C4ADS: Pyongyang’s networks in China are “centralized, limited, and vulnerable” to sanctions 

Because I’ve already given too many minutes of my life to the moveable farce named Dennis Rodman, I’m devoting today’s post to something more consequential: the Center for Advanced Defense Studies’s new report exposing more North Korean financial networks in China, and dispelling the misinformation that North Korea is isolated from the financial system and thus sanctions-proof. (Full disclosure: I advised C4ADS on the drafting of the report, without compensation of course.) Money quote:

The continuing misperceptions of North Korea as the “Hermit Kingdom” or “the most sanctioned country in the world,” are fueling the narrative behind the narrowing of non-military options on the Korean peninsula. In truth, the North Korean regime, far from being isolated, is globally active throsugh its overseas networks. The impact of these misperceptions is considerable, most notably in the false belief that sanctions cannot succeed on a “closed” country like North Korea. 

Following on last September’s exposé on Dandong Hongxiang, C4ADS sifted through public databases, shipping registries, and business records to widen its focus and try to find the extent of North Korea’s financial network in China. From this, C4ADS found, contrary to a lot of widely disseminated misinformation, that North Korea’s network is centralized, limited, and vulnerable to detection and sanctions:

Centralized. For example, C4ADS dug further into the role of Dandong Hongxiang and found it to be highly centralized around key nodes. It also exposed two more networks that were similarly centralized. In one case, C4ADS started with the seizure of the M/V Jie Shun at the southern entrance to the Suez Canal with a record haul of North Korean weapons (mostly PG-7 anti-tank rockets) aboard, which I figure were probably bound for Syria. Starting from the findings of the UN Panel of Experts (see paragraphs 61 through 71), C4ADS worked backward through shipping registries and corporate records and identified the holder of the Jie Shun’s compliance document as a Chinese national named Fan Mintian. Fan runs a company called V-Star Ships.

Fan and V-Star have been operating openly in China, helping North Korea evade shipping sanctions for at least four years. V-Ships did (much? all?) of its business through the dollar system, clearing its payments through the United States. Sadly, C4ADS doesn’t identify the author of the “please do not send us any instructions” email, which sounds like the kind of thing the FBI and the Justice Department may find worthy of further investigation, to say the least.

In another case, Wells Fargo was the correspondent bank, and its compliance officers were alert and on the job, and refused to process V-Star’s transactions. People may praise bankers even less than they praise lawyers, but here’s to Wells Fargo, for taking its compliance obligations seriously and refusing to launder money for North Korea.

Yet another major Chinese network, Dandong Zhicheng Metallic Material Inc. (DZMM) may be an even more important node for Pyongyang than Dandong Hongxiang. DZMM buys coal from North Korea. 

Three North Korean companies are currently designated by the Treasury Department: Daewon Industries (a part of Pyongyang’s military-industrial complex, designated in December), Kangbong Trading Company (same), and Paeksol Trading Corporation (controlled by the Reconnaissance General Bureau, designated in March). If DZMM willfully engaged in dollar transactions with any of those companies after their respective designations — and I stress that I don’t see proof of all of these elements from C4ADS’s report alone — that could constitute any of several federal felonies: violation of the International Emergency Economic Powers Act, money laundering under 18 U.S.C. 1956(a)(2), or conspiracy to commit either of the aforementioned under 18 U.S.C. 371. Even if you don’t arrest a single suspect, the Justice Department can bankrupt those networks by blocking their funds as they move through the financial system and forfeiting them.

Limited. C4ADS found that just 5,233 companies are involved in bilateral trade between China and North Korea, with the top ten companies controlling about 30 percent of it. If 5,233 sounds like a lot, last year, there were 67,163 Chinese companies exporting to South Korea. The concentration of wealth in the hands of a few state-controlled companies is consistent with Pyongyang’s centralized and controlling ways of running everything else. Even then, further research revealed that many of these companies were interconnected:

That means knocking over a few major networks could collapse much of the system that sustains His Porcine Majesty’s rule. C4ADS’s report even lays those connections out in charts.

And yet again, as with Ma Xiaohong, the person running a North Korean trade network turns out to be a member of the Chinese Communist Party. Arguably, our third attribute should be “inculpatory,” but it isn’t.

Vulnerable. Regular readers of the U.N. Panel’s reports will find North Korea’s methods of concealing its network aren’t qualitatively different than those used by terrorists, narco-traffickers, or other rogue regimes to launder money and evade sanctions; hence, the limiting reagents in U.S. sanctions enforcement are primarily political will and resources (cops, intelligence analysts, and lawyers). Contrary to widely-held assumptions, the networks are detectable.

The last time C4ADS published a report, Treasury designations, an indictment, and a civil forfeiture complaint soon followed. Which doesn’t sound imminent this time, judging by this Wall Street Journal report covering the C4ADS report. It suggests that the Trump administration is still in the bargaining stage with Beijing, asking it to curtail the activities of Chinese companies, run by party members, that are knowingly violating U.N. sanctions. 

The Trump administration has asked Beijing to take action against nearly 10 Chinese companies and individuals to curb their trading with North Korea, according to senior U.S. officials, as part of a strategy to decapitate the key networks that support Pyongyang’s nuclear-weapons program.

Although there is no firm deadline, the U.S. has indicated the Treasury Department could impose unilateral sanctions on some of these entities before the end of the summer if Beijing doesn’t act, the U.S. officials said. [WSJ, Jay Solomon]

While you’re at it, don’t miss Solomon’s other recent report on another North Korean network in China, which I didn’t have time to blog about when it came out.

So as with the Obama administration, we’re back to asking Bejing to enforce sanctions it has spent the last ten years willfully violating. That similarity must owe a great deal to the fact that Trump can’t get key appointees in place to execute a policy that resembles his tough talk. For all the talk of sabotage by the “deep state,” the effect of slow appointments is that the administration ends up abdicating a lot of policy decisions to holdovers and similarly disposed career civil servants. In any event, let no one say that sanctions against North Korea can’t work, if we ever muster the will to use them.

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Update: At the Washington Post, Anna Fifield adds:

Targeting just a few pivotal Chinese companies could severely disrupt North Korea’s ability to circumvent international sanctions and buy illicit goods — and could even cause its entire overseas network to collapse, according to a report out Tuesday.

[….]

The new report, by Washington-based research group C4ADS, lays out multiple ways for Beijing to cut off North Korea’s trading routes to the outside world, if it wanted to. It also found a Chinese citizen who was conducting large amounts of trade with North Korea while serving as president of a company in the United States — a status that would allow him to open bank accounts and send or receive shipments.

“By being centralized, limited and ultimately vulnerable North Korean overseas networks are, by their nature, ripe for disruption,” C4ADS researchers wrote in the report, titled “Risky Business.”

[….]

There is still plenty more to be done, C4ADS writes. “Although to date economic coercion has been ineffective in persuading North Korea to abandon its pursuit of nuclear weapons, this does not mean it cannot work,” the researchers say. 

On the contrary, targeting key companies could cripple multiple networks across multiple countries simultaneously, they write, because so many of these firms are intertwined.

[….]

The C4ADS researchers said focusing on these kinds of logistical “chokepoints” could cut off North Korea’s centralized, global system of illicit finance. 

For example, the Dandong Hongxiang Industrial Development Co., which was sanctioned by the U.S. Treasury Department last year — sending a sudden chill through the border city that acts as North Korea’s main commercial gateway to the outside world — is one of 18 companies that make up the Liaoning Hongxiang Group. This suggests the potential for an indirect effect if one company is stopped from helping North Korea, perhaps disrupting numerous other linked companies.

“Based on what we’re seeing in the data in terms of the reach and scope of these networks and the limited nature of the system that they live in, and the contamination with illicit activity, there is inherent value to enforcement actions,” said David Thompson, a senior analyst at C4ADS.  [WaPo, Anna Fifield]

See also this Washington Post editorial, citing the C4ADS report.