North Korea’s “charm offensive” coincides with growing international financial pressure

Observers in the West and South Korea tend to grasp (even gasp) at subtle or superficial changes in the tone of North Korea’s words, but the consistency of North Korea’s actions has always refuted the interpretations of these observers.  No charm offensive ever interrupted Pyongyang’s pursuit of nuclear weapons or its willingness to proliferate nuclear or chemical weapons technology.  Even its provocations, often described as “unpredictable,” follow a cycle that has become familiar to Korea-watchers, including the President of South Korea.

Still, the annual Ulchi Freedom Guardian exercises have always been Pyongyang’s cue to threaten to turn some city into a “sea of fire,” and until April of this year, North Korea was issuing a stream of escalating threats.  Now that this year’s exercises have begun, however, Pyongyang only seems slightly upset about them.  The Daily NK has not noted any increase in exhausting drills or exercises inside North Korea. Similarly, the North has had little to say about public hearings in Seoul about the North’s domestic atrocities.  These are new data points to add to North Korea’s hasty retreat from its closure of the Kaesong Industrial Park, a retreat so hasty that it suggests an effort to recover from a severe miscalculation.

The absence of provocation isn’t exactly conciliation, either; on closer examination, it’s really a blander form of the same old slop–criticism of South Korea’s conservative president mixed with appeals to pan-Korean nationalism and anti-Americanism.  But at least it’s not threatening anyone, and that represents a shift. So does it mean anything? I’ve observed that Pyongyang usually reaches this point in its bipolar cycle when it’s (a) planning a bigger provocation or (b) actually worried about the consequences of a provocation.  I don’t exclude (a) as a possibility, but there are some early, inconclusive, but significant reasons to think that the answer might be (b).

If you’ve been watching carefully for the last six months, it’s not hard to understand what happened here.  In February, North Korea conducted its third nuclear test.  In March, the U.N. Security Council tightened financial sanctions with Resolution 2094.  By itself, this was no threat to Pyongyang.  China and North Korea have been ignoring U.N. sanctions resolutions since 2006, and North Korea’s threats and fulminations escalated through April anyway.  The threats continued even after Treasury blocked all assets of the Foreign Trade Bank (FTB) of North Korea, North Korea’s main financial portal for international trade.  Although the FTB presumably doesn’t park its assets in U.S. banks, the sanctions apply prospectively, and dollar-denominated assets can’t move anywhere–not even between two non-U.S. banks–without flowing through correspondent accounts in U.S. financial institutions, where they would be blocked.

Then, on April 26th, the bi-partisan leadership of the House Foreign Affairs Committee introduced H.R. 1771, a sanctions bill that would not only sanction North Korean banks and trading companies, but the Chinese, European, and other entities that knowingly facilitate their proliferation, illicit activity, and human rights violations.  (Full disclosure: I helped the Committee draft this bill.)  Because the bill is in the early stages of its legislative gestation, I hesitate to infer too much about its contribution to what came next, but it clearly puts pressure on the administration to toughen enforcement, demonstrates how much Congress’s sentiment has shifted, and shows the potential impact of sanctions on third-country banks, ports, and companies in stark terms.  The bill now has more than 120 co-sponsors.

For whatever reason, about ten working days after the introduction of H.R. 1771, third-country banks began cutting off North Korea’s money transfers and the FTB’s accounts.  The decision by the Bank of China on May 7th to block the FTB’s accounts was the most important sign of this trend.  Then, more big Chinese banks halted money transfers to North Korea.

North Korea’s so-called “charm offensive” began immediately after these events.

The reports conflict about whether these banks acted on instructions from the Chinese government; they may well have acted on their fears that doing business with these North Korean banks was becoming legally hazardous for them.  Here’s an interesting quote from David Cohen, Treasury’s Undersecretary for Terrorism and Financial Intelligence:

But Cohen dismissed the claim that China is cooperating with the US, saying it is “taking steps for their own purposes”.

“Whether it’s China or any other country that has exposure to North Korean financial activity, what we have urged is both compliance with Security Council resolutions as well as additional steps to be particularly vigilant to ensure that North Korean illicit financial activity is not allowed in the financial sector,” he said.

“The way to prevent that activity which violates every standard of legitimate financial activity for the banks (is) to be very careful about who they’re doing business with.” [Korea Herald]

European banks have also followed suit, which is important.  We appropriately focus attention on China’s non-cooperation with sanctions, but financially, Europe’s role is almost as important. Depending on which sources you believe, North Korean officials have stowed either $1 billion or $4 billion in European banks.  This money pays for the European luxuries that North Korea’s elite craves.  Because North Korea is prohibited by U.N. Security Council resolutions and EU regulations from importing luxury goods, North Korea’s use of these European deposits could be viewed as a form of trade-based money laundering.  To the extent this money isn’t illegally derived, it should also be treated as the proceeds of kleptocracy.  This is where the World Food Program should go looking for the $98 million it’s now asking donors to contribute to feed less-privileged North Koreans.

Given Congress’s tendency to react to headlines, each new North Korean provocation is likely to provide additional momentum for this potentially game-changing legislation.  If Pyongyang and Beijing realize this, then H.R. 1771 could already be playing some role in deterring additional provocations.

The administration–or least, the Treasury Department–seems more serious about sanctioning North Korea today than at any time since 2007, when the Bush Administration ended a global financial sanctions enforcement campaign that proved devastating to Pyongyang.

A senior administration official told CBS News, “What we’re hoping to recreate is the financial pressure that North Korea endured back in 2005 when we took the action against Banco Delta Asia.”

Those Bush-era sanctions against a Chinese bank that allegedly laundered money for North Korea were viewed as an impetus for North Korea to join the six-party talks on nuclear weapons technology in 2007.  [CBS]

Treasury has since followed the blocking of the FTB by blocking the Daedong Credit Bank, about which I voiced my own suspicions years ago. It has also pushed for tougher sanctions enforcement in Europe, China, South Korea, Japan, Australia, and Southeast Asia, including Singapore and Malaysia.  Treasury makes no secret of its objective:  to find and block regime accounts worldwide, including the personal assets of Kim Jong Un:

The U.S. is interested in finding funds of North Korean leader Kim Jong Un family (sic), said David Cohen, undersecretary for terrorism and financial intelligence at the U.S. Treasury Department.

In a meeting with reporters Tuesday at the U.S. Embassy to Korea in central Seoul, he said the key purpose of making financial sanctions against North Korea is to prevent the country from developing nuclear weapons and missiles and to make it shift away from provocative policy. The U.S. official has actually admitted he is tracking Kim Jong Un`s money. In charge of financial sanctions against North Korea, Cohen is dubbed an “angel of death.”

Cohen added whether actions (sanctions) will be made and of what kind will be decided after illegal funds of Kim`s family are discovered. When Kim`s father and predecessor, Kim Jong Il, died in December 2011, some foreign media reported that the late Kim may have deposited at least 4 U.S. billion dollars in European banks, including those of Switzerland.  [Dong-a Ilbo]

Our Angel of Death seems to think that this is already having an impact:

“North Korea’s ability to access the international financial system to easily move money to pay for or to get paid for material that it’s either selling or that it’s purchasing for its program has been significantly impaired,” he said.

“North Korea tries to sell conventional weapons where they can. They have only a few countries that are interested in purchasing their conventional weapons ? they’re not very good, the weapons. It’s very hard to pay North Korea.”  [Korea Herald]

There are still loopholes in this emerging international campaign that need to be closed for the sanctions to have their desired long-term effect.  Treasury itself could do much more.  It should declare North Korea to be a jurisdiction of primary money laundering concern, as it has done previously to Nauru, the Ukraine, and Burma, for reasons that apply with equal or greater force to North Korea.  There is a more-than-sufficient basis for Treasury to take this action now, without waiting for Congress to act.  Such a declaration could have a severe impact on Pyongyang’s access to the global financial system.

Europe’s enforcement lags behind China’s in some ways.  Although it tightened its North Korea sanctions regulations in April and July, it still hasn’t sanctioned the Foreign Trade Bank, and it still hasn’t passed a regulation that would force the SWIFT network to cut off sanctioned North Korean banks, the way SWIFT cut off sanctioned Iranian banks last year.  This is something the EU is required to do under any fair reading of Paragraph 10 of UNSCR 2094.  Treasury could also force SWIFT to cut off North Korean banks, given SWIFT’s extensive U.S.-based operations.

China and its banks appear to be doing what they feel compelled to do, and nothing more.  Just before the FTB sanctions went into effect, its banks allowed North Korean agents to move FTB funds in Dandong to another bank.  North Korean money launderers continue to operate in China openly enough to be observed in the act by an intrepid Joongang Ilbo reporter.

Even so, sanctions are probably starting to have a significant impact on Pyongyang’s ability to use the offshore accounts that finance its power structure.  The current level of pressure is unlikely to be sufficient to secure our interests–the verified disarmament of North Korea and its transformation into a more transparent, less brutal, less militaristic society.  In time, North Korea will adjust, adapt, and recover to this level of pressure.  But for the first time since 2007, we are on a path toward applying enough pressure to achieve our interests peacefully.  Will we use the full range of tools at our disposal, or will this be just another pause in North Korea’s progression toward becoming the arsenal of terror for the region and the wider world?  We can sanction North Korea out of its nukes, or we can sanction it out of the headlines for a while. The choice is ours.

Our history of flunking that test every time we’ve taken it is what scares me.  The worst likely outcome of a strategy effective enough to force significant changes in North Korea’s behavior is that we would again settle for insignificant and ephemeral changes instead.