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

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

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

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

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

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

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

More posts on North Korean shipping here.

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

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

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

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

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

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

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

[link]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Update:

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

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

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

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

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

[Update]

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

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

[End update]

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

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

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

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

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

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

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

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

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

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

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

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

~   ~   ~

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

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GOP heavyweights push for secondary boycott of North Korea

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~   ~   ~

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

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

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

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

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

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

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

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

~   ~   ~

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[As seen here in better days]

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

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

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

[What do I win?]

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

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

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

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

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

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

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

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

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

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

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

SEC. 205. ENHANCED INSPECTION AUTHORITIES.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Japan Coast Guard, via CNN]

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

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

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

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

~   ~   ~

* Corrected, thank you.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Yun Byung-se, The Indispensable Man

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

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

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

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

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

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

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

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

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

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

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

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The Rime of the Uninsured Mariner

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

— Samuel Taylor Coleridge, The Rime of the Ancient Mariner

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~   ~   ~

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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What the Treasury Department’s blocking of Air Koryo means

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Do these new sanctions affect tourism?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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