Obama Gears Up for “Plan B;” John Kerry Blocks Terror Re-Listing

I really don’t know what to make of this.  A young, inexperienced president, one whom the North Koreans arguably endorsed, comes into office showing every sign of being easier meat than Lance Bass in Riker’s Island.  The North Koreans, true to Joe Biden’s prophetic gaffe, and with their exquisite sensitivity to American weakness, don’t even let the man get inaugurated before they begin the noisy repudiation of every agreed framework, U.N. resolution, and armistice they can stuff into a shredder.

Now for the unexpected part:  we actually seem ready to attach real consequences to those provocations.  What?  We aren’t already groveling for Agreed Framework III?  Did the North Koreans get Obama as wrong as Leon Sigal did?  Did I?  I’m starting to wonder if Obama is a closet OFK reader:

A U.S. delegation headed by Deputy Secretary of State James Steinberg briefed President Lee Myung-bak and other officials on independent U.S. sanctions “with a financial focus” against North Korea, a senior Cheong Wa Dae official said on Thursday. The sanctions are expected to be an expanded version of a 2006 freeze of North Korean accounts in Banco Delta Asia in Macau.  [Chosun Ilbo]

I can hardly believe I’m actually reading this, despite its welcome familarity.  Am I just three years ahead of my time?  Today, not only are Obama’s people talking about imposing sanctions, they’re talking about imposing them in a comprehensive way, which will be essential for them to really work.  Referring to the 2005-2006 Banco Delta Asia sanctions, one U.S. official says:

“At the time, the sanctions were slapped on a single bank, but the new sanctions would ban transactions with any banks suspected of being involved in the trade of North Korea’s weapons of mass destruction,” an official said.

Another government official said, “The U.S. apparently wants to take its own measures because the UN Security Council’s financial sanctions are modulated by the difference in positions among member countries.”

Read:  China and Russia are stalling us at the U.N., so we’re going to employ the kind of sanctions that were perfectly effective against a bank on Chinese soil.  We know that capital is a coward.  And while some bankers may have dismissed the Banco Delta Asia sanctions as a one-off, the very talk of imposing new sanctions on banks servicing North Korean accounts — indeed, the very prominence of Stuart Levey these days — is significant (more here).  Maybe that means Obama is bluffing.  But even if he is, if you were a banker these days, wouldn’t you be reevaluating your relationships with North Korean trading companies, nationals, and entities?

The U.S. Treasury has reportedly finished a legal review of its own sanctions policy against the Stalinist country. According to the International Emergency Economic Powers Act (IEEPA) enacted in 1977, the U.S. president is authorized to declare the existence of an unusual and extraordinary threat to national security, foreign policy, or economy and can then block transactions and freeze assets to deal with the threat. Iran has been subject to this law since 1979, and North Korea since 2008.

Japan is also considering financial sanctions. The Cheong Wa Dae official pointed out that Tokyo has already taken independent sanctions against the North in terms of money remittance and trade. Already after the North launched a long-range rocket in April, Japan lowered the ceiling for remittances to the North from 30 million yen to 10 million yen and is apparently considering banning them altogether. Since the North’s first nuclear test in 2006, Japan has completely banned imports from the communist country.  [Chosun Ilbo]

We can already see that Sections 311 and 318 of the USA PATRIOT Act will form the legal basis for part of this. Yesterday’s Washington Times report on North Korea’s continued counterfeiting bore the hallmarks of a deliberate leak for effect, and now, the Donga Ilbo (also quoted here) cites “a U.S. government source” to add much more detail to a recent seizure of supernotes in Pusan:

“Seoul and Washington have conducted a joint investigation since police booked those who attempted to circulate supernotes in South Korea in November last year. We’ve kept a close eye on the North’s forgery since it is likely to affect both inter-Korean ties and relations between Washington and Pyongyang,” the source said.  [Dong-A Ilbo]

The Donga reports what I’ve also heard off-record, that financial sanctions are an element of the new resolution we’re pushing at the U.N.:

“When members of the U.N. Security Council agree to impose tougher sanctions on North Korea over its second nuclear test, the North will be slapped with strengthened financial restrictions.

Busan police arrested four people Nov. 10 last year for smuggling in 990,400 dollars worth of fake supernotes and asked Interpol to cooperate in arresting a key figure in the scheme living in China.

Since then, the Secret Service under the U.S. Treasury Department has conducted a joint investigation with South Korean police to track global rings who make counterfeit currency.

The four arrested said they smuggled the forged currency to take advantage of the strong dollar, but refused to name international brokers assumed to be connected to the North and distribution networks, according to Busan police.

A diplomatic source said, “The Bush administration lifted financial sanctions on North Korea based on the North’s tacit promise to stop counterfeiting U.S. bills. The North, however, has not stopped its counterfeiting.

“The Obama administration is devising measures as tough as those under the Bush administration to stop the illegal activity.

As part of anti-forgery measures, South Korean and U.S. intelligence officials in Seoul yesterday agreed to impose economic sanctions by preventing the production and circulation of supernotes. To do so, both sides will strengthen monitoring in countries where supernotes are in circulation and focus attention on preventing materials for supernote production from entering North Korea.  [Dong-A Ilbo]

Don’t discount the value of U.N. cooperation completely.  We’ll return to the topic of China in a moment; for now, think of England.  Remember that North Korea managed to survive the last round of Treasury sanctions by selling gold, mostly on the London and Bangkok markets.  Closing off North Korea’s access to London in particular will be very damaging to the North’s finances and to its business relationships there.

Meanwhile, it sounds like Stuart Levey, possibly OFK’s favorite serving U.S. government official, had a productive visit to Seoul:

Stuart Levey, the Treasury Department’s undersecretary for terrorism and financial intelligence, agreed with South Korean Vice Finance Minister Hur Kyung-wook to strengthen cooperation in the fight against money-laundering and counterfeiting, Hur’s office said.  [….]

The alleged counterfeiting was discussed Wednesday at a meeting in Seoul between U.S. and South Korean intelligence authorities, the report said. The American officials are believed to be part of Steinberg’s delegation.

The significance here isn’t the counterfeiting itself, which is probably a small part of North Korea’s income stream (revenue from illegal drugs has probably fallen, too; cigarette counterfeiting has always been a much greater income source).  The real significance is North Korea’s access to international finance.  A basic principle of money laundering is the concept of “co-mingling;” that is, mixing dirty money with clean money, transferring it around repeatedly, then using the co-mingled assets for large cash purchases and investments.  A basic principle of combating money laundering is to treat co-mingled assets as dirty money.  So much of North Korea’s income is derived from currency or commercial counterfeiting, banned arms sales, and dope, that it’s difficult to say that any North Korean account is legit.

And for the first time in my memory, the South Koreans and the Americans are working together, not undercutting each other, speaking with one voice … in short, acting like allies:

Steinberg told South Korean President Lee Myung-bak that North Korea would be mistaken if it thinks it can make provocations and then get what it wants through negotiation as it did in the past. The U.S. won’t repeat the same mistake again,” Seoul’s presidential office said in a statement.  [AP]

The AP’s William Foreman also looks at how luxury item sanctions against North Korea might work, have worked, and what they’d likely target.  The report is mostly correct when it says that Kim Jong Il will find ways to supply his own table, and that a man in his poor health probably isn’t able to drink much cognac.  But what matters more is disrupting the flow of patronage gifts and ready cash to the North Korean elite, and of fuel, weapons, and spare parts to its military.  This will take some effort, of course:

The supply of luxury goods for such parties would be hard to block because North Korea has a complex network of trading companies that constantly change their names and are hard to track, said Bertil Lintner, author of the book “Great Leader, Dear Leader: Demystifying North Korea Under the Kim Clan.” Goods are also easily transported across North Korea’s long, porous border with China.

North Korea’s foreign missions are also masters at using diplomatic privileges to shuttle and smuggle goods around the world, Lintner said. But the North Koreans appear to be less active in Southeast Asia, which used to be one of their busiest trading centers, he said.

A chain of North Korean restaurants — possibly used for money laundering — has recently shut down in Thailand and Cambodia, he said. Trade has dropped off with Thailand, once a big source of commerce, he said. “They don’t have near as much money as they used to,” Lintner said. [AP]

Finally, a few points about China, and to a lesser degree, Russia.

But China and Russia, key allies of North Korea, have raised questions about some of the proposals, diplomats said on condition of anonymity because the consultations are private.

The Yonhap news agency said Steinberg’s delegation planned to present evidence of the North’s counterfeiting in talks with Chinese officials to try to persuade Beijing to agree to financial sanctions. The delegation planned to visit China on Friday.  [AP]

No surprise there.  We already know that China and Russia will try to stall, weaken, and undermine U.N. and U.S. sanctions.  But remember, Banco Delta Asia was a Chinese bank, and so was the Bank of China, which got such a scare from the example of BDA (and an unwanted mention in the Asian Wall Street Journal) that it later refused to help the Chinese government transfer $25 million in unblocked funds from BDA to Kim Jong Il in the spring of 2007, just after Agreed Framework II was signed.

My point then, is that the cooperation of China’s government would be helpful, but it’s not essential, either.  For sanctions to work, all they really need to do is to scare Chinese banks and businesses away from North Korea, which they did before.  I wouldn’t be too quick to assume that the current state of our economy changes this.  China, after all, needs its exports to the United States to sustain the high growth rates that keep its society stable and its pensions paid.  Like it or not, the U.S. and Chinese economies are interdependent now.  Its banks aren’t going to risk their access to correspondent accounts in U.S. banks and by extension, the world financial system, nor will the Chinese government force them to.  Does China really value Kim Jong Il more than it values its own economic health?

Yet this all leaves me confused.  I tend to predict things most accurately when I’m pessimistic, so the fact that all the signs now point to the United States working with Japan and South Korea to levy sustained, comprehensive sanctions on North Korea leaves me wondering what plot the State Department is hatching to keep our policy muddled, indecisive, and uninspired.  And in the end, if the North Koreans return to the talks and issue a vague new set of promises, they might just get us to back down.  That’s probably what State is praying for.

Meanwhile, there’s much less reason for optimism about the direction of Congress.  Let’s recall the reaction of John F. Kerry to North Korea’s nuke test:

US Senator John Kerry urged the international community Tuesday to have an “absolutely serious” response to North Korea’s nuclear bomb test, on a visit to China partly devoted to non-proliferation.

“I think it’s important for the world community to be absolutely serious in its response,” Kerry, chairman of the US Senate’s foreign relations committee, told reporters.

“Not only does North Korea and its programme hang in the balance of what we decide to do but this will have a profound effect on what the Iranians believe the world is going to do and how serious non-proliferation efforts will be.”  [AFP]

For those still waiting with baited breath for John Kerry’s serious response, here’s a bill that Senate Democrats blocked yesterday, that would have restored North Korea to the list of state sponsors of terrorism:

fda-samdt-1241-nk-terror-list.pdf

Related:   Mikhail Gorbachev, who is not dead, has an opinion about North Korea.  Warning: content may be tiresome to some readers.

Update:   To be fair, a source tells me, the sanctions bill was rider to a larger piece of legislation that was caught up in tobacco politics. So let’s see what our august Foreign Relations Committee does, though past practice gives no cause for encouragement.

Update 2:  I changed the post title to reflect that it was terror sponsor re-listing, not a sanctions bill per se, that was blocked.

Update 3:   Hmmm:

“State Department spokesman P.J. Crowley told reporters that U.S. action ‘within the banking sector certainly did get North Korea’s attention previously, and if we can find ways that we can do that, we will do so.'” [….]

The U.S. search for “financial levers” to pressure North Korea is meant to push the communist government back to stalled six-nation nuclear disarmament talks, Crowley said. “That’s our ultimate objective, and we will continue to use whatever levers that we see available and we think will be effective.”

He did not provide specific details of possible U.S. sanctions.  [AP, Foster Klug]