A Financial Constriction Strategy for North Korea

Although U.N. sanctions alone will be insufficient to put real pressure on Kim Jong Il, our own Treasury Department has had proven success at targeting the North Korean regime’s finances and putting the regime under severe economic strain. Unlike U.N. action alone, recent experience tells us that these measures could work. Consider what happened in the 17-month period between September 2005 and February 2007, when the Treasury Department took decisive action against North Korea’s counterfeiting of our currency. Treasury applied Section 311 of the PATRIOT Act against Macau’s Banco Delta Asia (BDA), a small bank that was laundering the currency and the proceeds of North Korea’s counterfeiting operation. Treasury called BDA a “willing accomplice” to North Korea’s criminal activities, including counterfeiting and drug trafficking, and labeled it as an entity of “special concern” for money laundering. That single measure cut off BDA’s access to the international banking system and blocked one of the North Korean regime’s most important conduits for recouping the profits from its illegal activities and weapons sales abroad. Depositors rushed BDA, which only stayed afloat because Macanese authorities stepped in and blocked $25 million in North Korean assets. North Korean front companies? income stream had been dammed. They sought new banks elsewhere, but Treasury followed them. Treasury’s action soon brought Kim Jong Il’s opulent palace economy to the brink of the same catastrophe that the rest of the North Korean economy reached 15 years ago.

Stuart Levey, Treasury’s Undersecretary for Terrorism and Financial Intelligence, soon expanded this campaign with visits to other nations, where he persuaded other states and banks to close questionable North Korean accounts. In January 2006, according to Japan’s Kyodo News Service, Kim Jong Il told Chinese President Hu Jintao that he feared that the sanctions would cause the collapse of his government. The following month, the Asian Wall Street Journal reported that Treasury’s action had “dealt a severe blow” to North Korea, “dried up its financial system,” and “brought foreign trade virtually to an end.” In April, Levey predicted that the sanctions could have a “snowballing ‘avalanche effect'” on North Korea as other banks sought to cut their ties, creating “huge pressure” on the regime, and noted that sanctions had hit the North Korean elite especially hard. Soon, Kim Jong Il started selling off his nation?s gold reserves. Even a leader of North Korea’s small group of European investors conceded that “[t]he impact is severe.” Marcus Noland and Stephan Haggard, two of America’s foremost experts on the North Korean economy, later wrote that the sanctions “hit harder than most people realize,” and caused the black-market rate for North Korea’s current to plummet. They estimated that before the sanctions, North Korea’s criminal activity and arms sales accounted for as much as half of North Korea’s exports. After Treasury imposed sanctions, that share had fallen to just 15 percent.

This bring us to a short list of practical and effective options for dealing with North Korea’s regime. In addition to stricter enforcement of existing U.N. resolutions, the United States could:

1. Designate the North Korean government itself to be an “entity of special concern” for money laundering, under Section 311 of the PATRIOT Act.

2. Expand the use of Executive Order 13,382, a tool that the President could use to sanction and freeze the assets of persons or companies that aid WMD proliferation. Previously, President Bush had applied this tool piecemeal to North Korean, Iranian, and Chinese front companies that traficked in WMD components. Ideally, a more aggressive interpretation of 13,382 would also reach companies, including some smaller banks, that provide funds used for North Korea’s WMD programs.

3. Welcome South Korea’s offer to join the Proliferation Security Initiative, and expand the use of the PSI to intercept North Korean shipments in violation of U.N. resolutions.

4. Restore North Korea to the list of state sponsors of terrorism, from which it was stricken as a reward for a series of broken promises to disarm.

5. Reimpose the trade sanctions that President Clinton relaxed to reward North Korea for its original missile moratorium.

6. Divest U.S. pension funds from companies doing business in, or with, North Korea.

7. Expand U.N. sanctions to ban the sale of North Korean gold — some of it likely mined in concentration camps — on the international markets. Even if China blocks U.N. sanctions on North Korean gold sales, most of this gold is sold in the capitals of U.S. allies Thailand and the United Kingdom. Thus, bilateral diplomacy would be an effective alternative to the U.N.

8. Ask a court to indict the notorious Bureau 39 of the North Korean Workers’ Party for financial crimes, including money laundering. I’ve been told on good authority that that indictment was complete and ready to go to a grand jury until political pressure got it pulled back.

9. Increase the pressure on China, which not only China sustains Kim Jong Il’s regime, but undermines deterrence by signaling at key moments that North Korea’s provocations will not draw adverse consequences. China announced before this missile test that it would oppose new U.N. sanctions, just as it flashed a green light at North Korea just before its October 2006 nuclear test. If China is unwilling to put real pressure on North Korea, we can let it be known that we’re willing to sell Japan, South Korea, and Taiwan long-range ballistic missile technology, and to form an integrated land- and sea-based missile defense shield that includes all three nations.

10. Increase broadcasting to the North Korean people. Nothing matters more to Kim Jong Il than domestic control of his population, especially now that the curtain of isolation around his subjects has eroded substantially. The Broadcasting Board of Governors has cited surveys from 2003 and 2004 that found that 28 to 31 percent of North Korean refugees had listened to the Voice of America, and that 18 percent had listened to Radio Free Asia. The penetration of subversive ideas has accelerated dramatically since then. Today, defector-run broadcasts from South Korea produce better content, but often lack sufficient funding. Kim Jong Il knows that today, most North Koreans realize that their South Korean and Chinese neighbors live far better than they do. If the primary objective of Kim Jong Il’s provocations is to foster nationalistic pride, a U.S. response that increases subversive broadcasting would remove part of that incentive.

To the extent any journalist even asks the administration about any of these options, excuses will be made for not using them. Certainly we must exercise care in our financial relationship with China, even as we recognize that China needs that relationship as much as we do. North Korea’s hungry and underprivileged would probably escape most of the adverse impact of these measures; they benefit very little from the regime’s income anyway, and increasingly depend on the black market for their survival. The worst excuse will be the administration’s professed desire to avoid a breakdown in the Six-Party talks, which have never produced a single meaningfully positive result for anyone but Kim Jong Il, and which have only produced agreements when Kim Jong Il was under pressure from Treasury’s sanctions.

In retrospect, it is probable that Kim Jong Il saved his regime by signing the February 13, 2007 agreement with Chris Hill and using Hill to get the sanctions lifted despite Treasury’s reservations. Not only did this breathtaking policy reversal extend the life of the world’s most odious regime, it also removed Kim Jong Il’s greatest incentive to disarm and assured that the U.S. diplomatic initiative would fail. President Obama ought to know that China won’t allow tough U.N. sanctions to pass, but if he is serious about attaching a cost to North Korea’s provocations, he doesn’t have to look far.

4 comments

  1. [...] with North Korea Goal: Hurt North Korea’s already-frail economy by sanctioning anyone who handles the country’s money, as the United States did in 2005 by targeting a Macao-based bank that laundered cash for [...]

  2. [...] 18. One Free Korea, A Financial Constriction Strategy for North Korea, May, 2012 (accessed December 7, 2013); available from http://freekorea.us/plan/ [...]

  3. […] than Noland that these actions will have concrete effect, but the case is most eloquently made by Josh Stanton, whose “Financial Constriction Strategy” pretty much speaks for itself. Stanton and Sung-Yoon […]

  4. […] perverse consequences. With respect to means, the legislation marks what Josh Stanton has called a financial constriction strategy against the regime. A key barrier to U.S. sanctions policy is to exercise leverage in the absence […]

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