Former Treasury Undersecretary David Cohen on N. Korea, China, and secondary sanctions

A recurring theme in the North Korea sanctions debate is that most of those who really understand what our sanctions on North Korea do and don’t do, and how they work, think they can work against North Korea, if we ever bother to enforce them (see, e.g., Juan Zarate, Anthony Ruggiero, Peter Harrell, George A. Lopez, and Bill Newcomb). Unfortunately, the actual experts are at variance with another group, consisting mostly of academics, retired politicians, retired diplomats, and experts in other fields, who say that sanctions either won’t work, or aren’t an alternative to a deal Kim Jong-un doesn’t even want. What most of these people have in common is a lack of any significant training or expertise on sanctions. Yet for whatever reason, some editors just can’t get enough of their op-eds, although it should be said that the editors of the Washington Post are more persuaded by the actual experts).

Because I see a very real danger that the policy views of those who’ve misjudged North Korea’s intentions all along, and who did so much to bring us to the worst nuclear crisis since 1962, could drown out the views of professional sanctions practitioners who offer us our last, best policy alternative to a devastating war, I do what little I can to amplify the views of experts who step forward to inform us. The latest example is David Cohen, who served as Deputy CIA Director and Undersecretary of the Treasury under President Obama:

In dealing with North Korea, the Trump administration should look to Iran. Specifically, it should take a page out of the Obama administration’s Iran sanctions playbook and apply against North Korea the tool used successfully to bring Iran to the nuclear negotiating table — “secondary sanctions” on those who do business with the regime. [David Cohen, The Washington Post]

As I’ve been shouting from the rooftops of this isolated outpost and elsewhere, until the reinforcements began to arrive …

North Korea is not, by any stretch, “sanctioned out.” Despite a broad set of international and U.S. sanctions, North Korea has gotten off relatively easy, especially as compared with Iran. That is largely because the United States has historically been reluctant to impose secondary sanctions to isolate North Korea, particularly against China, the regime’s principal legitimate trading partner. Certainly, the Trump administration should do its best to bring the Chinese government on board. But if China drags its feet, President Trump should proceed anyway.

And, consistent with the strategy behind the NKSPEA, hopefully soon to be strengthened by H.R. 1644 …

Secondary sanctions are both simple and enormously powerful. They work by presenting a stark choice to a foreign bank: It can process transactions for a bank already facing sanctions (for example, one of the many North Korean banks that have been listed by the United States) or it can maintain its access to the U.S. financial system, but it cannot do both. That presents an easy choice, because access to the U.S. financial system, which also means access to the U.S. dollar, is a practical necessity for almost any bank anywhere in the world.

Adopting secondary sanctions against North Korea could cut the last tendrils of its access to the international financial system. As a recent assessment by a special U.N. committee reportedly concluded, North Korean banks and trading companies operate in China through China-based front companies. These front companies, in turn, have accounts at Chinese banks, from which they are able to do business globally, including in the United States.

Cohen then addresses the question of how “China” would react. Some experts, including some officials who continue to occupy senior posts in the State Department, insist that sanctions can’t work without Beijing’s voluntary cooperation. Certainly, there are some sanctions, such as customs inspections at China’s ports and borders, that can only work with China’s cooperation, although the NKSPEA and H.R. 1644 both have provisions to sanction uncooperative ports, shippers, and shipping registries.

I’ve also argued for a more nuanced view of “China,” in that such a large and complex country is not a monolith, but a collection of constituencies within both government and industry that would have different responses to secondary sanctions. In Cohen’s view, it’s the views of the financial sector that really matter, and just as with Banco Delta Asia, China’s banking industry responded cooperated.

When I was serving in the Treasury Department during the Obama administration, we employed secondary sanctions to significantly ramp up pressure on the Iranian government. Hundreds of foreign banks that had been transacting with sanctioned Iranian banks voluntarily severed those relationships, thereby isolating much of the Iranian banking system.

But two banks in particular continued to work with sanctioned Iranian banks. One was China-based Kunlun Bank, a midsize institution that, our financial intelligence told us, “provided hundreds of millions of dollars’ worth of financial services” to a half-dozen sanctioned Iranian banks. Despite repeated warnings to the Chinese government, Kunlun refused to stop such activity. So in August 2012, Treasury used the secondary sanctions tool and cut off Kunlun from the U.S. financial system.

What happened next is instructive. The Chinese Foreign Ministry issued a relatively tepid and formulaic protest — and, behind the scenes, the Chinese government directed Kunlun to stop. Despite what some had feared, employing secondary sanctions against Kunlun neither led China to stop cooperating on Iran nor soured our relations with Beijing in any other respect.

And just as our strategic bombing campaign against Germany only had to paralyze a few critical industries (fuel) to be effective, targeted financial warfare against Pyongyang can be effective without targeting North Korea as a whole, if it can paralyze the regime’s finances.

I’ve pushed the boundaries of the Fair Use Doctrine far enough for one day, so read the rest of Cohen’s op-ed on your own. He goes on to suggest that the White House’s saber-rattling, which I view as harmful to our interests in Korea and Japan, may be designed to show China that the alternative to sanctions would be far worse, and that enforcing sanctions is a prerequisite to effective disarmament negotiations. He then advocates for a strategy of hitting the mid-sized Chinese banks that deal with North Korea first and leaving the bigger ones for later.

I don’t object to the first part of this strategy, although I also believe that some of the bigger banks, which are more likely to have branches in New York, should be targeted now with subpoenas to audit their compliance with the new Treasury regulation cutting off North Korean banks’ provision of indirect correspondent banking services. That’s one way to get the big banks to clean up their acts without actually taking legal action against them.

Banks that turn out to have violated the correspondent ban can don’t have to be targeted with measures as drastic as designation under NKSPEA 104 or Patriot Act 311; rather, they can be hit with civil penalties such as those applied to European banks that violated Iran sanctions. Under those circumstances, I’m confident that Congress wouldn’t object to a waiver under NKSPEA 208(c). In fact, we specifically wrote the exemption in 208(c)(1) to allow banks to agree to cooperate and provide additional financial intelligence, and to clean up their acts on money laundering compliance, pursuant to deferred prosecution agreements. Our options against non-cooperative banks are not all binary or nuclear, but vary across a wide spectrum of options.

For now, it looks like the Trump administration has decided to give China an opportunity to act on its own. I hope that opportunity is brief. Despite reports of fuel shortages and non-functioning ATMs in Pyongyang, you can color me skeptical; I’ve seen it all before. China’s strategy seems to be to generate headlines that it’s enforcing sanctions, only to ease off the moment those headlines reach the eyes of busy White House and congressional staffers. Then, as soon as Washington quits paying attention, it’s back to business as usual. The latest | developments with the so-called coal ban are only the latest example of China’s long record of broken commitments to enforce sanctions against Pyongyang.

I don’t object to giving China a brief opportunity to cooperate voluntarily, but it’s important to understand a few things. First, with China, the negotiation really begins after the contract is signed. Second, cheating is inevitable. Third, all of those diverse constituencies in China are watching how we react very carefully. Fourth, deterrence is as important in financial matters as it is in military matters. In the same sense that we keep forces in South Korea to deter North Korea from a military attack, having a strong legal and investigative team in place can help deter China from abusing our financial system. Right now, that force is badly understaffed and lacks political backing — and China knows it. There is no better way to show Beijing — and more importantly, China’s banking industry — that we’re serious than by staffing up the inter-agency working group that will investigate, enforce, and prosecute the violations of our money laundering laws that keep Kim Jong-un on his throne.