Because I’vealreadygiventoomanyminutesofmylife to the moveable farce named Dennis Rodman, I’m devoting today’s post to something more consequential: the Center for Advanced Defense Studies’s new report exposing more North Korean financial networks in China, and dispelling the misinformation that North Korea is isolated from the financial system and thus sanctions-proof. (Full disclosure: I advised C4ADS on the drafting of the report, without compensation of course.) Money quote:
The continuing misperceptions of North Korea as the “Hermit Kingdom” or “the most sanctioned country in the world,” are fueling the narrative behind the narrowing of non-military options on the Korean peninsula. In truth, the North Korean regime, far from being isolated, is globally active throsugh its overseas networks. The impact of these misperceptions is considerable, most notably in the false belief that sanctions cannot succeed on a “closed” country like North Korea.
Following on last September’s exposé on Dandong Hongxiang, C4ADS sifted through public databases, shipping registries, and business records to widen its focus and try to find the extent of North Korea’s financial network in China. From this, C4ADS found, contrary to a lot of widely disseminated misinformation, that North Korea’s network is centralized, limited, and vulnerable to detection and sanctions:
Centralized. For example, C4ADS dug further into the role of Dandong Hongxiang and found it to be highly centralized around key nodes. It also exposed two more networks that were similarly centralized. In one case, C4ADS started with the seizure of the M/V Jie Shun at the southern entrance to the Suez Canal with a record haul of North Korean weapons (mostly PG-7 anti-tank rockets) aboard, which I figure were probably bound for Syria. Starting from the findings of the UN Panel of Experts (see paragraphs 61 through 71), C4ADS worked backward through shipping registries and corporate records and identified the holder of the Jie Shun’s compliance document as a Chinese national named Fan Mintian. Fan runs a company called V-Star Ships.
Fan and V-Star have been operating openly in China, helping North Korea evade shipping sanctions for at least four years. V-Ships did (much? all?) of its business through the dollar system, clearing its payments through the United States. Sadly, C4ADS doesn’t identify the author of the “please do not send us any instructions” email, which sounds like the kind of thing the FBI and the Justice Department may find worthy of further investigation, to say the least.
In another case, Wells Fargo was the correspondent bank, and its compliance officers were alert and on the job, and refused to process V-Star’s transactions. People may praise bankers even less than they praise lawyers, but here’s to Wells Fargo, for taking its compliance obligations seriously and refusing to launder money for North Korea.
Yet another major Chinese network, Dandong Zhicheng Metallic Material Inc. (DZMM) may be an even more important node for Pyongyang than Dandong Hongxiang. DZMM buys coal from North Korea.
Three North Korean companies are currently designated by the Treasury Department: Daewon Industries (a part of Pyongyang’s military-industrial complex, designated in December), Kangbong Trading Company (same), and Paeksol Trading Corporation (controlled by the Reconnaissance General Bureau, designated in March). If DZMM willfully engaged in dollar transactions with any of those companies after their respective designations — and I stress that I don’t see proof of all of these elements from C4ADS’s report alone — that could constitute any of several federal felonies: violation of the International Emergency Economic Powers Act, money laundering under 18 U.S.C. 1956(a)(2), or conspiracy to commit either of the aforementioned under 18 U.S.C. 371. Even if you don’t arrest a single suspect, the Justice Department can bankrupt those networks by blocking their funds as they move through the financial system and forfeiting them.
Limited. C4ADS found that just 5,233 companies are involved in bilateral trade between China and North Korea, with the top ten companies controlling about 30 percent of it. If 5,233 sounds like a lot, last year, there were 67,163 Chinese companies exporting to South Korea. The concentration of wealth in the hands of a few state-controlled companies is consistent with Pyongyang’s centralized and controlling ways of running everything else. Even then, further research revealed that many of these companies were interconnected:
That means knocking over a few major networks could collapse much of the system that sustains His Porcine Majesty’s rule. C4ADS’s report even lays those connections out in charts.
And yet again, as with Ma Xiaohong, the person running a North Korean trade network turns out to be a member of the Chinese Communist Party. Arguably, our third attribute should be “inculpatory,” but it isn’t.
Vulnerable. Regular readers of the U.N. Panel’s reports will find North Korea’s methods of concealing its network aren’t qualitatively different than those used by terrorists, narco-traffickers, or other rogue regimes to launder money and evade sanctions; hence, the limiting reagents in U.S. sanctions enforcement are primarily political will and resources (cops, intelligence analysts, and lawyers). Contrary to widely-held assumptions, the networks are detectable.
The report goes on to note that because of “these networks’ reliance on the licit systems of finance, trade, and transportation … they leave behind a digital trail within public records, and other data sources, and are acutely vulnerable to targeted sanctions.” They also leave money trails. C4ADS’s conclusions reinforce what the U.N. Panel of Experts and the Justice Department have already established — that North Korea’s networks continue to launder their money through the dollar system. That’s a critical vulnerability that no U.S. president has yet had the political will to exploit.
The last time C4ADS published a report, Treasury designations, an indictment, and a civil forfeiture complaint soon followed. Which doesn’t sound imminent this time, judging by this Wall Street Journal report covering the C4ADS report. It suggests that the Trump administration is still in the bargaining stage with Beijing, asking it to curtail the activities of Chinese companies, run by party members, that are knowingly violating U.N. sanctions.
The Trump administration has asked Beijing to take action against nearly 10 Chinese companies and individuals to curb their trading with North Korea, according to senior U.S. officials, as part of a strategy to decapitate the key networks that support Pyongyang’s nuclear-weapons program.
Although there is no firm deadline, the U.S. has indicated the Treasury Department could impose unilateral sanctions on some of these entities before the end of the summer if Beijing doesn’t act, the U.S. officials said. [WSJ, Jay Solomon]
While you’re at it, don’t miss Solomon’s other recent report on another North Korean network in China, which I didn’t have time to blog about when it came out.
So as with the Obama administration, we’re back to asking Bejing to enforce sanctions it has spent the last tenyearswillfullyviolating. That similarity must owe a great deal to the fact that Trump can’t get key appointees in place to execute a policy that resembles his tough talk. For all the talk of sabotage by the “deep state,” the effect of slow appointments is that the administration ends up abdicating a lot of policy decisions to holdovers and similarly disposed career civil servants. In any event, let no one say that sanctions against North Korea can’t work, if we ever muster the will to use them.
~ ~ ~
Update: At the Washington Post, Anna Fifield adds:
Targeting just a few pivotal Chinese companies could severely disrupt North Korea’s ability to circumvent international sanctions and buy illicit goods — and could even cause its entire overseas network to collapse, according to a report out Tuesday.
The new report, by Washington-based research group C4ADS, lays out multiple ways for Beijing to cut off North Korea’s trading routes to the outside world, if it wanted to. It also found a Chinese citizen who was conducting large amounts of trade with North Korea while serving as president of a company in the United States — a status that would allow him to open bank accounts and send or receive shipments.
“By being centralized, limited and ultimately vulnerable North Korean overseas networks are, by their nature, ripe for disruption,” C4ADS researchers wrote in the report, titled “Risky Business.”
There is still plenty more to be done, C4ADS writes. “Although to date economic coercion has been ineffective in persuading North Korea to abandon its pursuit of nuclear weapons, this does not mean it cannot work,” the researchers say.
On the contrary, targeting key companies could cripple multiple networks across multiple countries simultaneously, they write, because so many of these firms are intertwined.
The C4ADS researchers said focusing on these kinds of logistical “chokepoints” could cut off North Korea’s centralized, global system of illicit finance.
For example, the Dandong Hongxiang Industrial Development Co., which was sanctioned by the U.S. Treasury Department last year — sending a sudden chill through the border city that acts as North Korea’s main commercial gateway to the outside world — is one of 18 companies that make up the Liaoning Hongxiang Group. This suggests the potential for an indirect effect if one company is stopped from helping North Korea, perhaps disrupting numerous other linked companies.
“Based on what we’re seeing in the data in terms of the reach and scope of these networks and the limited nature of the system that they live in, and the contamination with illicit activity, there is inherent value to enforcement actions,” said David Thompson, a senior analyst at C4ADS.[WaPo, Anna Fifield]
Two North Korea-linked ships have arrived at two separate coal terminals in Shanghai since Sunday, while one other was departing the area after having left a third facility at a similar time.
Satellite imagery shows that each of the terminals is equipped to handle coal. The UN currently restricts member states from importing North Korean coal, while Beijing has said numerous times that it has suspended all imports for the remainder of 2017.
“Imagery indicates these sites are primarily used for coal unloading. Some of the larger port areas are multi-use, but the specific berths that the ships were tracked to appear to primarily handle bulk coal,” Scott LaFoy, a Washington-based satellite imagery analyst, told NK Pro. [NK Pro]
As Byrne notes, this isn’t the first time in recent months China has been caught breaking its promise to stop importing North Korean coal this year. In addition to this, in 2016, China imported twice as much coal as permitted under a U.N. import cap. Much of North Korea’s coal trade is controlled by the North Korean military, or its external spy/terrorist/hacker agency, the Reconnaissance General Bureau.
China’s failure to identify the North Korean links to the ships is, at a bare minimum, negligent. For example, one of the ships, the Pu Hung 1, is controlled by Rungrado General Trading Corporation, which deals in various goods and services including slave labor, which had been mentioned in U.N. Panel of Expert reports for proliferation, and which the Treasury Department designated in December.
Byrne links two other ships to one Hiroshi Kasatsugu. You can read about Mr. Kasatsugu’s links to Mirae Shipping, a front for U.N.- and U.S.-designated Ocean Maritime Management Company, in paragraphs 143 through 148 of the 2015 report of the U.N. Panel of Experts.
One of the ships that recently arrived in a Chinese coal terminal, and which is linked to Mr. Kasatsugu, was later sold to a front for none other than Dandong Hongxiang Industrial Development, or DHID. DHID is under indictment in a U.S. federal court in New Jersey for money laundering, conspiracy, and sanctions violations on behalf of North Korea.
China is obligated to expel representatives of U.N.-designated entities, including Ocean Maritime Management, which the U.N. designated in 2014, yet Mr. Kasatsugu apparently continues to operate there. Not that this should surprise us, given how many members of North Korea’s proliferation network operate openly in China.
Brian Moore said it best:
Then I guess the North Korean ships seen docked in China recently were carrying lollipops and kittens. https://t.co/sEDFuHAcwx
I’ve come to the conclusion that official Chinese trade statistics are to certain journalists and economists what pro wrestling is to certain 10-year-old boys. So for this round, it’s NK News 1, Yonhap -1.
It’s an oversight on my part that this post didn’t also work in Byrne’s reporting on other Chinese businesses helping North Korea register ships associated with its smuggling fleet. UNSCR 2321, paragraph 24 requires U.N. members states to “de-register any vessel that is owned, controlled, or operated by the DPRK.”
Expect to hear much more about this topic soon, from another source.
China is also increasing imports of North Korean iron ore. Under paragraph 26(c) of UNSCR 2321, the U.N. banned imports of North Korean iron ore except for “livelihood” purposes unrelated to its WMD programs — whatever that means in Chinese.
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 Sanoff 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 IMOdoes 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.
Over the weekend, Malaysian authorities painstakingly decontaminated a terminal of the Kuala Lumpur International Airport where North Korean agents — including a diplomat — carried 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.
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.
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.
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.
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.
~ ~ ~
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.
~ ~ ~
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.
Lucky them. Most North Korean ships that have arrived in Japan recently have carried only thedead.
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.
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.
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 Departmentdesignations 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 slowto 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 stepforward 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.
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 underrising 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 beenhighly effectivethis 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 companiesthat prop upHis 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.
“The era of procrastination, of half-measures, of soothing and baffling expedients, of delays is coming to its close. In its place we are entering a period of consequences.” – Winston Churchill
It has now been six weeks since North Korea’s fifth nuclear test, and the U.S. and China remain deadlocked in their talks about a new resolution to close the loopholes in existing U.N. sanctions. Pyongyang is racing to make its nuclear armament a fait accompli before the next U.S. administration warms the chairs in the White House and Foggy Bottom. Kim Jong-un also has reason to hope that after 2017, it might be dealing with the sort of alt-left South Korean leader who would ask his permission before enforcing U.N. sanctions, and who would pressure a Clinton administration to start “peace” talks, Pyongyang’s preconditions for which would amount to de facto recognition of North Korea as a nuclear state. That would put His Corpulency within sight of achieving hegemony over the entire Korean peninsula. At the current rate, he is winning that race.
Would President Park choose to let that happen and go quietly into the night, or would she prefer to take her chances with preemptive strikes, with or without U.S. support? President Park’s Plan B may well look very much like Israel’s Operation Opera in 1982. The risks of miscalculation and escalation should require no elaboration. So when sanctions skeptics warn us of the risk that effective sanctions enforcement triggers a financial crisis in Pyongyang, just consider the alternatives.
Over the last few days, I’ve read a smattering of self-congratulatoryreports that China is finally enforcing sanctions against North Korea by cutting back on coal imports. This is flawed and dangerously wishful thinking. First, China has historically reacted to U.S. diplomatic pressure by dialing down commerce with Pyongyang for a few weeks or months until the heat is off. Then, it goes right back to propping up Pyongyang and breaking sanctions like it always has. Second, the skyrocketing price of coal could yield a massive financial windfall for Pyongyang:
At these prices, His Porcine Majesty can sustain his regime and keep nuking up by exporting a fraction of the volume of coal he exported last year.
China is helping North Korea break sanctions in other ways, too. It’s exporting kerosene to North Korea, in direct violation of UNSCR 2270. Work at the Musan mine near the Chinese border doesn’t appear to have slowed at all. North Korea’s main port at Nampo is crowded with ships loaded with coal, seafood, and other wares for the Chinese market. Some of the North Korean vessels approach the Chinese coast, hover offshore, meet up with smaller vessels coming from Chinese ports, and return to North Korea. Such “hovering vessels” have historically been used for smuggling, by evading customs inspections. This report is consistent with what trusted friends have observed in shipping trackers for months. If I had to venture a guess, I’d say this is probably indicative of the smuggling of bulk cash or gold, either of which would also violate UNSCR 2270.
The administration knows what it needs to do. Regardless of the price of coal, and regardless of the volume of coal — or anything else — that North Korea exports, all of that revenue goes into bank accounts in China. In recent months, I’ve become convinced we know where most of those bank accounts are. What is the answer to China’s years of duplicity, bad faith, double-dealing, and stalling? The answer is to walk away from the negotiations with China, build a diplomatic coalition to enforce sanctions with the authorities we already have, and freeze Kim Jong-un’s offshore accounts.
President Obama’s North Korea legacy will be to leave his successor and our allies with an escalating nuclear crisis, a deteriorating humanitarian situation, and possibly a nuclear arms race in Asia. History will eventually rank it alongside the failure of the Green Revolution in Iran, the near-collapse in Iraq, and the Syria fiasco as one of his greatest foreign policy failures. The question now is whether he will leave his successor with the makings of a strategy to stop Kim Jong-un while there’s still time … if there’s still time.
The other night, I was chatting with a reader who was surprised to hear me praise NK News. Although I consider Chad O’Carroll a friend, it’s no secret that Chad and I have philosophical differences about North Korea policy. Some of the things I read at NK News make me roll my eyes; others drive me to paroxysms of rage. But what I can never say about NK News is that it pulls punches. Its decision to publish Nate Thayer’s stunning expose of AP Pyongyang was as brave as the report itself was devastating. Its report on the Masikryong Ski Resort exposed serious sanctions violations and wound up being cited in the U.N. Panel of Experts reports. It did better reporting on the Pyongyang apartment collapse story from Seoul than the AP did from a few blocks away (Update: See? This is what I’m talking about.). You can love it, hate it, or alternate between both of those reactions, but NK News has become a public utility for North Korea watchers.
Yet NK News’s single greatest asset must be Leo Byrne, whose investigative tenacity and meticulousness puts him into contention to be the single best journalist covering North Korea for any publication, anywhere. Byrne does what too few journalists bother to do — he digs up hard-to-find facts; reads the legal authorities that give those facts meaning, consequence, and context; and reports them. Byrne’s recent reporting on shipping sanctions has been a good example of this. For some days now, I’d meant to find the time to write about his discovery that, following the adoption of U.N. Security Council in 2270 in March, 50 North Korean ships re-registered under the Tanzanian flag:
According to data from Marine Traffic, the Equasis maritime database, and inspection records from Port State Control (PSC) authorities, around 15 percent of ships on the NK Pro vessel tracker now sail with under (sic) a Tanzanian flag, with the large majority of changes happening over a three-month period.
The numbers and time frames indicate an unprecedented campaign to reflag vessels with links to the DPRK, dwarfing previous flurries of changes that occurred after the UN and U.S. designated a North Korean shipping company in 2014. [NK News, Leo Byrne]
“19.Decides that Member States shall prohibit their nationals and those in their territories from leasing or chartering their flagged vessels or aircraft or providing crew services to the DPRK, and decides that this prohibition shall also apply with respect to any designated individuals or entities, any other DPRK entities, any other individuals or entities whom the State determines to have assisted in the evasion of sanctions or in violating the provisions of resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013) or this resolution, any individuals or entities acting on behalf or at the direction of any of the aforementioned, and any entities owned or controlled by any of the aforementioned, calls upon Member States to de?register any vessel that is owned, operated or crewed by the DPRK, further calls upon Member States not to register any such vessel that is de-registered by another Member State pursuant to this paragraph, and decides that this provision shall not apply with respect to such leasing, chartering or provision of crew services notified to the Committee in advance on a case-by-case basis accompanied by: a) information demonstrating that such activities are exclusively for livelihood purposes which will not be used by DPRK individuals or entities to generate revenue, and b) information on measures taken to prevent such activities from contributing to violations of the aforementioned resolutions;
North Korea’s merchant fleet is subject to international sanctions because of North Korea’s history of using it for smuggling weapons, in violation of U.N. Security Council resolutions.
To give credit where it’s due, Claudia Rosett first discovered that the Dawnlight, a North Korean ship designated by the U.N. for arms smuggling, hoisted the Tanzanian flag as the Firstgleam, just days after 2270 was adopted. Byrne’s report shows that this was much more than a one-off; it as part of a pattern and practice of violation that was either grossly negligent, corrupt, or willful. In addition to the ex-Dawnlight, Byrne reports that the ships re-registered under the Tanzanian flag include a vessel designated by the U.S. Treasury Department, and others that have been “mentioned” in U.N. Panel of Experts reports.
The news site All Africa adds that Tanzania has a checkered history of reflagging ships for Iran, which drew a visit from the local U.S. embassy. The Tanzanian Foreign Ministry blamed “a ‘notorious’ Dubai-based agent” and said it would contact the local North Korean embassy to investigate. Well!
“Diplomatically, we can’t rush to act on unverified issues. But, in general, our international shipping registration agents have been categorically warned against permitting countries sanctioned by the UN to fly our flag because by so doing, the country would be deemed to have violated membership sections of the UN,” Dr Mahiga said. [Louis Kolumbia, AllAfrica]
Let’s hope that that investigation proceeds swiftly to a plausible conclusion, because Tanzania’s shipping registration authority is also in great peril under U.S. law, to the extent the transactions are denominated in dollars (which almost always turns out to be the case).
First, NKSPEA section104(b) gives the President the authority to designate any person who “knowingly engages in, contributes to, assists, sponsors, or provides financial, material or technological support for, or goods and services in support of, any person designated pursuant to an applicable United Nations Security Council resolution.” Then, Executive Order 13722, which (partially) implements the NKSPEA, imposes sectoral sanctions on North Korea’s transportation industry, potentially widening the risk to any transactions involving North Korean shipping. The potential consequence is that Tanzania’s registry could have its assets frozen. Fortunately, that may not be necessary, because Byrne’s report has captured the undivided attention of the Tanzanian government, which says it has already de-registered 13 of the North Korean ships, and has begun the process of de-registering the rest of them.
ZMA director general Abdallah Hussein said in an interview on Tuesday that the process to deregister Democratic People’s Republic of Korean (DPRK) vessels started in June and was ongoing to ensure no vessel with links to North Korea fly the Tanzania flag in compliance with the UN Security Council sanctions. The minister for Foreign Affairs minister (sic), Dr Augustine Mahiga, had told The Citizen on Sunday that the ministry would initiate a diplomatic process to ensure that all vessels linked to North Korea are deregistered. [….]
If the deregistration started in June as Mr Hussein claimed, then, that hasn’t been reflected yet in the Tanzania foreign ships registry, for the investigation carried out by Leo Byrne, a Data and Analytic Director at NK News based in Seoul shows the majority of the vessels that were deregistered by other countries following tightening of North Korean sanctions “transferred their details to the Tanzanian registry, which accepted nearly all the ships between June and August this year.”
Mr Hussein expressed surprise over the same thing. “I wonder why Mr Byrne’s analysis hasn’t reflected ships that we have deregistered,” he said. [AllAfrica]
As a blogger, the pinnacle of my career was the day I saw my work denounced by KCNA — on May Day, no less. Byrne now shares the rare privilege of being called out by an entire foreign government (in his case, by name). As to the defense that Byrne did not credit Tanzania for de-registering 13 ships, well, that’s fair in the same sense that no one thanked Kim Jong-un for not nuking off last weekend, and no one thanked Donald Trump for not grabbing anyone’s hoo-ha all day yesterday.
As far as I know, anyway.
Ideally, U.S. and South Korean diplomats in Dar as Salaam should pay courtesy calls to the Tanzanian Foreign Ministry and politely ask, “Hey, what gives?” Maybe they already have. That approach seems to have worked well enough for enforcing Iran sanctions. But if the State Department doesn’t act, I’d expect that eventually, Congress will ask the same question of the State Department. With Tanzania already acting to de-register North Korean ships, it may be that less subtle approaches should be reserved for more recalcitant targets (are you listening, Namibia?).
Overall, the news looks increasingly bleak for North Korea’s merchant fleet. Panama and Mongolia have de-registered North Korean ships, and Cambodia, the single largest reflagger, appears to be moving in that direction. The government of Jordan identified two cases in which its shippers used a North Korean flag of convenience and has since acted to put an end to that practice. As the range of countries reflagging North Korean ships narrows, more media and diplomatic attention will inevitably focus on those that remain, like Tuvalu and Sierra Leone. A sanctions regime is only as strong as its weakest link, but slowly, link by link, the chain is tightening.
As of yesterday, and for the first time ever, the U.S. Treasury Department has frozen the assets of Chinese entities for violating North Korea sanctions, and the Justice Department has indicted them for sanctions violations, conspiracy, and money laundering. The company in question is the Liaoning Hongxiang Group of companies, of which Dandong Hongxiang Industrial Development Company Limited, or DHID, is the largest component. The individuals are Hong Jinhua, Luo Chuanxu, Zhou Jianshu, and Ma Xiaohong, the CEO of the Liaoning Hongxiang Group.
All were first implicated by the remarkable investigative work of the Center for Advanced Defense Studies and the Asan Institute, which is wonderful and also troubling, in that it should not have been left to a small nonprofit research group with funding from a South Korean think tank to do the work that the Treasury and Justice Departments should have done — protecting such core U.S. security interests as global nonproliferation, the integrity of the financial system, and freedom of speech in our own towns and neighborhoods. It is wonderful and disturbing that two very young and very bright people with a tiny budget and no security clearances have now done more damage to the financial networks that sustain His Corpulency’s misrule than the Obama administration did on its own in eight years. (Full disclosure: I met with C4ADS a few times since they started work last fall, to help them focus and target their investigation.) Here is how they did it.
To map these growing overseas networks, this report used open source databases, including corporate registries; court filings; Equasis maritime database records; customs and trade data provided by Panjiva, a customs trade data aggregator; and real time data on ship activities provided by Windward, a maritime data and analytics platform. The compiled information was consolidated using Palantir’s Gotham network analysis platform.
In Part I, we focused on building bulk datasets on companies, individuals, and ships. By using corporate and tax registries in East Asian countries, we were able to identify significant points of convergence across seemingly disparate networks and identify 562 ships, companies, and individuals within one degree of separation from known DPRK illicit and regime entities.
In Part II, we identified key nodes from our expanded dataset for a more in depth investigation. We focused, in particular, on one Chinese trading conglomerate that has conducted over $500 million of trade with the DPRK in the past five years. Within this network, we were able to identify its subsidiary and affiliated entities that have transacted an additional $300 million with sanctioned Burmese and North Korean entities, helped maintain the cyber infrastructure of the DPRK, and traded in various goods and services that raise serious non-proliferation concerns. [C4ADS]
The researchers also pulled and read court filings in China, Japan, and Hong Kong to uncover what appear to be significant pieces of North Korea’s overseas financial support and shipping networks. Typically for criminal networks, the North Koreans mix legal and illegal business to conceal their illicit activity and disguise the origin of their profits. The result is that some businesses “are likely to be inadvertently facilitating North Korean illicit activity,” while others, like DHID, do so willingly. I won’t try to do justice to C4ADS’s report here; just read the whole thing. Among its findings —
The report uncovered 248 companies, mostly registered in Hong Kong, that operate North Korea’s shipping fleet, much of it concealed behind shell companies and flags of convenience.
Liaoning Hongxiang Group is directly responsible for operating 10 of those ships, which import North Korean coal and help Pyongyang get around the “livelihood” loophole in UNSCR 2270.
DHID’s parent company, the Liaoning Hongxiang Group, helped to run the Cambodian ship registry, which Cambodia is currently in the process of nationalizing. C4ADS found that Cambodia in the principal registrar of reflagged North Korean ships. UNSCR 2270 prohibits the reflagging of ships owned, controlled, or crewed by North Korea.
DHID’s annual trade volume with North Korea was more than twice that of the Kaesong Industrial Complex, and more than enough to fund North Korea’s nuclear program.
DHID may have facilitated North Korean exports to the United States, which would violate Executive Order 13570.
DHID has an equity stake the Bank of Dandong, which has previously been implicated in handling money transfers to North Korea, in violation of U.N. sanctions.
The Liaoning Hongxiang Group’s Vice Chairman had dealings with a sanctioned Burmese tycoon, Tay Za, who also bought a nuclear reactor from North Korea.
DHID entered into a joint venture with the Korea National Insurance Corporation, which defector Kim Kwang-jin has accused of insurance fraud, and which has been designated by the EU for the freezing of its assets for proliferation-related activities.
DHID’s parent company is a key facilitator of North Korea’s cyber architecture, which North Korea used in cyberattacks against SWIFT; against South Korean banks, nuclear power plants, and news media organizations; and against Sony Pictures. The empty brackets are for Chinese characters that WordPress can’t read:
Companies associated with the Liaoning Hongxiang Group provide services that are critical to the underlying cyber architecture of the DPRK, including the country’s primary email relay service, facilities from which hackers are alleged to operate, and IT firms producing software with possible military and regime applicability as will be discussed in this section. The Chilbosan Hotel [ ] in Shenyang, one of Liaoning Hongxiang’s joint ventures with the DPRK,117 is alleged to be the staging area for Bureau 121, a group of North Korean hackers.118 119 The source of the allegations is a North Korean defector, Kim Heun Kwang, a former computer science professor in Pyongyang, who escaped from North Korea in 2004 and gave detailed testimony on Bureau 121, a group that began large-scale operations in China in 2005.120 The group is reported to be comprised of about 1800 “cyber-warriors” and is considered the “elite of the military.”121 It has been widely reported that Bureau 121 may have been responsible for the 2014 Sony hack.122 The Chilbosan Hotel is majority owned by the North Korean Pyongyang Economic Exchange Society [ ], 123 which controls a 70% share of the company.124 The remaining 30% is owned by Liaoning Hongxiang Group member Dandong Hongxiang Industrial Development Co. Ltd.
The Chilbosan Hotel also shares a physical address with a company called Silibank.127 128 Silibank is an email relay service that charges for sending and receiving email through servers that connect from the DPRK, through China, and then to the outside world. Established in September 2001, Silibank is reportedly the DPRK’s first ISP provider,129 charging for its service in USD for each kilobyte sent.130 The company’s domain, silibank.com, is currently registered to a Chinese company called Liaoning Zhongtian Real Estate Development Co. [ ].
And finally, C4ADS found a link between DHID and North Korea’s WMD-related procurement operations:
Information found on Dandong Hongxiang Industrial Development Group shows that in several online classified ads and databases, Dandong Hongxiang sold products that could qualify as potential military and nuclear dual use products under the U.S. Department of Commerce Bureau of Industry and Security export restrictions.105 These goods included at least four dual use products: 99.7% pure aluminum ingots,106 aluminum oxide (Al2O3), ammonium paratungstate (APT), and tungsten trioxide (WO3).107 Information discovered using Panjiva customs records shows that Dandong Hongxiang Industrial Development Group sent two shipments of aluminum oxide worth a total of $253,219 to the DPRK as recently as September 2015.108 Classified ads posted by Shenyang Hongyang Fine Cermaics Co., which according to the Chinese business registry is owned by a Chinese national named Ma Xiaohong ???, listed “industrial spaceship” as a potential application for aluminum oxide (further investigation is required to confirm if they are the same individual).109 110
We cannot definitively identify the end-user of such goods, but there are clear dual use applications for the products listed. According to a leaked government cable, North Korea has sought to aquire aluminum ingots in the past. The cable further states that “these commodities have dual-use applications for the products listed. According to a leaked government cable, North Korea has sought to aquire aluminum ingots in the past. The cable further states that “these commodities have dual-use applications and could possibly be linked to the North Korean nuclear program.”111 Ammonium paratungstate and tungsten trioxide are byproducts of separating tungsten from its ore.112 A U.S. patent filed in 2010 states that tungsten trioxide is one of several oxidizing agents appropriate for use in a missile design with increased aerodynamic stability.113 According to the U.S. Nuclear Regulatory Commission, aluminum oxide is a component used to resist corrosion in gas centrifuges during uranium enrichment.114 In April 2013, a British company discovered that a firm they had been sending aluminum oxide to had links to the Iranian government’s nuclear program and immediately “ceased transactions. The article stated that “Aluminium oxide is an important material in gas centrifuges used to enrich uranium.”115 [C4ADS]
~ ~ ~
Strictly speaking, the Treasury and Justice Departments sanctioned and prosecuted almost none of this conduct. Let’s turn to the Treasury Department designations first. The “NPWMD” means the assets were frozen under Executive Order 13382, which makes any transaction that facilitates North Korea’s WMD procurement not only sanctionable, but punishable with criminal penalties under section 206 of the International Emergency Economic Powers Act, or IEEPA.
“Today’s action exposes a key illicit network supporting North Korea’s weapons proliferation,” said Adam J. Szubin, acting Under Secretary for Terrorism and Financial Intelligence at the U.S. Department of the Treasury. “DHID and its employees sought to evade U.S. and UN sanctions, facilitating access to the U.S. financial system by a designated entity. Treasury will take forceful action to pressure North Korea’s proliferation network and to protect the U.S. financial system from abuse.”
OFAC designated China-based DHID for acting for or on behalf of North Korean-based KKBC. Specifically, DHID used an illicit network of front companies, financial facilitators, and trade representatives to facilitate transactions on behalf of KKBC. Ma Xiaohong, Zhou Jianshu, Hong Jinhua, and Luo Chuanxu were designated for acting for or on behalf of DHID.
KKBC was designated by OFAC under E.O. 13382 and the UN pursuant to UN Security Council Resolution (UNSCR) 2270 for providing financial services in support of the previously designated entities Tanchon Commercial Bank and the Korea Hyoksin Trading Corporation. Both of those entities were designated pursuant to E.O. 13382 and UNSCR 1718 for their roles in North Korea’s WMD and missile programs. [Treasury Department press release]
As a result of Treasury’s designations, all dollar-denominated assets of the five targets are frozen, and U.S. persons are prohibited from doing business with them.
Not to be outdone, the Justice Department has unwrapped an early Christmas present by unsealing an indictment of Hong, Luo, Ma, and Zhou, and DHID for conspiracy, money laundering, and IEEPA violations, for helping a sanctioned North Korean entity circumvent sanctions. That’s about as much as you’ll see about proliferation in these indictments; the only link to proliferation is the money DHID moved for a North Korean bank that had been sanctioned for proliferation. The Justice Department also filed a civil forfeiture action against 25 bank accounts belonging to DHID, deposited in a who’s-who of Chinese banks. Want to know the names of the Chinese banks? You know you do.
China Merchants Bank
Shanghai Pudong Development Bank
Agricultural Bank of China
Bank of Communications Co. of China
Bank of Dandong (as predicted)
China Construction Bank
Guangdong Development Bank
Industrial & Commercial Bank of China
Bank of Dalian
Bank of Jinzhou
Hua Xia Bank
China Minsheng Banking Corporation
Contrary to what some news reports have written, a forfeiture action does not freeze assets; if effectively confiscates them. The ownership interest of the person who thought he owned the assets is legally extinguished if the government proves that assets are “involved in” illicit activity.
The banks themselves have no standing to challenge the forfeiture unless they can prove that they’d already closed the accounts. Typically, the feds will use 18 U.S.C. 981(k) to take an equivalent amount to the asset right out of the foreign bank’s U.S.-based correspondent account. It’s up to the foreign bank to make itself whole by taking an equivalent sum from the account holder, something that account holders usually agree to in the fine print of their account-holder agreements.
The actions are venued in the District of New Jersey because the Chinese banks that serviced DHID and the numerous shell companies it set up used Standard Chartered Bank and Deutsche Bank as their U.S. correspondent banks, and both banks based their dollar-clearing operations in New Jersey. I’ve explained how this works a few times before, but DOJ explained it well in its forfeiture complaint.
32. An interbank, also known as a correspondent bank, is a financial institution that provides services on behalf of another financial institution. It can facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of another financial institution. Correspondent banks are able to support international wire transfers for their customers in a currency that their customers normally do not hold on reserve. Correspondent banks in the U.S. facilitate these wire transfers by allowing foreign banks, located exclusively overseas, to maintain accounts at the correspondent bank in the U.S.
33. To obtain goods and services in the international market place, as North Korea must, it needs access to U.S. dollars as some international vendors require purchases to be made in U.S. dollars. As a result, North Korean entities, including designated entities such as KKBC, need access to the U.S. financial system.
The New Jersey venue is interesting, in that most correspondent banks operate in New York. (I wonder if that means we can expect to see another indictment in the Southern District of New York one day soon.)
~ ~ ~
Although news reports have said that the indictment was for aiding North Korea’s WMD programs, that’s only indirectly true. The crux of the government’s case is that after August 2009, when Treasury designated Korea Kwangsong Banking Corporation (KKBC) for WMD proliferation and blocked its access to the dollar system, DHID stepped in to serve as KKBC’s workaround and to launder its money. (Broadly defined, money laundering means moving or spending money that is “involved in” certain specified unlawful activity, whether as proceeds or as an instrumentality.) I’m often asked at this juncture why the North Koreans don’t just use Renminbi. I’ll let the Justice Department answer that.
35. Following the KKBC’s designation as an SDN by the U.S. Department of the Treasury in August 2009, DHID began working to find ways to conduct trade on behalf of KKBC despite the U.S. sanctions. One means of doing so was to use Chinese currency rather than U.S. dollars to conduct commodities transactions, so as to avoid sending money through the U.S. in violation of IEEPA. In July 2010, the City of Dandong, China highlighted press reports of a pilot program between DHID and KKBC to allow Chinese Renminbi (RMB) transactions to facilitate trade between China and North Korea.
36. North Korea’s trading needs, however, cannot be met using only Chinese currency. As a result, KKBC has continued to access the U.S. financial system to facilitate the purchase of goods in violation of U.S. sanctions. KKBC has done so by using DHID and its front companies.
In other words, what I said before — North Korea uses the dollar because that’s what sellers want, and also because (as I’ll explain later) Pyongyang is dollarizing to stabilize its economy.
When KKBC wanted to buy something in dollars — in this case, sugar and urea (used for fertilizer and explosives, and also, ewww) — it would place an order with DHID, which then bought the merchandise at a substantial mark-up — as much as 23 percent, through any one of 22 different front companies or shell companies it set up for just that purpose. That’s the kind of premium that, at least according to our friends in the FBI, people only charge to take the risks associated with breaking the law. Ma and DHID were initially well-positioned to charge these commissions due to Ma’s connections with Jang Song-thaek. Only when the guns of Jang’s firing squad fell silent, Ma’s business kept right on booming.
DHID and KKBC kept a ledger where KKBC would credit or debit DHID’s dollar account in KKBC in Pyongyang. The most suspicious transactions — those that involved a North Korean nexus — were all kept off the wires. Instead, DHID set up a whole series of shell companies, mostly registered in the British Virgin Islands or the Seychelles, and listing fictitious addresses in Hong Kong.
And how did DOJ find all of this out? Much of it obviously began with the C4ADS-Asan investigation, but there is much evidence in the indictment and forfeiture complaint that C4ADS didn’t write about. And why sugar and urea instead of, say, aluminum oxide? I can only speculate that those transactions were the easy ones to prove. Prosecutors prefer to charge the conduct that’s easiest to prove, especially if some of the other transactions with more jury appeal might also require proving up a longer, more complex chain of shell companies and beneficial owners.
All of which is our cue for a round of “Panama Papers Bingo,” which will allow you to read fun stuff about theshellcompaniesnamedin theindictment and theircorporate officers. By all means, leave a comment if you find something interesting in there, although I may hold your comment unpublished for a while for legal reasons.
Although the forfeiture action doesn’t say how much money was in the 25 accounts, it describes multiple transactions in the millions of dollars, including one that was for around $11 million. It wouldn’t surprise me if we learned that the total was well over $25 million, the amount that was blocked (but not forfeited) in the case of the Banco Delta Asia action.
Anyway, now you know why we wrote a section on “forfeiture of property” into the NKSPEA. Originally, we tried to create a special fund to pay for North Korea sanctions enforcement, broadcasting, and humanitarian purposes. Because that funding provision ended up on the cutting-room floor, the Justice and Treasury Departments will put the forfeited money into their respective forfeiture funds and use the money to pay for law enforcement operations. Where, as here, DOJ and Treasury worked the case together, they’ll typically work a deal for splitting that money up between them.
~ ~ ~
So what will the impact of all of this be? Financially speaking, DHID and Ma aren’t likely to survive the experience. Because 80% of DHID’s business was North Korea-related, His Porcine Majesty will probably feel a significant impact. DOJ’s indictment quotes a DHID powerpoint presentation that claims that as of 2012, DHID handled 20% of the volume of Sino-North Korean trade, and claims that DHID’s business was growing at 30 percent each year. I have no way of knowing if that’s true or not, but my guess is that these figures are exaggerated for shareholder consumption. After all, DHID was willing to file a false certification with a certain Panama-based law firm — any guesses, kids? — denying that it had any links to North Korea (exhibit 3).
The greater effect may be the in terrorem impact this action will have on companies like the 88 Queensway Group that had dealings with sanctioned North Korean entities and felt untouchable, possibly because they thought their Chinese political connections would protect them from Uncle Sam. Ma herself was a made member of the Chinese Communist Party, and Sam Pa was a former Chinese spy. Equally well-connected figures may feel less invincible today.
The bad news? Not only the fact that no Chinese banks are facing indictments for facilitating Hongxiang’s willful, long-standing money-laundering scheme, but also, the fact that in its press release, the Justice Department said that “[t]here are no allegations of wrongdoing by the U.S. correspondent banks or foreign banks that maintain these accounts.” I’ll discuss that in more detail in tomorrow’s post.
By now, diplomats at the U.N. have begun wrangling over the shape of the next North Korea sanctions resolution (let’s hope they at least vote before North Korea’s next nuclear test). Meanwhile, efforts to enforce the last resolution have lost momentum. With regard to both banking and shipping sanctions, the Obama administration doesn’t appear to have done much to encourage other U.N. member states to comply.
I’ve said before that following the money matters most, but North Korea’s transportation sector is another important pressure point. North Korea has long used its merchant fleet for smuggling drugs and weapons, and it has evaded law and sanctions enforcement by relying on reflagging — the registration of its ships under flags of convenience. States known to reflag North Korean ships include Panama, the Republic of the Marshall Islands, Tanzania, Sierra Leone, Cambodia, Mongolia, Kiribati, Tuvalu, Belize, and the Republic of Palau.
In March, the U.N. Security Council approved Resolution 2270, paragraph 19 of which requires U.N. member states to de-register ships that are “owned, operated or crewed by” North Korea. The U.S. Treasury Department followed this by imposing sectoral sanctions on North Korea’s transportation industry under Executive Order 13722. So by now, no one should be reflagging North Korea’s ships, right?
Shortly after the resolution passed, Yonhap reported that an unnamed U.N. member state had canceled the registrations of North Korean ships, but just four days after UNSCR 2270 passed, Tanzania reflagged the notorious, U.N.-designated North Korean smuggling shipDawnlight (now sailing as the First Gleam). The Dawnlight was previously operated from Singapore, which has since pledged its full cooperation with enforcing UNSCR 2270. The ship is now operated by a Marshall Islands based shell company, Sinotug Shipping.
As Claudia Rosett pointed out, the North Korean-flagged ships that are making regular voyages between North Korea and Iran probably aren’t being inspected as required.
Two North Korean ships, designated by the Security Council as the Jin Teng and the Jin Tai, have switched registrations from Sierra Leone to Belize. Worse, UNSCR 2270 requires members states to confiscate designated ships on arrival, but the ships have since landed in the Philippines, Japan, Vietnam, China and Indonesia. In the case of the Philippines, the authorities initially seized the Jin Teng, but China lobbied the U.S. to have its designation removed. Both ships are now operated by a China-based entity called Blue Ocean Ship Management.
Cambodia, the top registrar of flags of convenience for North Korea’s shipping fleet — ironically, through the Busan-based Cosmos Group — claims to have suspended reflagging operations pending a nationalization of the reflagging procedure. The suspension was not specific to North Korea, and I’ve seen no reports that it has de-registered North Korean ships. That the South Korean government has no recourse to influence the conduct of a company based in Busan is perplexing. Seoul has lobbied other governments to enforce sanctions; maybe it ought to set a better example itself.
In August, a month after Park Geun-hye visited Mongolia, the Joongang Ilboreported that “The Mongolian government cancelled contracts with 14 North Korean ships to operate under its flag of convenience.” NK News’s Leo Byrne suggested that the ships may have switched their registrations to Togo, Cambodia, Sierra Leone, Kiribati, or particularly, Tanzania. Byrne specifically found that Tanzania had registered four new North Korean ships since the approval of USNCR 2270. The list of compliance reports required under UNSCR 2270 shows no report for Tanzania, although there is a lag time between submission and publication of the reports. Last week, Byrne reported that that Tanzanian-flagged, North Korean-crewed Jin Long had caught fire off the Chinese coast, and traced its management to a shell company in Hong Kong.
What measures would help enforce the sanctions? One is old-fashioned diplomacy. I’ve seen almost no reporting at all that our diplomats have lobbied U.N. member states to comply with UNSCR 2270. Contrast this with 2006, when Treasury Department officials went on a world tour, warning bankers and finance ministers to steer clear of North Korean funds.
A third option would be for the next UNSC resolution to simply deny landing rights to vessels owned, operated, crewed, or flagged by North Korea. If North Korea didn’t have a shipping industry at all, it would have to rely on third-country shippers, who would be more averse to the risk of sanctions violations.
If all else fails, the Obama administration must be willing to use EO 13722, or section 104 of the North Korea Sanctions and Policy Enhancement Act, to impose secondary sanctions on ship registries that don’t comply with UNSCR 2270.
The HRNK insider blog carries a fascinating story that begins with “a recent speaking tour in South America.” Recently, a North Korean sailor arrived at the airport in Montevideo, Uruguay, from Beijing. The sailor and his minder must have been in quite a hurry to get to the port. They forgot his suitcase, which the airport authorities eventually declared unclaimed. The suitcase contained evidence that North Korea is renting crew services to third-country vessels via a Uruguayan broker. (HRNK claims it “has also received information on a similar operation being conducted in Peru, but has so far been unable to verify such reports.”) The scheme works like this:
Sources in the country have confirmed that a Uruguayan company is cooperating with the North Korean authorities to dispatch North Korean sailors and fishermen to work on foreign ships. Based on luggage tag information, prior to landing in Montevideo, the sailors transit through Beijing and Paris. Although HRNK hasn’t yet been able to independently verify this information, the company has been identified as “Grupo Christophersen Organizacion Maritima,” headquartered in Montevideo. In order to avoid scrutiny by locals and to deny the sailors contact with the outside world, the North Koreans are picked up as soon as they land in Montevideo. They are then taken to a foreign fishing vessel by taxi. Practically, unless they are accompanied by watchful North Korean minders, the sailors can’t set foot on Uruguayan soil. According to local sources, it is primarily Taiwanese ships that make port in Uruguay and take on groups of ten to twenty North Korean sailors. Two of these Taiwanese fishing ships identified by local sources are reportedly “Shengpa” and “Samdera Pacific.” [HRNK Insider]
Greg Scarlatoiu’s entire post is a must-read, if only for the photographs of the propaganda poems the heavily indoctrinated sailor wrote (or rewrote) by hand. The extensive maternal references strongly support Brian Myers’s analysis of North Korean propaganda.
If confirmed, such a scheme falls into a gray area in U.N. sanctions against North Korea. In March, the U.N. Security Council approved Resolution 2270. Although the resolution does not ban the provision of crew services by North Korea to other U.N. member states, it does call on (but does not explicitly require) member states “to de?register any vessel that is owned, operated or crewed by the DPRK.” HRNK’s post does not name the North Korean entity Grupo Christophersen contracted with, but if it’s designated by the U.N., the transaction would be a violation. For now, this warrants further investigation by the U.N. Panel of Experts, and some polite visits by State Department officials to the Uruguayan Embassy and TECRO.
If the Security Council is looking to impose an additional cost on Pyongyang for its latest missile tests, perhaps it can also ban the provision of crew services by North Korea to U.N. member states. If the Panel of Experts can’t figure out how His Porcine Majesty ultimately spends Grupo Christopherson’s money, it could add that partner to its blacklist. The Security Council is long overdue to ban labor-export arrangements that violate internationally accepted labor standards.
But the real lesson we learned today? Never forget your suitcase at the airport.
~ ~ ~
Update: What didn’t occur to me until after I posted this is that if the transactions are denominated in dollars, they’re subject to blocking under this provision of Executive Order 13722, which the President signed in March to implement the North Korea Sanctions and Policy Enhancement Act.
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:
(iv) to have engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea;
So, who knows the name of the North Korean company involved? In what currency does it accept payments, as if I have to ask?
Unlike my friend, Claudia Rosett, I’d call the new U.N. sanctions against North Korea a qualified success, despite the fact that implementation is still a work in progress. This post, and the other posts it links, summarize the effects of just one aspect of the sanctions — their restrictions on North Korean shipping, which have idled dozens of North Korean ships. Since then, NK News’s Leo Byrne has reported that no North Korean ships have called in the port of Dandong since late March. Other Chinese ports continue to admit North Korean ships, none of which have been designated by the U.N.
Given the importance of the coal and mineral trade in the regime’s finances, it’s not surprising that the regime is squeezing its people to make up the difference, but it’s finding that even this has limits. There isn’t much to squeeze out of them, and the squeeze also costs the regime in the loyalty of its subjects, includingcitizens once deemed loyal enough to send abroad. Obviously, this is no time to relax our diplomatic pressure for strict enforcement. Despite these encouraging signs, the long history of sanctions-busting by China, and by North Korea’s arms clients, demands eternal vigilance, and sometimes, the threat of harsh consequences, or sanctions will leak and fail.
There are already some warning signs of how that could happen. For example, one ship that was designated by the U.S. Treasury Department, but not by the U.N., continues to make crossings between North Korea and China. Another example is the case of the M/V Jin Teng. Three days after the Security Council approved Resolution 2270, and designated 31 ships “owned or controlled by” designated North Korean arms smuggler Ocean Maritime Management (OMM), the Philippines seized one of those ships, the Jin Teng. After the seizure, China successfully lobbied Security Council members to lift the designation of the Jin Teng, and even threatened to block the reauthorization of the Panel of Experts monitoring compliance with the sanctions. This week, among other revelations, Claudia Rosett informs us that the Jin Teng has since been released, “sending the message that it’s hardly worth rushing to enforce U.N. sanctions.” That’s worrying.
There are other worrying signs, too. Rosett points to three ships, the Deniz, the Shaima and the Yekta, which fly the North Korean flag and have made regular voyages between North Korea and Iran.
Since March 2015, the Deniz has made at least 10 calls at Iran, including at least four this year, shuttling among Turkey, Kuwait and Iran’s Bushehr port and Kharg and Sarooj terminals. According to Equasis, the Deniz’s registered owner since February 2015 is H. Khedri—or Hadri Khedri, according to the IMO’s shipping-company database—with an address for Siri Maritime Services in Tehran. The Yekta and the Shaima have been making runs between Dubai and the Iranian port of Abadan, which the Yekta visited as recently as April 5.[Claudia Rosett, Wall Street Journal]
The ships are not designated by the U.N., although several facts here certainly call for further investigation by the U.N. Panel of Experts. Rosett points to the long history of WMD cooperation between Iran and North Korea, and any WMD-related commerce would clearly be forbidden by U.N. resolutions going back to 2006. To this, I would add the long history of North Korea supplying arms to Iran, for the use of its terrorist clients, which is also prohibited. The names of the ships aren’t Korean and don’t even sound Persian. If you forced me to guess, I’d say they’re Turkish.
This raises several potential violations of UNSCR 2270:
– The odds seem rather low that we can trust Iran to inspect the North Korean cargo as required by paragraph 18. This points to one loophole the Security Council should close after North Korea’s next nuclear test — to authorize the boarding and search on the high seas of vessels owned or controlled by North Korea when a member state at a vessel’s origin or destination has repeatedly failed to carry out its obligations under the resolutions.
– Rosett notes that “[t]he Deniz was reflagged from Japan, the Shaima and Yekta from Mongolia.” The reflagging (registration) of North Korean ships is banned by paragraph 19. Paragraph 19 also prohibits providing crew services to North Korean vessels.
– Paragraph 20 prohibits foreign ships from flying the North Korean flag, and also requires member states to prohibit the leasing and insurance of vessels flagged by North Korea.
The Panel, and Mongolian and Japanese authorities, should investigate, regulate, and prosecute as appropriate. And that is not all.
Among the North Korea-linked ships still on the U.N. blacklist, some are making fresh maneuvers that appear aimed at camouflaging their identities. The North Korean vessel the Dawnlight, which the U.S. has designated since last year, was flagged to Mongolia. In January it was renamed the Firstgleam and acquired by Sinotug Shipping Limited, a company set up just this past September in the Marshall Islands.
The U.N., having apparently missed the update, blacklisted this ship on March 2 under its old name of Dawnlight. A day later, despite a provision calling for member states to deflag North Korean ships, the Firstgleam was reflagged to Tanzania, according to Lloyds. As of this week, the ship, which the U.N. and U.S.-sanctions lists still refer to as the Mongolia-flagged Dawnlight, was signaling a position close to Japan. [Claudia Rosett, Wall Street Journal]
Anna Fifield reported extensively on the Dawnlighthere, for The Washington Post, and I’ve also written about it in this post. If investigated, Sinotug may turn out to be another North Korean shell company, but to be clear, I don’t have evidence to conclude that, only that it merits investigation. Tanzania’s reflagging of the Dawnlight is just the latest case of non-compliance by African governments that either don’t know or don’t care that they’re in violation.* The job of our diplomats is to help them know and make them care.
Another continuing problem with China’s implementation continues to be the loophole allowing coal and iron ore imports for “livelihood” purposes. Not one person I know really understands what this ambiguous term means, or what its limits are. If Congress takes up another round of sanctions legislation in response to a nuclear test, it should seek to define “livelihood” more narrowly, perhaps as in-kind exports of food, to be distributed as aid. Coal exports continue to cross the Yellow Sea from North Korea to China. It’s a different story at the land borders, where coal export traffic across the Yalu River has slowed greatly or stopped, while the trade in consumer goods and food continues to flow freely (which, as I keep trying to remind people, is both important and good).
Despite the valuable service Claudia has done for us in this op-ed, I part ways with her when she writes: “It’s highly questionable whether sanctions, however watertight, can stop North Korea’s deeply entrenched nuclear program.” That depends on just exactly how one envisions stopping it. Will sanctions convince Kim Jong-un that it’s in his interest do disarm in good faith? I don’t know anyone who thinks so, although I think it’s important to leave room for that possibility. It may well be that there will be no diplomatic solution as long as His Corpulency weighs down a throne. As I’ve said repeatedly, sanctions are one part of a strategy to convince someone in Pyongyang — most plausibly, the generals surrounding His Porcine Majesty — that the system must change or perish.
Despite these implementation problems, more evidence suggests that shipping sanctions are working than not. Xi Jinping is feeling intense international pressure to seem to be enforcing the sanctions. Six weeks after the passage of UNSCR 2270 seems a bit premature for us to throw up our hands and give up on a promising strategy. What’s needed instead is targeted and tough diplomacy, backed by the threat of tougher national sanctions for those who won’t comply voluntarily.
~ ~ ~
* Corrected after posting, because the reflagging did, in fact, happen one day after the adoption of UNSCR 2270.
Since this year’s nuclear test and the rounds of U.S. and U.N. sanctions that followed, I’ve tracked the implementation and enforcement of shipping sanctions closely on this site. For ease of reference, here’s a brief chronology of what I’ve observed since March 2, 2016, when the U.N. Security Council approved Resolution 2270, which —
required the inspection of all cargo to and from North Korea;
banned the reflagging of North Korean ships;
banned exports of coal and iron ore (except for “livelihood” purposes);
banned exports of gold, vanadium, and rare earths;
designated a list of ships owned or controlled by Ocean Maritime Management; and
designated North Korea’s Reconnaissance General Bureau, which also operates a small fleet (though the ships themselves are not designated).
As I’ve repeatedly noted, China has a long and well-documented history of violating North Korea sanctions right after voting for them, which is why any evidence of China’s compliance with the new U.N. sanctions ought to be read skeptically. Still, since March, the signs of China’s implementation of shipping sanctions has been mixed, but mostly good. A short chronology of my posts:
On March 8th, I noted early signs that Chinese ports, specifically in Dandong, were turning away North Korean ships.
This month’s reports reinforce the trend we’ve observed in those past reports — that for the most part, foreign ports are shunning the designated North Korean ships, including in China.
None of the 27 North Korean ships that are on a UN Security Council blacklist have been able to dock at foreign ports, the Voice of America reported Wednesday. They are either stuck in North Korean ports or marooned on the high seas. A diplomatic source said, “The UNSC sanctions are now biting, and North Korean ships are port-bound or stuck at sea.”
As of March 3, when the UNSC adopted the fresh sanctions, 15 of the North Korean ships on the blacklist were moored at foreign ports or traveling the open seas, according to VOA’s analysis of data from the private website Marine Traffic showing the real-time vessel positions. Four days later seven were still in foreign ports, and last month they had dwindled to two. The others returned to North Korea this month after they were denied entry to ports in China, Hong Kong, and Russia. [Chosun Ilbo, April 7, 2016]
Well … plus or minus. A rather confusing UPI report, citing the Voice of America, finds that all 27 of the North Korean ships designated under UNSCR 2270 are stranded at what UPI calls “various ports,” but also says that a number of ships continue to move between other North Korean ports, or have vanished from online tracking databases.
NK News’s Leo Byrne also finds that China and other countries have generally barred the designated ships from their ports, but with one exception — the M/V Victory 2, which continues to shuttle between Nampo and Lizhao. The U.S. Treasury Department designated the Victory 2 under Executive Order 13722 last month, but the U.N. did not designate it in UNSCR 2270. The Treasury designation links the Victory 2 to Korean Buyon Shipping Company Limited, presumably a shell company used by Ocean Maritime Management, the North Korean shipping company previously designated by the U.N. and the U.S. for arms smuggling.
So what does it mean to be designated by the U.S., but not by the U.N.? As an initial, practical matter, being on the U.S. SDN list means as much or as little as the Treasury Department decides it does. If Treasury doesn’t actually enforce the blocking of the ship or the shell companies behind it, it might scare some banks, and it might mean nothing. If Treasury does enforce it, it could mean that the dollar accounts of the shell companies are blocked, and dollar payments to provide fuel, insurance, registration, and bunkering services for the ship are blocked.
If China and North Korea are circumventing dollar sanctions, the new U.S. sanctions law and Executive Order 13722 would allow Treasury to block the dollar assets of the Chinese middlemen who are knowingly facilitating those non-dollar payments.
If the de facto de-listing follows the pattern of the Jin Teng and other de-listed vessels, China may have argued that the Victory 2 is not, in fact, owned or controlled by Ocean Maritime Management. What this means depends on whether the U.S. and China are dealing with each other forthrightly to enforce the sanctions, or whether China is simply testing the administration’s attention span.
This is all interesting enough, but the most interesting report may be the one that informs us that in early April, the Palau-flagged M/V Lucky Star-8 entered the Japanese port of Rumoi, on the northern island of Hokkaido, where the authorities promptly arrested the vessel’s Chinese captain.
It seems the captain failed to mention that between January 29th and February 1st, he’d stopped over in an unnamed North Korean port, and under new Japanese laws, ships that recently visited North Korea are barred from Japanese ports. Japanese customs found out about the North Korean port call during a cargo inspection, although the ship was carrying no cargo. The ship the left port without its captain.
This is a secondary shipping sanction, like the ones Congress passed in section 205 of the NKSPEA, only targeting third-country ships rather than third-country ports. This could have tremendous impact over time. North Korea’s maritime exports are almost exclusively used to generate revenue for the state and its priorities. It may not be a bad idea for Congress to consider when North Korea launches that missile, subject to an exemption for port calls solely for the delivery of food or humanitarian aid to North Korea. The effect could be that North Korea’s only maritime commerce would be from a few non-designated ships that go between North Korean ports and Chinese ports, and pretty much nowhere else.
The European Union’s administrative body, the European Commission or EC, has added seven additional designations to its regulation on “restrictive measures” against North Korea. The new designees include the Korea National Insurance Corporation, or KNIC, and six of its officials. There are several good reasons why the EC could have designated KNIC, but didn’t (the reason it did use is more interesting, but we’ll get to that later).
First, KNIC has been linked to Pyongyang’s luxury goods imports, which have been banned since the U.N. Security Council adopted Resolution 1718 in 2006. Historically, most of those goods have been of European origin. The EC notice, however, does not link KNIC to the luxury goods trade.
Second, the EC designation notice says that “KNIC headquarters Pyongyang is linked to Office 39 of the Korean Worker’s Party, a designated entity.” Office 39, a/k/a Bureau 39, the North Korean ruling party’s foreign currency-earning agency, is designated by the U.S. Treasury Department and the EC, but not the U.N., for financing North Korea’s prohibited WMD programs. The EC notice, however, does not say that KNIC is owned or controlled by Bureau 39.
Third, one of the ways KNIC has historically earned money is through insurance fraud. A former KNIC official, Kim Kwang Jin, revealed this in a 2009 Washington Post story, by Blaine Harden, and a 2013 Reuters story. The allegations of fraud arose even before Kim’s revelations, and led to protracted litigation between KNIC (on one side) and Lloyds and Allianz (on the other). The defendants alleged that KNIC had fabricated an accident to collect insurance payments from Lloyds and Allianz, which refused to pay, until the parties settled out of court. If the EC concluded that KNIC engaged in insurance fraud, that would also justify blocking it under UNSCR 2094:
“8. Decides further that measures specified in paragraph 8 (d) of resolution 1718 (2006) shall apply also to the individuals and entities listed in annexes I and II of this resolution and to any individuals or entities acting on their behalf or at their direction, and to entities owned or controlled by them, including through illicit means, and decides further that the measures specified in paragraph 8 (d) of resolution 1718 (2006) shall apply to any individuals or entities acting on the behalf or at the direction of the individuals and entities that have already been designated, to entities owned or controlled by them, including through illicit means;
The notice, however, does not accuse KNIC of fraud or other illicit activity.
Fourth, I’ve long suspected, but can’t prove, that KNIC is also involved in insuring ships owned or controlled by Ocean Maritime Management, a North Korean entity that was designated by the UN, the EC, and Treasury in 2014 for arms smuggling (specifically, for the Chong Chon Gang incident). OMM controls the ships through individual shell companies for each OMM vessel. According to this 2015 UN POE report, however, a different company, Korea Shipowners’ Protection & Indemnity Association, insured the sanctioned vessels. According to KNIC’s web site, however, KNIC is “a sole insurer of the DPR Korea” and sells maritime insurance. If the EC determined that KSPIA is a front company for KNIC, that would require the EC to block KNIC. There’s almost no information about KSPIA online, and nothing in the UN POE reports links it to KNIC. Anybody?
Unpack the language of the EC’s justification, however, and it doesn’t accuse KNIC of any of these things. It stops short of claiming that KNIC is controlled by Bureau 39. It merely says KNIC is funding the regime, and that those funds “could contribute” to North Korea’s WMD programs.
KNIC GmbH, as a subsidiary controlled by KNIC headquarters in Pyongyang (address Haebangsan-dong, Central District, Pyongyang, DPRK), a government entity, is generating substantial foreign exchange revenue which is used to support the regime in North Korea. Those resources could contribute to the DPRK’s nuclear-related, ballistic missile-related or other weapons of mass destruction-related programmes.
Furthermore, the KNIC headquarters Pyongyang is linked to Office 39 of the Korean Worker’s Party, a designated entity.’
I’m not complaining, mind you. The EC’s rationale is fully consistent with the language of UNSCR 2094, which raises the burden of due diligence that applies to transactions with North Korean state entities:
“11. Decides that Member States shall, in addition to implementing their obligations pursuant to paragraphs 8 (d) and (e) of resolution 1718 (2006), prevent the provision of financial services or the transfer to, through, or from their territory, or to or by their nationals or entities organized under their laws (including branches abroad), or persons or financial institutions in their territory, of any financial or other assets or resources, including bulk cash, that could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, including by freezing any financial or other assets or resources on their territories or that hereafter come within their territories, or that are subject to their jurisdiction or that hereafter become subject to their jurisdiction, that are associated with such programmes or activities and applying enhanced monitoring to prevent all such transactions in accordance with their national authorities and legislation;
The EC’s action has significant potential to crimp Pyongyang’s finances and improve the enforcement of the Security Council’s resolutions. The blocking of Pyongyang’s state insurer will make it much more difficult for it to engage in air and sea commerce with Europe. It could affect Air Koryo, which has long been under suspicion by the U.N. Panel of Experts for being a de facto arm of the North Korean military. It will affect ships in North Korea’s merchant fleet that haven’t yet been blocked by Treasury, and will impede Pyongyang’s ability to access luxury goods from Europe. It will send a strong signal that Pyongyang can’t seek refugee in the Euro system to escape from sanctions in the dollar system. It will require Pyongyang to draw from its hard currency reserves to buy insurance on the commercial market.
But for all the material effects the EC’s action may have, the action may be even more significant for the analytical shift it represents. As far as I’m aware, this is the first designation based on UNSCR 2094–on either side of the Atlantic–that does not make a direct link between the targeted entity and a specific prohibited activity. Instead, on its face, the EC designation applies Paragraph 11’s heightened due diligence requirement to say that KNIC could be funding sanctioned activities. That almost certainly happens to be true, even if the EC doesn’t directly say so.
The EU’s action, along with President Obama’s signature of Executive Order 13,687, represents movement–however glacial–from conduct-based sanctions to status-based sanctions, a shift Treasury officials recently told GAO would make the sanctions much easier to enforce. That is to say, the EU and the U.S. are both moving toward designating Pyongyang’s hard currency earning enterprises simply because they’re Pyongyang’s hard currency earning enterprises. That’s necessary because North Korea’s opaque and deceptive financial practices–as the Financial Action Task Force has alleged for years–make it impossible for the bankers who clear the transactions to meet the resolutions’ heightened due diligence requirements. Two years after UNSCR 2094 passed, governments are finally enforcing it according to its spirit and its letter.
That’s why this burden shifting represents such a welcome change. In fact, it’s one of the most important shifts the North Korea Sanctions Enforcement Act was intended to drive. It’s also fully consistent with how governments everywhere apply their financial regulations–by sanctioning entities that engage in deceptive financial practices solely for engaging in those practices, even without evidence that the underlying money flows involve illicit activity.
Just ask Dennis Hastert.
Now, a question for your consideration. If the U.S. and the EU are shifting toward status-based sanctions enforcement and enforcing the requirements for “enhanced monitoring,” how will South Korea continue to justify the Kaesong Industrial Park’s opaque financial arrangements? As Treasury Undersecretary (and now, CIA Deputy Director*) David Cohen said:
“Precisely what North Koreans do with earnings from Kaesong, I think, is something that we are concerned about,” said Cohen. “All of the hard currency earnings of North Korea are something I would say that we should be concerned about. [Voice of America]
The EC is acting on those concerns, and the U.S. has at least laid down a legal foundation for doing so. South Korea, a member of the Security Council when UNSCR 2094 passed and the principal beneficiary of the Security Council’s resolutions, simply refuses to acknowledge them, almost certainly for domestic political reasons.
Oddly enough, the EC’s action means it has designated KNIC, but that the U.S. Treasury Department hasn’t. The fact that European insurers were the main victims of KNIC’s insurance fraud may help explain this disparity. Still, as with the push for action on the U.N. Commission of Inquiry’s report on human rights, this is another case of U.S. “leading from behind” in holding North Korea accountable. It’s yet another disparity between U.S. and EC regulations that Section 202 of the NKSEA urges the U.S. governments to harmonize. If the U.S. won’t lead enforcement efforts, the least it can do is be a good follower.
Hat tip to Rob York of NK News. You can read NK News’s report here.
~ ~ ~
* A previous version of this post said that David Cohen was the Director of the CIA. He is actually the Deputy Director. Thanks to a reader for bringing the error to my attention.