UN report shows China, others are still havens for North Korean money laundering

Due to a convergence of other commitments, it took me longer than I’d hoped to digest the U.N. Panel of Experts‘s latest findings about North Korea and financial sanctions. If you only read the bottom line and stop there, you’ll either be discouraged or find support for an argument that sanctions are futile.

210. Despite expanded financial sanctions adopted by the Security Council in resolutions 2270 (2016) and 2321 (2016), the Democratic People’s Republic of Korea has continued to access the international financial system to support its activities.  Financial networks of the Democratic People’s Republic of Korea have adapted to these sanctions, using evasive methods to maintain access to formal banking channels and bulk cash transfers to facilitate prohibited activities. At the time of writing, Democratic People’s Republic of Korea circumvention techniques and inadequate compliance by Member States are combining to significantly negate the impact of the resolutions.

But you shouldn’t just stop there. If you read the entire report, you’ll find ample evidence that with sufficient resources and political backing, competent investigators can find, expose, and destroy Pyongyang’s financial networks. The Panel has shown us how it’s done. But even if financial sanctions can work, they are not yet working. Pyongyang’s money launderers are experienced and sophisticated, and they’re still accessing the financial system. Member states (read: China, and to lesser degrees, Russia, Malaysia, Singapore, Namibia, Zambia, and the Seychelles — and by default, the U.S.) aren’t complying with, are ignoring, or aren’t enforcing the resolutions.

In many cases, Pyongyang’s money launderers are the same people who’ve plied their trades from the same Chinese cities for years with impunity. Increasingly, they work through local agents, from offices in storefronts or hotel rooms. They may have formalized links to North Korean banks, or they may conceal those links and work through trading companies to move funds and conduct transactions on their behalf. These techniques aren’t new; they’re the same ones terrorists, drug lords, and other rogue states have used since the passage of the Bank Secrecy Act years ago. What else isn’t new? Pyongyang’s reliance on the dollar system:

Most of the financial activity investigated by the Panel was denominated in United States dollars, euros and renminbi. (Para. 213.)

To help you understand the meaning of the Panel’s findings, I’ve organized this post around a few simplified rules I synthesized from seven different U.N. Security Council resolutions. I’ve also blended in information from last year’s report and from other relevant posts I’ve written about North Korea’s finances.

Some caveats are also appropriate here. First, two of these resolutions (2270 and 2321) are fairly recent. Some member states whose names don’t start with “ch” and end in “ina” may still have been in the process of complying when the Panel’s reporting period closed.

Second, in this post, I use “money laundering” to mean the deceptive financial practices that Pyongyang uses to conceal the ownership, origin, and use of its funds to help it violate U.N. sanctions. In most cases, those practices will also meet the U.S. (or domestic) legal definition, but not always. In U.S. law, “money laundering” is defined in two fairly complex statutes, but can be simplified to mean moving money that’s “involved in” certain categories of unlawful activity, either because the funds are proceeds of a crime (say, spending the take from a bank fraud scam), are the corpus of a crime (such as a payment by a blocked person through a U.S. correspondent), or are being used to conceal a crime (for example, Pyongyang Restaurant profits that are commingled with drug money to obscure the illicit origins of the latter).

Rule 1: Member states must freeze the assets of designated entities.

States must freeze the assets of designated persons and “ensure that any funds, financial assets or economic resources are prevented from being made available to or for the benefit of” them. That includes denying them financial services, closing their representative offices, preventing their agents from participating in joint ventures or business arrangements, and expelling those agents. UNSCR 1718, para. 8(d); UNSCR 2094, paras. 8 & 11; UNSCR 2270, paras. 15 & 32; & UNSCR, 2321, para. 3.

Who’s Breaking it: China, mainly. The Panel suspects that at least four U.N.-designated North Korean banks or their aliases continue to operate from Chinese territory:

• Korea Kwangson Banking Corporation, which operated from Dandong until the Dandong Hongxiang indictments, and still has fronts in the British Virgin Islands, the Seychelles (where this blog has a readership, for some reason), and Hong Kong. (Para. 224.)
• Daedong Credit Bank, which has offices in Dalian, Dandong, Shenyang, and may actually be majority Chinese-owned, in violation of the prohibition against joint ventures with North Korean banks (see below). Daedong Credit Bank recently hit the headlines again when it appeared in the Panama Papers. (Para. 225.)
• Korea Daesong Bank also has offices in Dalian, Dandong, and Shenyang. (Para. 225.)
• Ryugyong Commercial Bank, a suspected front for Daedong Credit Bank, operates in Beijing, where it processes transactions for designated entities and finances arms deals. (Para. 227.)

Rule 2: Banks must cut off correspondent relationships with North Korean banks.

Member states must “prohibit financial institutions within their territories or subject to their jurisdiction from . . . establishing or maintaining correspondent relationships with DPRK banks,” except with the Committee’s advance approval, and requires member states “to terminate such . . . correspondent banking relationships with DPRK banks within ninety days from the adoption of this resolution.” UNSCR 2270, para. 33.

Who’s Breaking it:

• The unnamed Chinese banks that maintain correspondent accounts for Daedong Credit Bank, which is helping Glocom, its officers (Rang Su-nyo) and its front companies (Pan Systems Pyongyang, Pan Systems Singapore, International Golden Services, and International Global Systems) process U.S. dollar and euro transactions through U.S. and European correspondent banks. (Paras. 233-38.) That’s a violation of the money laundering statute — specifically 18 U.S.C. 1956(a)(2), because as the Panel notes, Glocom is a front for the Reconnaissance General Bureau, which itself is designated by both the U.S. Treasury Department and the U.N. The obvious predicate offense for a money laundering charge would be the International Emergency Economic Powers Act. If those banks aren’t violating the IEEPA, they may be in violation of their customer due diligence obligations under 31 U.S.C. 5318(i). I’d like some names, please.
• China, by hosting Kim Chol-sam, an extraordinarily prolific money launderer who is a director of DCB Finance and is linked to Daedong Credit Bank, both of which were designated by the Treasury Department for WMD proliferation in 2013. According to the Panel, Daedong Credit Bank and DCB Finance ran millions of dollars in U.S. dollar wire transactions through our financial system through Korea Daesong Bank (also designated). He also facilitated bulk cash smuggling from China to North Korea. Kim sometimes poses as a South Korean, maintains a series of front companies in China, including Dalian Daxin Electronics, Hongdae International Ltd. (HK), Pan Ocean Investments, Ltd. (set up with help from a Hong Kong company’s Beijing office), Win Talent International Ltd. (ditto). Those links, by the way, are to the Panama Papers database. (Paras. 226-28.)

Rule 3: States must close foreign branches of, and joint ventures with, North Korean banks.

Member States shall “prohibit in their territories the opening and operation of new branches, subsidiaries, and representative offices of DPRK banks,” to “prohibit financial institutions within their territories or subject to their jurisdiction from establishing new joint ventures,” except with the Committee’s advance approval, and requires member states “to close such existing branches, subsidiaries and representative offices, and also to terminate such joint ventures [and] ownership interests . . . within ninety days from the adoption of this resolution.” UNSCR 2270, para. 33.

Who’s Breaking it: China, Russia, Malaysia, Zambia, Egypt, and others.

It’s important to note that the ban on joint ventures with North Korean banks is only as recent as last March, and much of the information below is from the Panel’s previous reports that predate those resolutions. Having said that, I saw nothing in the 2017 report indicating that any of the banks listed below were closed. All of these are North Korean banks with foreign branches, North Korean joint ventures with foreign banks or companies, or both:

• A bank that calls itself — I am not making this up  — “the International Bank of Martial Arts in Pyongyang,” continues to do renminbi money transfer services from Dandong. According to the Panel, it “has served foreign clients with renminbi savings, loan, and transfer services; has undertaken transactions in China; and has issued guidelines in Chinese and English to foreign clients on how to transfer renminbi from China.” (Para. 216; Annex 15-2).
• The Central Bank of the DPRK has branches in China, where (my conjecture, based on Dodd-Frank disclosures) it likely sells gold, in violation of UNSCR 2270, para. 30. (2014 Report, Table XXXIV.)
• The Chinese Commercial Bank in Rason, established in 2013 by the China Gold Trade Exchange of Dalian. (Para. 219.)
• The First Credit Bank, a/k/a Cheil Credit Bank, a/k/a Jeil Credit Bank, which the Panel’s 2014 report describes as a “possible joint venture.” (2014 Report, Table XXXIV.)
• First Trust Corporation, a joint venture with the notorious Japan-based front group Chosen Soren to finance trade with North Korean firms based in Russia, which would now violate UNSCR 2321, paragraph 32. (2014 Report, Table XXXIV.)
• Golden Triangle Bank in Rason, which provides support for trade with North Korea, also in violation of UNSCR 2321, paragraph 32. (2014 Report, Table XXXIV.)
• Hana Banking Corporation, which the Panel’s 2014 report described as a “joint stock company arranged between Central Bank of DPR Korea and Central Bank of China.” It “operates branches in China and deals in RMB.” (2014 Report, Table XXXIV.)
• Hi-Fund Bank, a subsidiary of the MKP Group, a joint venture with Malaysian parters with a branch in Zambia, which I mentioned in this post. (Para. 218.)
• International Consortium Bank, another MKP subsidiary. (2014 Report, Table XXXIV.)
• Korea Joint Bank, a/k/a Korea Joint Operation Bank, Chosun Joint Operation Bank, a joint venture bank “established by Korea International General Joint Venture Company and Association of Korea Traders and Industrialists in Japan.” Japan has usually been a strict enforcer of North Korea sanctions. I wonder if this bank is still operating. (2014 Report, Table XXXIV.)
• Koryo Commercial Bank, a/k/a Korea Commercial Bank, a joint venture bank; established by North Korean and U.S. residents — and what I wouldn’t give to know who those U.S. residents are, although I can venture some guesses (which I’ll keep to myself). According to the Panel, it may be related to Kumgangsan International Group. (2014 Report, Table XXXIV.)
• Orabank, which, as George Turner informed us, is a joint venture between Orascom and the Foreign Trade Bank of North Korea, which the Treasury Department designated in 2013 under Executive Order 13382 for financing the proliferation of weapons of mass destruction. This connection was a legal risk for Orascom and a far greater one for its former CEO, Naguib Sawaris, a U.S. citizen.
• Kumgyo International Commercial Bank. Per the latest Panel report, this bank is run jointly with the China Inner Mongolia Horizon (Hong Yuan) International Trade Corporation, Ltd. and affiliated with Korea Chongsong Mining Company. (North Korea’s mining industry is now under U.S. sectoral sanctions for its frequent involvement in WMD proliferation and arms trafficking.) The bank is registered with the Chinese Ministry of Commerce as a venture, and is 49 percent owned by a Russian company, Menggely K LLC,  of the Tuva Republic. It facilitates exports of pearls and magnesium. (Para. 220.)
• First Eastern Bank, Rason. This is a joint venture with the Chinese company Unaforte, which is linked to our friend Jim Rogers. It’s involved in mining, investment, and the (now prohibited) gold trade. We’ve already covered that North Korea is banned by U.N. resolutions from exporting gold. Remember also Leo Byrne’s reports exposing that Unaforte exported gold jewelry to Hawaii, which would violate Executive Order 13570 unless the exporter had an OFAC license (place your bets). It has a branch in Yanbian and is licensed by the North Korean government, but claims not to be subject to either North Korean or Chinese jurisdiction. It advertises that it does not require proof of identity, which sounds like an open invitation to money laundering. (Para. 221.)

To the extent these banks still operate, they’re all violating U.N. sanctions. If the new administration is looking to show seriousness of purpose about cutting off North Korea’s finances, it could start by designating all of them under section 104 of the North Korea Sanctions and Policy Enhancement Act or its implementing order, Executive Order 13722. That would reinforce the message that Chinese banks should not continue to do business with them.

Rule 4: Member states must expel persons working for North Korean banks.

Persons working on behalf of North Korean financial institutions or U.N.-designated entities must be expelled for purposes of repatriation to North Korea, and are ineligible for any immigrant, non-immigrant, or transit visa, unless their presence is required for a legal, medical, or humanitarian reason. UNSCR 2270, para. 15; UNSCR 2321, para. 33.

Who’s Breaking it: China and Malaysia, mostly. See, e.g., Kim Chol-sam and his entire network, the Glocom network, and all of the foreign branches of North Korean banks I mentioned above. The branches are supposed to be closed, and their North Korean employees expelled.

Rule 5: Member states must restrict bulk cash transfers to and from North Korea.

The Security Council “[e]xpresses concern that transfers to the DPRK of bulk cash may be used to evade” the sanctions resolutions, “and clarifies that all States shall apply” the “enhanced monitoring” measures set forth in paragraph 11 of UNSCR 2094 to bulk cash transfers to and from North Korea. Although the language “expresses concern” appears non-binding at first glance, it refers back to mandatory provisions. UNSCR 2094, para. 14.

Who’s Breaking it:

• China, for hosting bulk cash smuggler and money launderer Kim Chol-sam and his network.
• Glocom, and also Malaysia for letting Glocom get away with it.
• Singapore and the UAE, which failed to stop a North Korean diplomat who was carrying $1.4 million in gold through their airports. (Para. 243.)

Who isn’t:

• The government of Bangladesh deserves an honorable mention for seizing that $1.4 million in smuggled North Korean gold (para. 243) and this Rolls-Royce, which was shipped from Malaysia by a North Korean diplomat …

[to raise money to buy infant formula and TB medicine, naturally.]

Could that have something to do with North Korean hackers picking the Bangladesh Bank as a victim? Could be, but then how do you explain the killing of Kim Jong-nam in Malaysia? Either way, Bangladesh’s good-faith enforcement has earned it a supportive response to that crime.

Rule 6: Member states must limit extensions of credit to North Korea.

States should not enter into new commitments for grants, financial assistance, or concessional loans to the DPRK, except for humanitarian and developmental purposes directly addressing the needs of the civilian population, or the promotion of denuclearization, and should exercise enhanced vigilance with a view to reducing current commitments. Strictly speaking, this is non-binding language. UNSCR 1874, para. 19.

Who’s Breaking it:

• China, if Sam Pa and the 88 Queensway group are still in partnership with KKG, Korea Daesong General Trading Company, and Bureau 39.
• Moon Jae-in next year, unless we stop him.

Rule 7: Member states must close bank branches and accounts in North Korea.

Member States must take the necessary measures to close existing representative offices, subsidiaries or banking accounts in North Korea within 90 days, unless the Committee determines on a case-by-case basis that such offices, subsidiaries or accounts are required for the delivery of humanitarian assistance or the activities of diplomatic missions in the DPRK or the activities of the United Nations or its specialized agencies or related organizations or any other purpose consistent with the objectives of this resolution. UNSCR 2321, para. 31.

Who’s Breaking it: China mostly, as noted above.

Concern: Member states should “exercise vigilance” over North Korea’s slave labor exports.

This isn’t a binding rule, but the Security Council expressed “concern that DPRK nationals are sent to work in other States for the purpose of earning hard currency that the DPRK uses for its nuclear and ballistic missile programmes, and calls upon States to exercise vigilance over this practice.” UNSCR 2321, para. 34.

The is provision isn’t, strictly speaking, so much about the exploitation of the workers as it is about the fact that their “wages” are stolen, laundered, and used for prohibited purposes.

Who’s Ignoring it:

• China, the largest single user of North Korean labor;
• Russia, which just signed a new contract for North Korean labor;
• Namibia, whose banks process dollar payments to U.N.-designated Mansudae Overseas Project Corporation, as “wages” for its workers. (Para. 245.)
• Oman, Kuwait, Qatar, and other Gulf states, as illustrated by Sri Lanka’s seizure of $167,000 in cash, gold jewelry, and watches, which the courier said were wages of construction workers in Oman. Uh huh. (Para. 244.)
• Malaysia, as discussed.
• More research about that topic here, here, here.

Conclusion: What we learned about North Korean money laundering from the Panel’s report

First, North Korea increasingly relies on non-bank front companies that essentially operate as banks, and would thus qualify as financial institutions under the U.S. legal definition in 31 U.S.C. 5312.

Second, North Korea still prefers dollars (see, e.g., paras. 114, 224, 226 n.206, 227, 234, 238 & 244). Many of those dollar transactions continue to be run through U.S. correspondents (see, e.g., paras. 217 n.194, 226 & 235), who need to step up their game.

239. Stronger sanctions have led networks of the Democratic People’s Republic of Korea to employ greater ingenuity in using formal banking channels and bulk cash transfers to facilitate their illicit endeavours. At the same time, Member States that host nationals of the Democratic People’s Republic of Korea, that control the movement of persons across their borders, that regulate banks and that regulate correspondent banks have not made a commensurate investment in their own capacity to enforce the strengthened sanctions. Consequently, agents of the Democratic People’s Republic of Korea have been able to mask both their illicit activities and their links to the country.

A new Treasury Department regulation at 31 C.F.R. 1010.569, implementing the ban on correspondent accounts and imposing new due diligence requirements, may give them an incentive to do just that. The fact that Pyongyang still relies on the dollar system gives us more options to intercept those dollars.

While some of that cash is eventually smuggled into North Korea, most of it is probably commingled with illicit (or as the case may be, licit) funds and deposited into Chinese banks by small-time operatives (who do what’s known as “structuring”). From there, it’s transferred into other accounts (“layering”) and spent on stuff the elites in Pyongyang like. Then, the goods are shipped in by boat or Air Koryo (the final stage of money laundering: “integration”).

None of these methods are more sophisticated than those of Al Qaeda (with its use of hawalas), Colombian drug lords (with their clever use of trade-based money laundering), or Iran (with its talent for using gold as a sanctions dodge). The Panel’s report proves that these networks can be uncovered by skilled and determined investigators. So, for that matter, did C4ADS, and the Treasury and Justice Departments. It’s by no means impossible to find and destroy these networks with enough of the right people. The Panel has identified dozens of potential North Korean targets that should be expelled and have their assets frozen. Maybe now we have to political will to make that effort, but do we have enough cops, lawyers, and diplomats to get the job done?

For two other good analyses of the report and how to respond to its findings, read this one, by George Lopez and this one, by Richard Nephew. Lopez, in particular, dispels the myth that North Korea is already isolated and therefore financially impregnable. Instead, the Panel’s report proves that Pyongyang remains dependent on offshore finance.