Follow the money. All of it.
Marcus Noland has published two fascinating charts on recent changes in North Korea’s palace economy. According to one, North Korea has begun posting a current account surplus by squeezing its poor, and by taking in foreign exchange from mysterious (but probably Chinese) sources. That would certainly explain some of its recent, more aggressive behavior — a well-funded North Korea is menacing; an underfunded North Korea is relatively, if temporarily, conciliatory. Judging by North Korea’s aggressive WMD development and investment in white elephants (gray ones, too) and perks for its elite, the regime doesn’t appear to be starving, even if its people are. Noland also posts another fascinating chart showing his estimate of the share of North Korea’s income earned through illicit activities, which he estimates at between 5 and 20 percent of its export revenues.
Obvious questions arise about how we can really know such things, but it’s unlikely that anyone in America knows better than Marcus does. Assuming his charts are correct, enforcement efforts have had considerable success, yet a staggering share of North Korea’s revenues continues to come from illicit sources. It’s now incumbent on us to identify these new revenue sources for the sake of our own national security; indeed, it may also alter our estimates of the “illicit” share of North Korean exports. Both charts present challenges to the potential effectiveness of sanctions, but not insurmountable ones under anti-money laundering (AML) principles. It all depends on how widely you’re willing to target North Korea’s income, because our time for playing whack-a-mole has run out. A strategy that isn’t comprehensive and that doesn’t reach North Korea’s foreign enablers is, by default, a license to proliferate.
How an economist analyzes those challenges is apt to differ from how a lawyer addresses them. This is why I enjoy my side of this public conversation so much. Please don’t confuse what follows with criticism. What it is, is eagerness to devour and parse the research. So having said that, here’s a short list of what else I wish I knew.
First, how do we define “legitimate?” For example, are the Siberian logging revenues legitimate, given that some of the escaped loggers say they aren’t being paid? That would make any transaction to facilitate these arrangements “trafficking in persons,” which is a predicate offense for money laundering under 18 U.S.C. 1956(c)(7)(B)(vi), and therefore subject to criminal prosecution, along with the seizure and forfeiture of any proceeds or instrumentalities of the transaction. The same predicate offense may well describe North Korean gold, coal, iron ore, and copper, probably its largest “legitimate” exports, if they are mined with forced labor (for which North Korea’s mining industry is deservedly notorious). If the products of this newly announced Chinese-owned garment factory in North Korea (HT) are labeled “Made in China,” importing them into the United States could violate the country-of-origin labeling laws, this executive order, and consequently, the International Emergency Economic Powers Act, which would make the merchandise subject to seizure and forfeiture, and any movement of funds to facilitate that importation (you guessed it) money laundering, under 18 U.S.C. 1956(c)(7)(D). Drive it past me, and I can probably find a broken taillight that anyone else would be ticketed for. I have never accepted “North Korean exceptionalism,” the idea that we must judge North Korea by a lower standard.
Second, one of the reasons why estimates about illicit revenues are invariably imprecise is the problem of commingling of legitimate and illicit funds. If a North Korean attache’s diplomatic pouch contains $100,000 in supernotes, $100,000 in dope revenues, and $800,000 in proceeds of North Korean restaurants, how much should the authorities seize? The answer, under AML principles, is $1 million, because commingling is usually a sine qua non for money laundering, and lawmakers eventually decided to vastly improve enforcement, and save law enforcement officers much annoyance, by empowering them to seize the whole lot.
Third, it’s important to distinguish between proceeds of prohibited activity and instrumentalities of prohibited activity. Even if you accept the legitimacy of the labor and pay arrangements Kaesong, how do we know that its proceeds aren’t used for WMD development? (My view is that only Jang Song Thaek, Kim Jong Un, and a few people in Bureau 38 really know, and that as North Korea threatens South Korean civilians, and South Korea’s President prepares to visit the United States, for South Korea to revive the idea of importing Kaesong-made products into U.S. markets tariff-free is just crazy talk.) If those proceeds are misused for WMD programs, they become instrumentalities. Under AML principles, instrumentalities can be seized and forfeited, along with whatever other funds they’re commingled with.
What this means is that, even assuming the accuracy of Noland’s estimates, well-crafted sanctions could and should reach much more than 5 to 20 percent of the regime’s income, and thereby suffice to vaporize its surplus and shock it into instability. After all, the money isn’t being used to better the North Korean people.
If the administration is really serious about stopping North Korean proliferation, it needs a new sanctions law, similar to the Iran sanctions acts of 2010 and 2012, which targeted Iran’s main source of income, its oil industry, as an instrumentality for its proliferation and a means to put political pressure on its regime. As the Financial Action Task Force has been telling us for years, North Korea lacks the financial transparency needed to ensure that its income does not facilitate illicit activity. We also know that North Korea prioritizes weapons development over providing food, heath care, and education for its people, and even over feeding some less-favored units of its military. North Korea can’t continue to develop its WMD programs or maintain its system of domestic terror without foreign money, particularly from China, but also from South Korea, the Middle East, and a small amount of European trade.
When it comes to investments, aid, and loans to North Korea, we would be well justified, and arguably compelled by Paragraph 8(d) of UNSCR 1718 to shift the burden. As such, North Korea’s donors, lenders, investors, and insurers should be required to “ensure” that the end use of their funds is not some banned purpose. If not, those funds should also be subject to blocking, seizure, and forfeiture.
Correction: A previous version of this post contained an image of an incorrect location for Bureau 39. I will try to post an image of the correct location later.