Ed Royce’s North Korea sanctions bill is already giving President Obama leverage over China

Kim Jong-un’s Groundhog Day message to the world was the announcement of a long-range missile test, and as you’ve no doubt heard, he has since made good on that threat. Like the movie “Groundhog Day,” this provocation cycle has been a variation on an endless loop. In 2006, 2009, and 2013, the missile test came before the nuke test, but if reports that His Corpulency is preparing yet another nuclear test are true, that will still technically be the case.

Otherwise, events have played out much as they did then: emergency meetings at the U.N., shuttle diplomacy, calls by the U.S. for tougher sanctions, and calls by China for everyone to just chillax and talk it out.

The Obama Administration is pushing China to push North Korea, but China has pushed back, stalled, and obstructed. For all the talk about a downturn in relations between Beijing and Pyongyang, Xi Jinping is being exceptionally stubborn in shielding Kim Jong-un from the consequences of his provocations. As the Brookings Institution’s Jonathan Pollack observes, “The sense of silence from China on this issue is really quite extraordinary.” It’s no great wonder why. Our President has done little of consequence to pressure Pyongyang or Beijing, so naturally, Xi and Kim have learned not to take him seriously. Whenever President Obama sees Kim Jong-un’s shadow, our State Department makes six more weeks of empty threats.

Will this time finally be different? Maybe so. 

Thanks to quick action by a united and bipartisan Congress — and how often do you read those words anymore? — the U.S. now has leverage with China that it didn’t have before. President Obama and the State Department may have been caught off-guard by Kim Jong-un’s nuclear test on January 6th, but Congress wasn’t. Since 2013, Ed Royce, the Chairman of the Foreign Affairs Committee, had been preparing a North Korea sanctions bill (full disclosure) and quietly building a bipartisan coalition to support it in the House and the Senate. Six days after the test, Royce pounced. Now, the administration isn’t even waiting for the bill to pass the full Senate (projected next Wednesday, if there are no “poison pill” amendments) to use its secondary sanctions provisions as leverage over the Chinese.

Mr. Kerry warned the Chinese that if they didn’t toughen their response to the North the U.S. might have to use secondary sanctions or deploy an advanced U.S. missile defense system to the region, according to U.S. officials. [WSJ, Jay Solomon & Josh Chin]

Separately, the New York Times quotes Deputy Secretary of State Antony J. Blinken as saying that “[t]he United States and its allies will bolster sanctions and go on the defensive against North Korea in ways that China may not like” if it doesn’t put the screws to His Corpulency.

Some of those steps “won’t be directed at China, but China probably won’t like them,” he said. Mr. Blinken refused to go into detail. But he said that “everything is on the table,” including so-called secondary sanctions, of the type the United States most recently used against Iran, which would target third-party countries doing business with North Korea. [N.Y. Times, Choe Sang-hun]

As you’d expect, that discussion and the exchanges between State and the Foreign Ministry since then have been contentious. They needed to be. North Korea’s financial links are concentrated in China. Despite China’s new propaganda meme that it really can’t control North Korea, most of North Korea’s money is in Chinese banks, and the vast majority of North Korea’s trade is with China.

That means the new sanctions could fall heavily on Chinese firms, which current and former U.S. officials have long accused of complicity in Pyongyang’s military development. [WSJ, Jay Solomon & Josh Chin]

The Chinese government says it’s opposed to “any efforts to unilaterally impose sanctions on North Korea.” So they’re unhappy. Which is sort of the idea here.

Sen. Cory Gardner (R., Colo.), who sponsored the North Korea legislation that was approved Jan. 28 by the Senate Foreign Relations Committee, said it aims to “send a strong message to China and others that the United States will use every punitive economic tool at its disposal to punish the regime and its enablers, wherever they may be.” [….]

“China is the place we really want to send a signal to,” said a congressional official working on the North Korea sanctions. [WSJ, Jay Solomon & Josh Chin]

President Obama has since called Xi Jinping personally “about how to coordinate efforts in response to North Korea’s provocations.” If the new sanctions legislation didn’t come up in that conversation, it surely hovered in the background. According to the WSJ, not only is the bill “unlikely to meet with a White House veto,” but the administration is threatening to do something unprecedented — enforce the law. 

Senior administration officials said they were receptive to vigorously enforcing the unilateral sanctions being developed by the Congress, despite some technical concerns.

Congressional officials working on the legislation said they’ve sought to replicate elements of the financial campaign the Obama administration used against Iran. Those sanctions cut by more than half Tehran’s crude oil exports and largely froze Tehran out of the global financial system.

The North Korea legislation aims to sanction any foreign firms aiding Pyongyang’s nuclear and cyberwarfare programs. It also is designed to block North Korea’s ability to export minerals, a key foreign exchange earner, and blacklist its entire financial system for its alleged role in illicit businesses. [WSJ, Jay Solomon & Josh Chin]

The administration is sending a clear message to China through various channels.

The United States would clearly prefer that China actively cooperate on a much fuller spectrum of measures. But Washington’s message to Beijing is clear: America will act with or without China’s concurrence.

The United States has long believed that China has the means to more decisively oppose North Korea’s nuclear and missile development, including restrictions on China’s financial, economic, and energy assistance to the North. By sharpening the choices confronting Beijing, Washington shows it believes that equivocation or indecision by China is no longer acceptable. [Jonathan Pollack, Brookings Institution]

Don’t be surprised if, when the next provocation cycle comes, Congress is ready to pounce again. 

In the end, I don’t expect Xi Jinping to agree to significantly tougher U.N. sanctions. He’ll try to wear us down, weaken any draft resolution, and eventually, if only to let us save face, agree to a watered-down resolution that nominally increases sanctions. Then, within a few months, China will go right back to violating them. (We’ll almost certainly see further evidence of China’s pattern and practice of non-enforcement when the U.N. Panel of Experts monitoring North Korea sanctions releases its next report in March — sooner if one of you leaks me a copy). He’ll also fight the new sanctions law tooth-and-nail, such as through barter and yuan-based transactions, although I have to wonder how many Chinese companies are interested in that kind of business.

What happens next depends on whether the Obama Administration (a) puts the new bill on a shelf for the next President to find, like both George W. Bush and Barack Obama did with the North Korean Human Rights Act of 2004, or (b) actually enforces it, like it wants us (and the Chinese) to believe it will. If the answer is (b), there may not be much Xi Jinping can do about it. In practical terms, even small Chinese banks and companies can live without access to North Korean markets, but not without access to ours. Even companies that don’t deal directly with the U.S. market need banking services, and banks won’t touch them if they’re designated. When China’s banking system is as shaky as it looks right now, no sane bank manager is going to risk secondary sanctions over transactions with North Korea. Once they see that the Treasury Department is serious, Chinese bankers will drop North Korean customers like so many hot potatoes.

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How will we know that the administration is serious? I can think of several signs to watch for. First, the Treasury Department could finally declare North Korea, a notorious counterfeiter and money launderer, to be a jurisdiction of primary money laundering concern, and impose harsh special measures on its banks. This is the single most powerful tool in the President’s arsenal.

Second, it could declare North Korea to be a state sponsor of terrorism, which would immediately invoke the tougher transaction licensing regulations at 31 C.F.R. Part 596, thereby closing a major sanctions loophole. If nothing else, that would help to appease Congress.

Third, it could launch criminal indictments against North Korean entities that have committed crimes. The government has expressed “very high confidence,” for example, in North Korea’s culpability for the Sony cyber attacks, which are violations of 18 U.S.C. 1030. An indictment would allow the government to issue an Interpol Red Notice for Kim Yong-chol, the assassin and terrorist who formerly headed Unit 121, until his recent promotion. Another potential basis for action could be that big meth smuggling conspiracy in New York, if any of the defendants have cut deals with DOJ and implicated North Koreans. More importantly, a conviction would allow the Justice Department to use 18 U.S.C. 981(k) and 982 to forfeit any North Korean assets involved in any crimes for which defendants were convicted, right out of the correspondent accounts through which those assets flow.

Fourth, it could take civil enforcement actions against entities that are propping up Pyongyang financially. The extraordinary reporting of George Turner at Finance Uncovered, for example, shows us that Orascom’s Naguib Sawaris, while building a cell phone network for the North Korean government, also set up a bank, Orabank, in partnership with North Korea’s Foreign Trade Bank. The U.S. Treasury Department blocked the FTB in 2013 for WMD financing. Turner’s article implies that Treasury knew less about Sawaris than he did, including Sawaris’s U.S. citizenship and links to a major defense contractor. If Sawaris or his companies are designated under Section 104 of the new sanctions law, they and their subsidiaries could face the blocking of their assets, civil and criminal penalties, and debarment from receiving government contracts. Sawaris’s U.S. citizenship is not a prerequisite to Treasury blocking his dollar assets,  but if the Justice Department finds evidence that he broke the law, his U.S. citizenship will make it much easier for DOJ to assert personal jurisdiction over him. Another potential target is China’s 88 Queensway, which worked in direct partnership with North Korea’s money laundering agency, Bureau 39. Even the Bank of China has reason to be nervous.

Fifth, the President could direct the Securities and Exchange Commission to require issuers with investments in North Korea to disclose those investments in their public filings. The reputational risks associated with investments in North Korea could have the effect of driving investors out of North Korea, if those investments become a matter of public record. And given what happened with Orascom’s catastrophic gamble on Koryolink, who can seriously argue that the risks of investing in North Korea aren’t “material?”

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One last question: did the North Koreans consider the potential impact of this before going through with these provocations? After all, they have the experience of Banco Delta Asia behind them. Of course, with the amount of turnover inside the regime since His Corpulency’s succession, there may be plenty of people in his inner circle who don’t remember Banco Delta Asia. Maybe the North Koreans don’t think President Obama dares touch them. Maybe the explanation is mostly psychological. Mabye Kim Jong-un’s domestic pressures are forcing him to take risks despite the consequences. Most likely, given Kim Jong-un’s record of brutality toward his inner circle, his advisors don’t dare try to restrain him. If Treasury enforces this law, the reality won’t set in until the checks start to bounce. That’s when the hard part comes — knowing how to use that pressure, and if and when to relax it for the deal Beijing and Pyongyang will inevitably offer us to get the sanctions relaxed.