Commence Primary Ignition: Treasury zaps the Bank of Dandong for laundering Kim Jong-Un’s money

And so, the “maximum pressure” we’ve been waiting for begins in earnest. Yesterday afternoon, the Treasury Department announced a series of legal actions against Chinese enablers of North Korea’s proliferation, smuggling, and money laundering. First, Treasury’s Office of Foreign Assets Control froze the assets of two businessmen and a shipping company. One of those businessmen, Sun Wei, was the sole shareholder of Mingzheng International Trading, the Chinese company targeted in this recent civil forfeiture action. The shipping company was sanctioned for smuggling luxury goods to North Korea, in violation of UN sanctions.

The more potentially significant action, however, was  Treasury/FINCEN’s action against a Chinese bank. The target was the Bank of Dandong, and the weapon was 31 U.S.C. 5318A(b)(5), otherwise known as the Fifth Special Measure of Section 311 of the Patriot Act — the same provision used against Banco Delta Asia in 2005. The action effectively makes the BoD a global pariah and cuts it off from the financial system.

[Alderaan shot first.]

Interestingly enough, if you had asked me to pick just one Chinese Bank to make an example of, I would have named the Bank of Dandong. Yes, the Bank of China was the most flagrant violator, but a large bank calls for a different strategy (which I’ll discuss below). Based on the open-source evidence, it was the BoD that had the most integration into Pyongyang’s palace economy. This 2013 report documented its ties to US- and UN-sanctioned Korea Kwangson Bank (KKBC). This report from early 2016 indicates that Chinese merchants trading with North Korea (temporarily) shifted away from the Bank of Dandong after the U.N. Security Council passed Resolution 2270. A few months later, the Justice Department indicted a Chinese company, Dandong Hongxiang Industrial Development, for laundering money for KKBC through 12 Chinese banks, including the BoD. Just a few days before, the Center for Advanced Defense Studies had revealed that DHID had an equity stake in the BoD.

To this body of evidence, the Treasury Department now adds a Notice of Proposed Rulemaking to support the 311 action. Treasury accuses the BoD of facilitating money laundering by trading companies that are fronts for North Korean banks and agencies designated for proliferation. Sorry for the long money quote, but it’s all worth reading:

Bank of Dandong serves as a gateway for North Korea to access the U.S. and international financial systems despite U.S. and UN sanctions….  For example, as of mid-February 2016, North Korea was using bank accounts under false names and conducting financial transactions through banks located in China, Hong Kong, and various southeast Asian countries. The primary bank in China was Bank of Dandong.

In early 2016, accounts at Bank of Dandong were used to facilitate millions of dollars of transactions on behalf of companies involved in the procurement of ballistic missile technology. Bank of Dandong also facilitates financial activity for North Korean entities designated by the United States and listed by the United Nations for WMD proliferation, as well as for front companies acting on their behalf.

In particular, Bank of Dandong has facilitated financial activity for Korea Kwangson Banking Corporation (KKBC), a North Korean bank designated by the United States and listed by the United Nations for providing financial services in support of North Korean WMD proliferators. As of May 2012, KKBC had a representative embedded at Bank of Dandong. Moreover, Bank of Dandong maintained a direct correspondent banking relationship with KKBC since approximately 2013, when another Chinese bank ended a similar correspondent relationship. As of early 2016, KKBC maintained multiple bank accounts with Bank of Dandong. 

Bank of Dandong has also facilitated financial activity for the Korea Mining Development Trading Corporation (KOMID), a U.S.- and UN-designated entity. As of early 2016, a front company for KOMID maintained multiple bank accounts with Bank of Dandong. The President subjected KOMID to an asset blocking by listing it in the Annex of Executive Order 13382 in 2005, and the United States designated KOMID pursuant to Executive Order 13687 in January 2015 for being North Korea’s primary arms dealer and its main exporter of goods and equipment related to ballistic missiles and conventional weapons.

FinCEN is concerned that Bank of Dandong uses the U.S. financial system to facilitate financial activity for KKBC and KOMID, as well as other entities connected to North Korea’s WMD and ballistic missile programs. Based on FinCEN’s analysis of financial transactional data provided to FinCEN by U.S. financial institutions pursuant to the BSA as well as other information available to the agency, FinCEN assesses that at least 17 percent of Bank of Dandong customer transactions conducted through the bank’s U.S. correspondent accounts from May 2012 to May 2015 were conducted by companies that have transacted with, or on behalf of, U.S.- and UN-sanctioned North Korean entities, including designated North Korean financial institutions and WMD proliferators.

In addition, U.S. banks have identified a substantial amount of suspicious activity processed by Bank of Dandong, including: (i) transactions that have no apparent economic, lawful, or business purpose and may be tied to sanctions evasion; (ii) transactions that have a possible North Korean nexus and include activity between unidentified companies and individuals and behavior indicative of shell company activity; and (iii) transactions that include transfers from offshore accounts with apparent shell companies that are domiciled in financial secrecy jurisdictions and banking in another country. [FINCEN NPRM]

For a brief discussion of the BoD’s rights to challenge this action before it officially becomes final in 60 days, see this post. The Bank of Dandong can’t say it wasn’t warned; in its notice, Treasury cites its November 2016 regulation at 31 C.F.R. 1010.659, calling on banks to exercise enhanced due diligence with regard to North Korean customers, and to deny North Korean banks direct or indirect access to the financial system. That regulation was promulgated to implement Treasury’s designation of North Korea as a jurisdiction of Primary Money Laundering Concern in November, which in turn was in response to section 201 of the North Korea Sanctions and Policy Enhancement Act, which effectively forced Treasury to make that designation.

Naturally, the principal congressional leaders behind passing the law that led to this result welcomed Treasury’s decision. Rep. Ed Royce (R-CA), chairman of the House Foreign Affairs Committee called the action “a big step,” adding, “The administration is right to target any around the world who act as financial lifelines to Kim Jong-un, and to give them a clear choice: You can do business with North Korea or with the U.S., but not both.” Royce also called on the Senate to pass his KIMS Act. Senator Cory Gardner (R-CO) issued a statement applauding the action and calling it long overdue.

It’s hard to believe that it was a complete coincidence that Treasury took this action while Moon Jae-In was in town. The message thus sent is that the U.S. and South Korea must be aligned on sanctions enforcement. We cannot have a repeat of 2005, when South Korea undermined the sanctions the U.S. imposed (Roh Moo-Hyun opened Kaesong, which became a $100-million-a-year subsidy for Kim Jong-Il, just as the Banco Delta Asia sanctions were achieving their effects). Someone in the White House clearly understands that we cannot make a coherent policy of sanctioning and subsidizing the same target at the same time. Treasury Secretary Steven Mnuchin emphasized that yesterday’s action was directed at North Korea, not China, and expressed the hope that China would “continue to work with us” to pressure North Korea.

So noted.

What should we watch for next? First, for North Korean money men to step up their bulk cash smuggling game, or shift to non-dollar currencies or trade-based money laundering as sanctions dodges. The excellent Noon in Korea Twitter feed, for example, points to a Korean-language report that authorities in Vladivostok have seized bulk cash from North Korean money launderers who are apparently having trouble sending wire transfers (an increasingly rare case of Russia enforcing sanctions). Interestingly, Treasury says that BoD also maintains “euro, Japanese yen, Hong Kong dollar, pound sterling, and Australian dollar correspondent accounts that would not be affected by this action.” That’s why it will be important for State and Treasury to engage in some good financial diplomacy to get those third-country regulators to blacklist the BoD under their own authorities.

Also, look for the “death spiral” — North Korean money launderers who defect because they can’t pay their kick-up quotas because of sanctions, who then provide us more intelligence, leading to yet more sanctions. Rinse and repeat. (We might as well put out the word now that they’ll get better living arrangements if they bring their ledgers and laptops.) For a fascinating interview of one of those money launderers who defected after the Jang Song-Thaek purge, read this. North Korean money launderers’ fear of coming home to Pyongyang short-handed may be one of our intelligence agencies’ best tools to be a major player in the sanctions game. For reasons I explained here, that death spiral could pose a serious threat to the survival of the regime.

We should also watch for local regulators stepping in to take over the Bank of Dandong to prevent a run and shield other local banks from secondary effects. We should look for more reports that other Chinese banks are closing North Korean accounts. We should also look for correspondent banks in the United States to raise their scrutiny of Chinese banks that try to clear dollar transactions on behalf of suspicious or poorly documented customers. If FINCEN plays its cards right, Chinese banks that don’t step up their compliance game may find it difficult to clear their transactions. For more on how EU and New York state regulators have applied similar strategies, see this post.

Finally, we should look for China to send more mysterious convoys to North Korea and engage in conspicuous sanctions violations to deter any more actions by Treasury. We must be prepared to escalate in kind. Chinese retaliation may be Trump’s excuse to do what some in his administration have wanted to do all along — hit China with, say, steel tariffs. Fortunately, Trump has backed off from a threat to withdraw from NAFTA. And needless to say, the worst possible time to drop or renegotiate the Free Trade Agreement with South Korea is when China is bullying it with unilateral trade sanctions. After all, you can’t wage a trade war with everyone at once. If you trade less with China and you aren’t willing to eat a recession, you have to trade more with someone else. Given that most of the economies that compete with China as providers of low-wage labor or high-technology manufacturing (or both) are in East Asia, Trump should consider making some face-saving changes to the Trans-Pacific Partnership and reviving it as part of a long-term plan to encourage an emigration of manufacturers from China to friendlier venues in Southeast Asia and Japan. While I’m not a fan of protectionism, Xi Jinping’s behavior in the South China Sea, North Korea, and Hong Kong has also convinced me that “peaceful rise” is a self-serving delusion, and that our economic interest in robust trade with China is outweighed by the threat that we’re selling Xi the rope to hang us with.

We also need a strategy for banks like the Bank of China that may think they’re too big to sanction. The Bank of Dandong is expendable, but the Bank of China is not. Unlike the Bank of Dandong, however, the Bank of China has deep links to the U.S. financial system, is under pressure from the Chinese Finance Ministry to improve its anti-money laundering compliance, and has a branch in New York (which regularly checks in on this humble blog for … for posts like this one, I suppose). The better approach for Treasury, then, would be to use FINCEN to treat the BoC’s North Korea ties as an anti-money laundering compliance problem and, in the event the feds smell something fishy, issue subpoenas with a mind toward doing to the BoC what it did to BNP Paribas — impose heavy fines and a deferred prosecution agreement for data stripping and flunking Know-Your-Customer obligations. That is to say, there is no such thing as “too big to sanction,” merely different strategies for different targets. Another advantage of a deferred prosecution agreement, of course, is that it can force a bank to cooperate by providing financial intelligence — intelligence the feds can use to take action against other targets.

Some of these effects should be evident within the next week or two. The effects that matter most, however, are on the stability of the North Korean system. To have any chance at all for a negotiated denuclearization of North Korea, we will have to force the regime to choose between its nukes and its survival. My guess is we’ll see effects of that kind within a year or two if — and only if — we continue to press the financial, law enforcement, and diplomatic campaign needed to starve the regime of funds.