What does the NKSPEA do?
The North Korea Sanctions and Policy Enhancement Act, or NKSPEA, was signed into law by President Obama in February 2016, after North Korea’s fourth nuclear test. The NKSPEA uses targeted financial and economic sanctions to isolate Kim Jong Un and his top officials from the assets they maintain in foreign banks, and from the hard currency that sustains their rule. These assets are derived in part from illicit activities and proliferation, and are used to advance Pyongyang’s weapons programs, to pay for the luxurious lifestyle of the ruling elites, and to repress the people of North Korea. It also raises the pressure on Kim Jong-un to end the crimes against humanity he inflicts on its own people.
Why are more sanctions needed now?
North Korea may be approaching the point of nuclear “breakout,” when it could build—and sell—effective nuclear weapons that could be carried by ballistic missiles. Tough financial sanctions are the only strategy that has ever slowed North Korea’s nuclear program, and that has the greatest potential to stop it without the use of force or violence. If North Korea achieves nuclear breakout, it could help Iran, Syria, or even terrorist groups achieve nuclear breakout, too. That would mean the defeat of the entire global counter-proliferation system.
Can sanctions really work?
Yes, if they are the right kind of sanctions, are targeted correctly, and are enforced aggressively. Financial sanctions were devastating to North Korea when applied for a brief period between late 2005 and early 2007. Financial sanctions that were imposed on Iran in 2010 and strengthened in 2012 brought its economy to the brink of collapse in 2013, and forced it to return to disarmament talks.
North Korea’s links to the financial system are more fragile than those of Iran, which makes it uniquely vulnerable to financial sanctions. Our financial sanctions authorities are relatively new tools, pioneered after the September 11, 2001 attacks. They are far more powerful than the traditional trade sanctions used in the 1980s and 1990s, which often took many years to work, and often worked poorly. Most of the sanctions in effect against North Korea prior to the NKSPEA’s passage were trade sanctions, or very limited financial sanctions against (mostly low-level) North Korean individuals or companies.
How can the Treasury Department reach North Korean assets?
The vast majority of international transactions are denominated in dollars, and nearly all dollar-denominated transactions are cleared through U.S.-based banks regulated by the Treasury Department. Because North Korea’s own currency is worthless, and because the Chinese Renminbi is not a convertible currency, North Korea continues to use the U.S. dollar. Legitimate and counterfeit dollars both circulate widely inside North Korea. North Korea hides its dollar transactions in the financial system behind false names, shell companies, and other deceptive practices. Determined financial investigators have defeated similar tactics by other rogue states, terrorists, and drug-trafficking organizations. One NGO working with unclassified information recently uncovered sanctions violations by North Korea and its Chinese enablers that led to a Justice Department indictment for money laundering and sanctions violations.
North Korea’s reliance on the dollar allows U.S. sanctions to reach North Korean assets in two ways. First, if North Korea transfers or spends dollars, Treasury can block them as they pass through dollar-clearing banks (mostly in New York or New Jersey). Second, banks that clear North Korea’s non-dollar transactions or convert its dollars to bulk cash, and businesses that facilitate barter transactions, still need access to dollar-clearing banks for the majority of their non-North Korea business. The NKSPEA threatens the access of those banks and businesses to the dollar system. Few banks or businesses would be willing to take that risk to help North Korea evade Treasury sanctions.
What conduct and assets does the NKSPEA sanction?
Section 104(a) describes prohibited conduct, including proliferation, arms trafficking, money laundering, censorship, luxury goods purchases, cyber attacks, and human rights abuses. The President is required to investigate credible reports of prohibited conduct and, if the President determines that a person or entity knowingly facilitated prohibited conduct, to block that person or entity’s assets. The Justice Department may also prosecute persons involved in prohibited conduct, or forfeit assets involved in the prohibited conduct.
Section 104(b) gives the President new discretionary sanctions authorities to block assets involved in violations of U.N. Security Council Resolutions, and in the kleptocracy that sustains Kim Jong Un’s luxurious lifestyle while most North Koreans live in extreme poverty and hunger. Section 104(b) gives the President the authority to trace and block the personal assets of Kim Jong Un and his key minions. According to open source reports, their assets number in the billions of dollars and are mostly held in accounts in Europe and China. In addition to the blocking of assets, sections 104(a) and 104(b) also authorize additional discretionary sanctions, described in the next section.
Section 104(c) blocks all assets of the government of North Korea and its officials that pass through the dollar-based financial system. All of the mandatory sanctions in section 104 are subject to humanitarian and other exemption and waiver provisions.
What other discretionary sanctions apply?
The President may also bar persons or entities designated under section 104 from receiving government contracts or U.S. visas. Designated banks could face additional financial sanctions, including enhanced transaction reporting requirements, the loss of their licenses to deal in foreign exchange or inter-bank transfers of credit, or even the loss of their access to the financial system. These powerful new sanctions will help enforce the due diligence and enhanced monitoring requirements of U.N. sanctions resolutions.
Section 205 also authorizes shipping sanctions against ports that fail to inspect North Korean cargo, as required by Resolution 2094. Cargo from these ports will face enhanced inspection requirements when landed in U.S. ports. The fear that shippers would switch to other, more secure ports would force port directors to take their inspection obligations seriously, or to avoid the risk of handling North Korean cargo entirely.
Does the NKSPEA conflict with or duplicate U.N. sanctions?
No, it puts teeth into them. Since 2006, the Security Council has repeatedly sanctioned North Korea’s proliferation, arms trafficking, and imports of luxury goods, most recently through Resolution 2270. In practice, however, some member states, such as China, have failed to enforce U.N. sanctions without the threat of U.S. national sanctions.
The NKSPEA also sanctions additional conduct on which the U.N. Security Council has failed to act, including North Korea’s crimes against humanity, money laundering, corruption, kleptocracy, and counterfeiting of U.S. currency and intellectual property.
How does the NKSPEA address North Korea’s crimes against humanity?
Section 303 required the President to investigate and act on the report of the U.N. Commission of Inquiry that found crimes against humanity in North Korea and—as the Commission recommends—imposes targeted sanctions against North Korean leaders found responsible for those crimes.
Section 303(b) required the President to make specific findings with respect to the individual responsibility of Kim Jong Un and other top North Korean officials for crimes against humanity. Persons designated for committing or facilitating crimes against humanity and censorship will be subject to NKSPEA’s toughest sanctions, including the blocking of their personal assets. In 2016, consistent with the requirements of this subsection, the Treasury Department personally designated Kim Jong-un for human rights abuses, but has not yet begun to pursue and freeze Kim Jong-un’s personal assets abroad.
Why are luxury goods sanctioned?
The U.N. Security Council first sanctioned North Korea’s purchases of luxury goods in Resolution 1718, in 2006, as a response to widespread hunger in North Korea requiring appeals for international food aid, while North Korea’s leaders lived in palaces, ate imported delicacies, and rode in expensive imported limousines.
Although a 2014 U.N. survey recently found that 84 percent of North Korean households have borderline or poor food consumption, at around the same time, Kim Jong Un spent $300 million a water park, a fitness center, a dolphin aquarium, a 3-D cinema, and a ski resort stocked with equipment imported from Europe and Canada, in violation of U.N. sanctions. Also during that period, the U.N. World Food Program appealed for $200 million for a two-year food aid program for North Korea that it later called “critically underfunded.”
Will these sanctions affect humanitarian aid?
Inevitably, some banks will incorrectly over-interpret sanctions in ways that affect humanitarian aid work. That is an unfortunate consequence of the North Korean government misusing the financial system to proliferate weapons of mass destruction while disregarding the welfare of the North Korean people. It is important to remember, however, that most North Koreans survive “off the grid,” on food that is smuggled into the country, pilfered from government stockpiles, or grown on private plots. That food is then sold in markets that the state barely tolerates. Today, few North Koreans survive on foreign aid or government rations. That makes the food sources that most North Koreans rely on relatively resilient.
Regulators can mitigate the unintended consequences of sanctions through careful targeting, licenses, and exemptions. Section 207 of the NKSPEA contains broad exemptions for food imports and humanitarian aid, and provides for waivers for humanitarian reasons, or when a waiver is important to the national security or economic interests of the United States. The Treasury Department has also published general licenses permitting humanitarian aid.
Is there anything left to sanction in North Korea?
Yes. President Bush lifted our toughest North Korea sanctions in 2007 and 2008, in exchange for Kim Jong Il’s false promises to disarm. When North Korea reneged on those promises, President Obama did not reimpose the sanctions.
Before the NKSPEA, our North Korea sanctions were among the weakest in force against any sanctioned government. They lacked the broad-based financial sanctions that applied to such targets as Iran and Burma. Iran and Burma were designated as primary money laundering concerns under Section 311 of the USA PATRIOT Act, a designation that restricts their access to the global financial system. North Korea, the world’s most notorious counterfeiter and money launderer, was not designated until May of 2016. Before the NKSPEA, there were no sanctions against specific North Korean officials who in counterfeit U.S. currency and engage in other illicit activities (as with the Sinaloa Cartel and other criminal organizations). The Treasury Department had designated hundreds of Iranian, Cuban, and terrorist-related entities, but less than 100 North Korean entities.
Two years after a U.N. Commission of Inquiry found the government of North Korea responsible for crimes against humanity, there were no sanctions against North Korean officials involved in repression or human rights violations (as with Sudan, Iran, and Belarus), or those who enforce its system of censorship (as with Iran). The NKSPEA changed that.
Before the NKSPEA, the administration was tracing and blocking assets stolen by former Ukrainian official officials, but not of the North Korean officials who amassed billions of dollars in offshore accounts while most North Koreans went hungry, and while the U.N. asked for contributions for food aid for North Korea. President Obama signed two executive orders, Executive Order 13,660 and Executive Order 13,661, blocking the property of Russian officials responsible for aggression against the Ukraine, but none against the North Korean officials responsible for the 2010 attacks that killed 50 South Koreans.
North Korea, which was recently caught in the act of arming Hamas and Hezbollah, and which has assassinated (or attempted to assassinate) defectors and human rights activists in China and South Korea, is not listed as a state sponsor of terrorism.
The NKSPEA does not impose a full trade embargo or travel ban on North Korea, but it is worth noting that import sanctions were relaxed in 2008 and were not reimposed until 2011. With some exceptions, including items on the Commerce Control List and certain luxury items, it is legal to export to North Korea after obtaining a license from the Treasury Department. U.S. law bans tourist travel to Cuba, but not North Korea.
Will this bill set back efforts to “engage” North Korea economically?
It could set back engagement programs if those programs provide revenue to Pyongyang without ensuring that that revenue does not fund North Korea’s prohibited activities. Such programs, however, are already inconsistent with Resolution 2094‘s financial transparency requirements (see paragraphs 10-15).
Twenty years of “engagement” programs have failed to induce the North Korean regime to reform, disarm, relax its control of the economy, or ease its repression of the North Korean people. They sustain Pyongyang with billions of dollars in hard currency, although we have little idea how Pyongyang spends that money. Everyone agrees that reforming North Korea is an admirable goal, but North Korea will not decide to reform or disarm until it has no other choice. Until North Korea makes those key decisions, engagement sustains the status quo and gives it the option of avoiding reform and disarmament.
North Korea would never attack us. Why should its nuclear weapons concern us?
North Korea wants nuclear weapons to intimidate and assert political hegemony over South Korea, and is working on long-range missiles and submarines that would allow it to strike the United States and deter it from assisting South Korea.
North Korea’s direct nuclear threat is not our only concern. North Korea has sold arms—including man-portable surface-to-air missiles—to terrorists. It built Syria a nuclear reactor, and has since assisted Syria with its chemical weapons and missile programs, even while Syria was using those programs against its own people. It may also be assisting Iran with its nuclear program.
Can the NKSPEA overcome China’s support for North Korea?
Yes, enough to accomplish the purposes of this legislation. For years, the Chinese government has looked the other way at violations of U.N. sanctions against North Korea. Its interests are in stabilizing the regime in Pyongyang, regardless of how it threatens the peace of other nations or oppresses its own people. The Chinese banks and businesses that deal directly with the North Korean regime, fund it, finance it, and sustain it, have different interests. They seek to protect their assets, their access to the financial system, and their access to markets in countries other than North Korea — including the United States. History has shown that when the interests of the Chinese government diverge with the interests of Chinese banks and businesses, banks and businesses put their own interests first, to North Korea’s detriment.
We saw evidence for this on two occasions, in 2005 and in 2013, when Treasury sanctioned North Korean targets. In 2005, when Treasury sanctioned Banco Delta Asia in Macau, the Bank of China and other banks around the world shunned North Korean accounts and depositors. The deterrent power of Treasury’s sanctions was so persistent that in 2007, the Bank of China refused to handle $25 million in illegally derived North Korean funds, despite requests from both the U.S. and Chinese governments.
More recently, in 2013, the Treasury Department designated the Foreign Trade Bank of North Korea for its involvement in WMD proliferation. Two months later, and ten days after the introduction of the first version of the NKSPEA in Congress, the Bank of China closed the Foreign Trade Bank’s accounts. Five days later, the Bank of China, the Industrial and Commercial Bank of China, the China Construction Bank, and the Agricultural Bank of China all halted money transfers to North Korea.
Unfortunately, this effect was short-lived, and the regime in Pyongyang is again flush with cash. (In the first quarter of 2015, North Korea imported $17.66 million in digital televisions from China, and two North Korean banks are building skyscrapers in Pyongyang to house their new headquarters.) The financial industry is highly sensitive to Treasury’s determination—or lack thereof—to enforce sanctions against a target. If it does not perceive that Treasury’s enforcement will be aggressive and persistent, it quickly resumes its business relationships with North Korean clients.
No sanctions program will ever be 100 percent effective, but 100 percent effectiveness is not necessary. It is not necessary to block every dollar; it is only necessary to block enough of them to prevent the regime from sustaining a critical mass of its ruling elite, military, and security forces. Pyongyang cannot sustain itself on bulk cash and barter alone.
Why is this bill so long?
North Korea is a multi-faceted problem, involving multiple crises for the U.S. and its allies—proliferation, military deterrence, law enforcement, and crimes against humanity. For years, nations pursued divergent interests and divided strategies against each of these crises. North Korea has successfully frustrated our responses by dividing humanitarian and law enforcement interests against diplomatic interests, by dividing our allies from China and Russia, and by dividing our allies from us and from each other. This allowed Pyongyang to access foreign hard currency and offset the economic pressure of sanctions.
The NKSPEA unites these interests under one tough and comprehensive strategy that leverages our financial and diplomatic power against Pyongyang’s financial vulnerability.
Will this bill set back diplomatic efforts?
No. In fact, sanctions forced North Korea back to the bargaining table in 2007, and forced Iran back to the bargaining table last year. Today, our diplomacy to disarm North Korea is stalled. North Korea insists that it will never give up its nuclear programs, has declared itself a nuclear state in its constitution, and has boycotted six-party talks since 2008.
For five years, the administration followed a policy of “strategic patience,” imposing gradual half-measures while waiting for North Korea to be ready to return to talks. Instead, North Korea has evaded this gradual pressure with China’s help.
The NKSPEA rejects the pursuit of short-term, reversible gains. It applies comprehensive financial pressure that recognizes the interests of our allies, exploits the vulnerabilities of our adversaries, and can give the administration the leverage to disarm North Korea completely, verifiably, and irreversibly.
Will this bill make North Korea lash out?
Possibly, but North Korea lashes out with or without sanctions to achieve aims that aren’t always clear to us. For example, there is no clear reason why North Korea sank a South Korean warship or shelled South Korean territory in 2010. North Korea has consistently calibrated its provocations to avoid provoking a war that it would be unlikely to survive. In the short term, if sanctions cause enough pain, North Korea may lash out. But the more its nuclear capabilities grow, the more serious its provocations will become. Our best chance to avoid war is to break this cycle of provocation and stop the development of Pyongyang’s nuclear weapons programs.
Why are the suspension and waiver provisions so detailed?
Too often, our diplomats have traded the lifting of sanctions for short-term freezes or empty promises, only to see North Korea renege later. North Korea must be forced to make the fundamental decision to accept enough transparency to allow for the verification of its disarmament. This may seem difficult to imagine now, but it also seemed difficult to imagine with respect to Burma until recently.
Allowing the open distribution and monitoring of food aid, and progress toward improving conditions in North Korea’s prison camps, could be key tests of North Korea’s willingness to accept transparency. So would progress toward releasing abductees, the cessation of currency counterfeiting, and accepting basic financial transparency. Several of these provisions recognize the interests of our allies in the region, which helps us to coordinate a consistent and unified policy toward North Korea.
What if North Korea isn’t willing to disarm?
The longer North Korea refuses to disarm, the more assets and income streams Treasury will identify, block, and cut off. The more allies will be persuaded to cut their financial ties with North Korea, identify its assets, and freeze them. The more officials will defect and provide information about North Korean slush funds. The loss of access to his offshore wealth will leave Kim Jong Un unable to sustain his own lifestyle, advance his WMD programs, pay his ruling elite, or feed his military and internal security forces. His mechanized military will degrade for lack of spare parts, fuel, and ammunition. The capabilities, discipline, and cohesion of his military and internal security forces will degrade until they are unable to suppress internal dissent.
In due course, these developments will begin to destabilize the regime. That may cause China to reassess its North Korea policy, enforce U.N. sanctions, and pressure Kim Jong Un to disarm diplomatically. Failing this, it may conspire with factions within the North Korean government to euthanize the Kim Dynasty to preserve its greater interest in stability on the Korean Peninsula. This, in turn, could pave the way for a diplomatic settlement of the nuclear and humanitarian crises, and an orderly long-term road map to the reunification of Korea. Alternatively, the regime’s financial isolation and political destabilization could cause other senior officials to prevail on Kim Jong Un to change his policies, or to remove him from power in favor of more rational leadership. It could also provoke regional mutinies or uprisings against the state.