trading companies and ports to choose between doing business with North Korea and doing business in dollars, which usually is an easy call. That’s what happened a decade ago when the U.S. blacklisted Macao-based Banco Delta Asia and spurred a cascade of other Chinese banks to drop their North Korean clients lest they lose access to the U.S. financial system.
But this only works if the U.S. exercises its power and blacklists offending institutions, as Congress required in February’s North Korea Sanctions and Policy Enhancement Act. The Obama Administration hasn’t done so even once.
As sanctions expert Joshua Stanton has noted on his One Free Korea blog, this isn’t for lack of targets. U.S. and South Korean intelligence have long tracked Pyongyang’s overseas slush funds, an effort surely boosted by high-level defections from Kim’s court. [Wall Street Journal, Review & Outlook]
A U.N. report in February named dozens of Chinese firms as fronts or partners of blacklisted North Korean entities. It also detailed how the Bank of China allegedly helped a North Korea-linked client get $40 million in deceptive wire transfers through U.S. banks.
This is going to help put some steel behind Congress’s oversight of the administration’s enforcement of North Korea sanctions at a very important time — just as China concludes that it can get away with business and usual, and just as everyone’s attention is distracted by our ridiculous dumpster fire election. Better yet, it puts political pressure on President Obama just as he leaves for his final meeting with Xi Jinping.
On balance, I suppose Kim Jong-un probably prefers to see his foreign emissaries expelled than boardingKAL flights to Seoul. Still, since we last took inventory of Pyongyang’s distressed diplomatic corps in March, several more North Korean diplomats have been kicked out and sent home, and His Corpulency is apparently displeased.
In 2014, I wrote about North Koreans who were bootlegging alcohol in Muslim countries, quite possibly the only illicit North Korean activity that also provides a useful service to humanity. At the time, I didn’t see strong evidence that any of the perpetrators were diplomats, but a series of arrests has delivered that evidence. Several North Korean diplomats have since been arrested for smuggling alcohol, using their status as a cover.
In April, a North Korean diplomat posted in the Pakistani city of Karachi was apprehended while trying to bring 855 boxes of duty-free liquor, nearly double the amount allowed, into the country. A source in Pakistan Tuesday identified the diplomat as Kang Song Gun, a commercial counselor at North Korea’s consulate in Karachi. [VOA]
In May 2015, another North Korean diplomat, Koh Hak Chol, a third secretary at the consulate, was apprehended by customs officials while carrying liquor that exceeded quotas, the source said. Pakistani officials questioned Koh for several hours but released him without charge. The Pakistani source said both Kang and Koh are still with the diplomatic mission.
Another source in Pakistan said some North Korean diplomats who were arrested for illegal liquor selling continued the illicit activity after their release. Trading alcohol in a black market is an important money-making source for many North Korean diplomats although the sale of alcohol is strictly banned in the Muslim country, according to the source. [….]
In April 2015, a North Korean diplomat and his wife were caught selling liquor inside the upscale Defense Housing Authority (DHA) development in Karachi. In 2013, Pakistan’s Express Tribune newspaper reported Pakistani officials had investigated complaints that North Korean diplomats were selling alcohol at the complex. [VOA]
An unnamed Pakistani source tells VOA that “[t]here have been at least 10 confirmed cases of illegal liquor trade involving North Korean diplomats in Pakistan since 2009.” So there is ample evidence that North Korean diplomats are involved. Unfortunately — or fortunately, if you’re a thirsty Pakistani — the Pakistani government still isn’t expelling them.
In April, North Korea suddenly recalled its ambassador to Germany, Ri Si-hong, who had been in his post since 2011. The reasons for Ri’s recall weren’t clear, although the Korean press offered several lines of speculation. The Chosun Ilboreported that Ri’s recall followed Germany’s deportation of two other North Korean diplomats for “illegally raising cash for the regime,” and cited Radio Free Asia’s speculation that Ri was recalled “because he was being blamed” for the arrests. Yonhap (also citing RFA) offered the alternative theory that Ri had failed “to meet expectations,” which may mean he isn’t kicking up enough loyalty payments. The Donga Ilboclaimed that he was being held “accountable for Berlin’s condemnation of the North’s nuclear test in January” and for Germany’s subsequent support for UNSCR 2270. It also reports that North Korean diplomats had previously quarreled with their German hosts after the embassy rented out part of its building, in violation of the Vienna Convention.
Whatever the reason for Ri’s recall, in July, we learned that Germany had refused to credential Ri’s designated successor. Yet again, we could only speculate as to why, and yet again, the Korean press was equal to the challenge. Some said he was a spy in involved in “dubious business activities” (North Korea’s Reconnaissance General Bureau is designated by the U.N. and the U.S. Treasury Department). Yonhap also implied that the nominee had been “involved in unlawful activities in the past.”
At last word, Ri was back to Berlin to resume his duties — presumably, with his family under the watchful eyes of the Ministry of Peoples’ Security back in Pyongyang. If the German authorities ultimately determine that Ri was involved in illicit activities, it may be required to expel him, too.
In July, Vietnam banned a total of 28 U.N.-designated North Koreans and deported at least two of them. According to UPI, one of the men, Choe Sung-il, was a representative of U.N.-designated Tanchon Commercial Bank, who was in charge of North Korea’s arms sales in Asia. He was deported in April. Also deported this year was Kim Jung-jong.
According to NK News, however, Vietnam later denied that either of the men was associated with Tanchon, and even asked the U.N. 1718 Committee to update its designations accordingly. Valiantly attempting to deconflict these reports, Hamish MacDonald writes:
However, despite the requested amendments, it appears that Vietnam is not necessarily refuting that the two individuals were representatives of Tanchon Commercial Bank (TCB), but rather take issue with them being identified as representatives specifically “in Vietnam”, considering that it says that TCB did not have a physical branch within the country.
In the report’s conclusion, the Vietnamese authorities suggested that the listing of the two North Koreans be altered to simply “Tanchon Commercial Bank Representatives”, with no mention of Vietnam itself.
Another likely factor in the request is that the two individuals in question are no longer residing in Vietnam. According to Vietnamese authorities, Kim left the country in January – prior to the adoption of Resolution 2270 – while Choe departed Vietnam in April.
“Vietnam is clearly requesting a change to the designation explanations for Choe Song Il and Kim Jung Jong. It does not wish to be publicly associated with sanctions breaches and has given evidence that the individuals have left the country, which it claims should be sufficient for the ‘Vietnam’ portion of the designation text to be stricken,” Andrea Berger of the Royal United Services Institute (RUSI) told NK News on Thursday.
“Its assertion that the individuals cannot be connected to Tanchon because there is no evidence that Tanchon had representation in the country, may in fact be the product of clever North Korean sanctions evasion,” Berger added. [NK News, Hamish MacDonald]
According to the U.N. Panel of Experts’ 2016 report, Vietnam had previously been one of Pyongyang’s customers, which might explain why Hanoi has a motive to dissemble. Furthermore, Tanchon had been designated long before this year. Vietnam may be concerned that the U.N. designation list implicates it retroactively.
Some of the 26 other North Koreans appear to be senior officials without ostensible links to ’Nam, who may have been added to pad its list. I say let bygones be bygones (this is Vietnam we’re talking about, after all). Now, our interests are converging again. It can’t hurt our efforts to secure Vietnam’s compliance that Vietnamese opinion has turned sharply against China over the South China Sea.
Earlier this month, Bangladesh expelled a North Korean diplomat for smuggling cigarettes and unspecified electronic goods in a shipping container.Reuters identified the diplomat as Han Son-ik, the First Secretary of North Korea’s embassy in Dhaka.
Bangladesh foreign secretary Shahidul Haque confirmed the order had been made to the North Koreans, but declined to give a timetable for his departure. Local media said he had been ordered by leave by Monday.
“We have asked North Korea to take him back for violating diplomatic norms,” Haque, Bangladesh’s top foreign bureaucrat, told AFP, declining to give details. A senior customs official told AFP the North Korean used his diplomatic immunity earlier this month to import the goods which were suspected destined for the blackmarket.
“The diplomat declared that his cargo contained food and soft drinks. But when we opened the cargo, we found 1.6 million stalks of expensive cigarettes and electronics,” Moinul Khan, head of intelligence at Bangladesh customs, told AFP. “At market prices these products are valued at 35 million taka (US$430,000). We suspect that he brought the products to sell to local smuggling gangs,” he said. [Channel News Asia]
KBS reports that the containers came in from Malaysia, which has close commercial ties to North Korea, and which should now conduct its own investigation into the smuggling operation — first, to determine whether any of the electronics were proliferation-sensitive items or luxury goods headed for Pyongyang; second, to determine whether U.N.-designated persons were involved in the shipments; and third, to determine whether the revenues from the transactions violated any of the financial due diligence provisions of UNSCR 2270 or 2094.
If that seems brazen, KBS also reports that Bangladeshi authorities are “conducting a probe into two other containers held under the North Korean embassy’s name that are suspected of carrying undeclared vehicles including Rolls-Royces and BMWs.” That’s a potential violation of UNSCR 1718’s luxury goods ban, depending on where those vehicles ended up.
I’ve long hoped that the Panel of Experts would focus more attention on North Korea’s Malaysian connections, in the hope that Malaysia would decide that it would rather do without this kind of attention. Hopefully, we’ll learn more about that investigation in the next POE report.
The position of First Secretary in Dhaka has experienced significant turnover recently. Last year, Bangladesh expelled Han’s predecessor, Son Young-nam, for smuggling $1.4 million worth of gold. UNSCR 2270 requires member states to “prohibit the procurement of” gold by North Koreans.
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Expulsions of North Korean diplomats appear to be on the rise. In some cases, that’s because UNSCR 2270 has emphasized member states’ duty to expel diplomats involved in certain prohibited activities. In other cases, diplomats appear to be engaged in the same old garden-variety smuggling North Korean diplomats are infamous for, only they’re making more stupid mistakes than they used to. Based on other reports I’ve read, North Korean diplomats are under pressure to maintain agency operations, pay their own salaries, and make steep loyalty payments to the Mother Ship. They appear to be making those stupid mistakes out of financial desperation.
It won’t improve morale that following Thae Yong-ho’s defection, Pyongyang is sending more security agents abroad to watch its diplomats more closely than ever, and has ordered the execution — with antiaircraft guns! — of those who fail to prevent defections. Or so says a “source, who declined to be identified.” That source also claims that His Corpulency “has ordered the families of North Korean diplomats and overseas workers back to the country following Thae’s defection,” as I’d have expected. I’m no longer alone in describing the death spiral of rising pressure on a shrinking pool of North Korean expatriates to support the regime, which ultimately breaks their morale, spurs more defections, and causes Pyongyang to call yet more expats home.
Lather, rinse, repeat.
But why the financial desperation? I’ve explained my doubts that the U.S. has made full use of its power to freeze North Korean slush funds, and I stand by those doubts. Could it be that South Korea’s cutoff of Kaesong, and its diplomatic push to cut Pyongyang’s sources of hard currency, have been more effective than I’d realized? Or might banks be blocking North Korean accounts already, in anticipation of Treasury’s final rule cutting North Korean banks’ correspondent relationships, or in fear of the enhanced due diligence requirements that will apply to North Korean customers? I suppose time will tell.
Update: Uzbekistan embassy closes
Yonhap reports that North Korea has closed its embassy in Tashkent for “restructuring.” That leaves no North Korean embassies in the ‘stans, and only one former Soviet state with a North Korean embassy — Russia. Really? Evidently so. I guess that foils my plans for getting my first visit from Turkmenistan.
In February and March, respectively, the U.S. Congress and the U.N. Security Council responded to North Korea’s fourth nuclear test with sanctions that were, in theory, an order of magnitude stronger than any sanctions imposed on North Korea until then. Sanctions, of course, are only as good as their enforcement, and in enforcing sanctions against North Korea, the most important rule has always been “follow the money.” Money — along with the contradictions of its political system — hasalwaysbeen one of Pyongyang’s main vulnerabilities. Much of that money sits in banks in China, Europe, and Russia. A sudden cutoff of those funds could shake the increasingly fragile cohesion and discipline of the security forces. It could also shake the waveringconfidence of North Korean elites in Kim Jong-un’s capacity to preserve their status, position, and survival. After an inevitable period of backlash, tension, and provocations, an insolvent dictatorship in Pyongyang would confront an existential choice to reform and disarm or perish.
Of course, confronting Kim Jong-un with that choice depends on getting Kim Jong-un’s bankers in China, Russia, and European states to comply with the new U.N. sanctions. Because China and Russia have voted for and subsequently violated U.N. sanctions resolutions for years, Congress concluded that a credible threat of secondary sanctions was necessary to make them enforce the resolutions. Section 104 of the North Korea Sanctions and Policy Enhancement Act requires the administration to block the slush funds that facilitate Kim Jong-un’s proliferation, arms trafficking, luxury goods imports, and human rights abuses, wherever those funds are found. The purpose of the law is to force the administration to cut off the funds that maintain Kim Jong-un’s regime, and to send a clear message to Chinese and Russian banks that the days of business as usual are over. Either they can do business with Pyongyang or New York, but not both.
Congress made those sanctions mandatory — barring the invocation of a presidential waiver in section 208(c), which must be reported to Congress — because had it lost patience with China, and because it had lost confidence in the Obama administration’s will to enforce U.S. law or U.N. sanctions against North Korea. The Obama administration has too a long history of letting Kim Jong-un off the hook for his most egregious conduct to be trusted. It did functionally nothing to sanction Pyongyang after its second and third nuclear tests, multiple missile tests, and two attacks against South Korea. It failed to list North Korea as a state sponsor of terrorism despite multiple attempts to assassinate dissidents and human rights activists, multiple arms shipments to Iranian-backed terrorists, and the Sony cyber terrorist attack against the U.S. homeland. It did nothing to the Chinese and China-based entities that hosted and enabled the North Korean hackers. Yet for years, despite the extensive evidence of China’s bad faith, the White House effectively outsourced its North Korea policy to China.
The administration has denied knowing where North Korea’s slush funds are, but those denials become harder to believe as the open-source evidence accumulates. For years, open sources have reported that U.S. and South Korean authorities had pursued and identified large amounts of those funds. A recent spate of high-level defections — yet another was revealed just today — has likely added to the U.S. government’s knowledge of those funding streams. Good journalism has done much to expose North Korea’s China-based money laundering. In the coming days, an extraordinary and little-known organization, the Center for Advanced Defense Studies, will release a meticulously researched report, based entirely on open-source information, that will provide a ground-breaking expose of the North Korean overseas procurement networks. Any guesses which country they operate from?
But perhaps “ground-breaking” is too optimistic. Six months afterthe latest reportfrom the U.N. Panel of Experts, the administration still hasn’t sanctioned any of the dozens of third-country enablers of North Korean proliferation, smuggling, or money laundering named in that report. The Panel’s report added dozens of names to the long list of Chinese and China-based trading companies, middlemen, and assorted death-merchants to the list of those who’ve spent the last two decades helping Pyongyang buy, sell, and trade the instruments of proliferation and extortion. You won’t find any of them listed among this year’s designations by the Treasury Department.
The administration still hasn’t blocked Chinpo Shipping, which wasconvictedby a court in Singapore of facilitating North Korean weapons smuggling. It has taken no action against the Bank of China, whose local staff knowingly deceivedtheir U.S. correspondents — and may have brokenU.S. money laundering laws— by directing Chinpo to conceal any North Korean links to the shipment. It has not sanctioned Chinese ex-spy Sam Pa or his 88 Queensway Group fortheir dealings with Bureau 39(sanctioned by both Treasury and the U.N.) although it did sanction Pafor violating Zimbabwe sanctions. The same goes for the North Korean mining companies and their foreign investorsI found among the Panama Papers. UnderExecutive Order 13722, those companies and their enablers should be subject to sectoral sanctions. No action has been taken against any of them, either.
If the administration — despite the vast personnel, legal, and intelligence resources at its disposal — doesn’t have all of this information, that could only be because it isn’t trying to gather it. What seems much more likely is that the administration has decided not to act on it — on any of it. The fact that the Obama administration won’t act on the information it has makes it harder to believe its denials that it knows where Kim Jong-un’s money is. I have no way of knowing what Treasury knows on the classified or law enforcement sensitive level, of course, but Congress does. We’ll get to that at the end of this post.
~ ~ ~
Is the administration simply afraid of the diplomatic consequences of secondary sanctions against Chinese and Russian interests? Clearly not. Just two weeks ago, the Treasury Department designated and blocked a network of traders and trading companies that were helping the Syrian government’s arms procurement and proliferation. One of those traders was a Chinese national and two were Russian; one of the companies is located in Shenyang and one in Moscow. And of course, the Obama administration has directly sanctioned some of Putin’s top officials and financiers over Russia’s invasion of the Ukraine.
The administration can’t credibly claim that China deserves a pass because of its good behavior, either. Recently, China has turned sharply toward authoritarianism, anti-Americanism, and imperial hegemony over neighboring states and waters. It just blocked a toothless U.N. censure of North Korea over missile launches that flagrantly violated a decade-long series of Security Council resolutions by inserting poison-pill language objecting to South Korea’s improvement of its missile defenses.
Yet instead of accepting responsibility for selling North Korea missile technology and road-mobile missile carriers, among other items, China’s Global Timesblames the U.S. for the North Korean threat. Instead of sanctioning Pyongyang, Beijing is threatening Seoul with trade sanctionsfor having the temerity to want to defend itself from North Korea missiles. It has made a show of cozying up to North Korea and expressing its “significant differences” with the United States.It has even taken to bullying South Korea’s beloved K-pop artists. Korean conservatives are making an issue of this, as they should. Even the far-left, anti-American Hankyoreh Sinmuncalls China’s threats “petty.” Scott Snyder is probably right that in the end, this will hurt China’s own economic interests. That is to say nothing of the nationalist backlash it will inspire among Koreans. But the broader point is that China isn’t taking the gravity of this threat to U.S., South Korean, and Japanese security seriously. That’s all the more reason why China must share in the cost of the threat it has done so much to incubate.
I disagree with John Park and James Walsh on the role of sanctions as often as not, but they are right that for sanctions to slow North Korea’s proliferation, the administration must be willing to pursue and sanction North Korea’s procurement networks in China. They are also correct that weakly enforced sanctions, like half-doses of antibiotics, only serve to strengthen the disease’s resistance to the cure. It should go without saying that in attacking North Korea’s procurement networks, it may be necessary to sanction their Chinese enablers, too. But to go beyond merely delaying Kim Jong-un’s progress toward an effective nuclear arsenal, we must do much more — we must instill the fear of God in Chinese banks that hold (at least) hundreds of millions of dollars in North Korean slush funds, and that allow Kim Jong-un and his cronies to use those funds to maintain his hold over his military and security forces.
In the weeks and months following the imposition of U.S. and U.N. sanctions, I’ve seen and seized on hopeful signs that Chinese banks were freezing North Korean accounts, and that North Korean operatives have been unable to pay their debts. No doubt the administration knows things that I don’t, but these isolated reports still do not suggest that Pyongyang is in the early stages of a liquidity crisis that will confront it with the choice to reform and disarm or perish. Rather, absent more evidence that Treasury is serious about finding and blocking North Korean slush funds, those initial hopeful signs will fade away. It will be business as usual all over again, just as it was not long after Chinese banks brieflyfroze North Korean funds in 2013.
The fact that Pyongyang continues to sell coal and iron ore to China — in volumes that are increasing, not decreasing — suggests that Pyongyang still has access to bank accounts where it can deposit its coal and iron ore revenues. North Korea’s unsanctioned mineral exports are also rising. Because the mineral trade is under regime control, the fact that it is not directly sanctioned does not absolve China from the duty to ensure that revenue from this trade isn’t used to support Pyongyang’s WMD programs. The rise in this trade reinforces the likelihood that China’s banking industry is open for North Korean business. One South Korean expert opines that it also reflects a rising consensus among Chinese trading companies that China has lost interest in enforcing sanctions against Pyongyang.
~ ~ ~
Yes, the administration has taken the long-overdue step of blocking North Korean banks’ access to the financial system. Treasury’s regulation is still not final, and it still remains to be seen what effects U.S. and EU money-laundering blacklisting will have. On one level, the recent surge of defections suggests that the regime is under some financial duress, for some reason. Yes, the administration has designated Kim Jong-un by name for his human rights abuses, while signaling that this action is an entirely symbolic one. Those actions were commendable, so I commended them. But they were meant to be symbolic and much more. The administration must do more than name Kim Jong-un; it must find and freeze the billions of dollars he is not using to provide for his people. Whatever we are doing right, we can do it better.
Fortunately, Congress learned a lesson from the North Korean Human Rights Act: administrations don’t always want to enforce the law, so Congress must make them. When it passed the new sanctions law, Congress included numerous reporting requirements, including a requirement that the administration report to Congress 180 days after the enactment of the legislation on exactly what it has done to enforce the new sanctions. I wonder if the administration forgot about this. Congress hasn’t forgotten it. The time has come for Congress to ask for that briefing. I can think of some very detailed and specific questions the staff should ask about what the administration has done to follow the money. If the administration doesn’t have satisfactory answers, Congress should hold oversight hearings.
We are still in the early phases of implementing these new sanctions authorities. There is still time for sanctions to work, but we are also at the stage where China traditionally stops pretending to enforce sanctions and returns to business as usual. In Washington, the distractions of an election year present a high risk that the administration may prefer a quiet exit to stopping North Korea’s march to nuclear breakout. An administration that wasted eight years while the North Korean threat continued to build has not earned one last “era of procrastination, of half-measures, of soothing and baffling expedients, of delays.” We are entering an era of consequences. The President must enforce the law. Congress must use its oversight authority to ensure that he does.
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Update:Similar thoughts here, from the Heritage Foundation’s Bruce Klingner. And I should note that this Time report from Dandong offers some contradictory (and more encouraging) evidence:
Sipping fruit tea in a Dandong café, Wang, the alias of a Pyongyang-born Chinese trader who speaks to TIME on condition of anonymity, describes how his business importing North Korean coal and minerals and exporting building materials has been eviscerated by the sanctions. “North Korean traders don’t have cash anymore,” he says. “I have to limit the amount of goods I sell to them on credit as the risk of default is so high.”
The report also says that refugees in South Korea have had an easier time sending money to their relatives back in North Korea. There’s nothing wrong with that, as long as Chinese banks enforce sanctions against the regime’s agents.
Like its neighbor, Namibia, Angola aligned with the Soviet block during the Cold War. The Angolan government and the Namibian rebel movement, the South West Africa Peoples’ Organization or SWAPO, received military assistance from Cuba, which had up to 60,000 soldiers near Angola’s border with Namibia during a vicious set of guerrilla wars in the 1990s. The Soviet Union is gone, but historic alliances can be persistent things, especially when those alliances also come with financial ties. This has certainly been the case with North Korea’s tiesto Namibia, which has been reluctant to shut down a North Korea arms factory on its territory, despite the fact that that factory is a clear violation of UNSCR 2270.
In April, I cited the 2016 Panel of Experts report and raised suspicions that Angola’s military cooperation was a violation of UNSCR 2270. Since then, Andrea Berger has done us all the service of pointing out where U.N. member states’ compliance reports are published online. Not surprisingly, Angola’s report raises more questions than answers. First, Angola admits that it is hosting two North Korean nationals, Kim Hyok-chan and Kim Kwang-hoon, who are under investigation by the U.N. Panel of Experts monitoring compliance with the sanctions.
However, it must be noted that Kim Hyok Chan, a DPRK citizen born on 6 September 1970, carrier of diplomatic passport No. PD563410191, is on the list of individuals under investigation by the Panel of Experts established pursuant to resolution 1874 (2009) and designated for targeted sanctions such as a travel ban and asset freeze. This individual holds multiple-entry visa No. 60000/MRX/16, valid until 2 February 2017, from the Angola Ministry of External Relations. The individual is a diplomat of the DPRK and entered the national territory on 14 February 2016 from Addis Ababa. [….]
Kim Kwanghoon, a DPRK citizen born on 9 June 1981 and carrier of passport No. M66430933, has an ordinary visa with the number 100866086/16, valid until 6 May 2016, and left the country on 5 May 2016, bound for Dubai, United Arab Emirates. The individual works for the Ofek Company. [Angola compliance report]
Neither man appears on the U.N.’s consolidated sanctions list, and neither is mentioned by name in the POE’s 2016 or 2015 reports. If there’s a list of persons under investigation published by the U.N., I’m not aware of it. Nor would it seem wise to publish a list of persons under investigation. I wonder if the Angolans just said more than they should have (oops). Then, Angola then takes the position that it’s under no obligation to expel either man.
Concerning the expelling of diplomats or representatives of the government of the DPRK or nationals of other countries suspected of helping to circumvent the sanctions regime, it was not necessary to expel any DPRK diplomat from the country, as they did not represent a threat to national security and were not outright affected by any of the provisions of resolution 2270 (2016). [Angola compliance report]
So, move along! Nothing to see here! Not quite. The resolutions have several provisions that require the expulsion of North Korean or third-country nationals. Not all of them necessarily require an individual by-name designation. Here’s a paragraph from UNSCR 2270:
“13.Decides that if a Member State determines that a DPRK diplomat, governmental representative, or other DPRK national acting in a governmental capacity, is working on behalf or at the direction of a designated individual or entity, or of an individual or entities assisting in the evasion of sanctions or violating the provisions of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013) or this resolution, then the Member State shall expel the individual from its territory for the purpose of repatriation to the DPRK consistent with applicable national and international law …. [UNSCR 2270]
So, if the Angolan government knows that Kim Hyok-chan or Kim Kwang-hoon is working on behalf of a designated entity, such as Green Pine (U.N. designated since 2012), Saeingpil (a U.N. designated alias of Green Pine), or KOMID (U.N. designated), the Angolans have to expel them, whether the individual people are designated by name or not. The apparent intent of the resolutions’ drafters was to allow either designation of entities (and by implication, their employees) or alternatively, the designation of individual bad actors whose affiliations aren’t clear or aren’t proven.
But is there any evidence that either man is working for a designated entity? In the case of Kim Kwang-hoon and his employer, Ofek, I found no additional information online. Ofek isn’t designated. Kim Hyok-chan, however, is another story. Let’s start with the 2016 Panel of Experts report.
108.The Panel investigated two incidents involving Green Pine (see S/2012/287): two deliveries in July 2011 of items for military patrol boats to Angola and an air shipment in February 2011 of submarine parts inspected in Taipei (see annex 1 and S/2015/131, paras. 81-83). The consignments were shipped from Vienna by an Austrian national, Josef Schwartz, through his company, Schwartz Motorbootservice & Handel GmbH. He had traded with the Democratic People’s Republic of Korea on multiple occasions in the past, including violations and attempted violations of the luxury goods ban. The Panel confirmed that he had assisted Green Pine in evading the arms embargo. [UN POE report, 2016]
That finding apparently has its origins in this interesting report on Saeingpil in the Washington Free Beacon, which alleges that Kim Hyok-chan works for Saeingpil.
The assistance includes marine engines and replacement parts for North Korean patrol boats sold to the Angolan military within the past six years.
Additionally, North Korean military trainers are providing arms and security support to Angolan presidential guards, according to recently obtained information on the transfers.
Similar military support to Uganda and Tanzania was ruled to violate U.N. sanctions by a United Nations panel of experts on North Korea.
According to the sources with access to details of the Angolan military transfers, a North Korean company, Saengpil Associated Co., currently is in the process of shipping engines and replacement parts for some of the 18 patrol boats that were built for the Angolans since 2011.
Saengpil is part of North Korea’s Green Pine Associated Corp., which has been sanctioned in the past by the United Nations. Both entities are part of the Reconnaissance General Bureau, the North Korean covert action and intelligence organization.
The Saengpil representative behind the military transfers was identified as Kim Hyok-chan who has been working in Angola since 2008 and has been the lead official in charge of the arms deals between the two countries. Kim also is a second secretary at the North Korean embassy in Luanda, the Angolan capital.
North Korean agreements for the patrol boats date to August 2009, when Angolan technicians were trained on repair and maintenance. Construction of the patrol boats, described as PB 100s, began in March 2011. Renewal of the accord for repair and maintenance was concluded in January 2013. [Washington Free Beacon]
Nowhere does the Angolan report say whether its government investigated whether Kim is or is not tied to Saeingpil. You have to wonder if it ever occurred to the Angolans to, you know, ask him, or maybe review his immigration or banking records. If Kim works for one of those designated entities, Angola is required to expel him, regardless of whether he’s designated by name. Its non-response on that issue suggests that it’s playing fast-and-loose with the resolutions.
The report goes on:
Concerning Green Pine Pi’l Trading Corporation, also known as Saeng Pi’l Associated Company, and Beijing New Technology Trading Company, Limited, inquiries made did not uncover any new information, and the information provided in previous notes still prevails. [Angola compliance report]
My only reaction to this is, what the hell does that even mean? If Green Pine or Saeingpil has an office in Angola, the Angolan government is required to close it, end of story. Here’s the relevant provision from UNSCR 2270:
“15.Underscores that, as a consequence of implementing the obligations imposed in paragraph 8 (d) of resolution 1718 (2006) and paragraphs 8 and 11 of resolution 2094 (2013), all Member States shall close the representative offices of designated entities and prohibit such entities, as well as individuals or entities acting for or on their behalf, directly or indirectly, from participating in joint ventures or any other business arrangements, and underscores that if a representative of such an office is a DPRK national, then States are required to expel the individual from their territories for the purpose of repatriation to the DPRK consistent with applicable national and international law, pursuant to and consistent with paragraph 10 of resolution 2094 (2013); [UNSCR 2270]
Next, Angola — which was so recently busted for making arms deals with Green Pine, and which hosts 1,000 North Korean workers, claims that it’s unaware of any North Korean bank accounts that it has to freeze.
Concerning the freezing of any funds, financial assets and economic resources of the DPRK that are deposited in foreign banks, as well as funds managed by entities linked to the Government or the North Korean Worker’s Party in Angola, the relevant institutions, including the ministries of Defence and the Interior and the National Bank of Angola, are surveying the situation regarding bank accounts and migratory status of citizens from the Democratic People’s Republic of Korea, as well as of DPRK collaborators working in the country. [Angola compliance report]
Most recently, Angola was in the news for hosting North Korea’s Vice Foreign Minister, who “defended Pyongyang’s dual pursuit of nuclear and economic development during talks with his Angolan counterpart.” This doesn’t inspire great confidence.
Finally, I expect to see some more interesting reporting about Angola’s links to North Korea in the coming weeks, but I’ll let someone else tell you that story.