Steve Mnuchin is defying Congress & undermining the President’s North Korea policy

WHO, EXACTLY, DOES STEVE MNUCHIN THINK HE WORKS FOR—Donald Trump or Xi Jinping? We are just weeks away from a scheduled meeting between the President who appointed Mnuchin and the dictator of North Korea. That meeting may decide whether it’s still possible to disarm the North through diplomacy instead of a war that could easily go nuclear. Unlike every other U.S. president since there has been a North Korea, President Trump grasps that the prerequisite to a successful negotiation is leverage. That is why he directed his cabinet to put “maximum pressure” on North Korea.

As I’ve argued repeatedly, one of the two most effective forms of pressure at our disposal is financial, because it leverages our power to block Pyongyang’s slush funds as transactions are cleared through correspondent accounts in the United States, and to specifically target the accounts and transactions of the most dangerous “relevant organs” of the regime. Indeed, Congress and the U.N. have passed laws and approved resolutions making this a legal requirement, subject to certain exceptions. But as I pointed out recently, what we actually have is something more like “medium pressure,” and no one, save the President himself, is more responsible for this than Steve Mnuchin, the former Goldman Sachs hedge fund manager, Hollywood B-movie producer, and finance chairman of Trump’s campaign who is now our Treasury Secretary.

First, the federal agencies tasked with identifying, sanctioning, and prosecuting those who help Pyongyang launder its money are woefully understaffed—something I’ve heard directly from the people responsible for the sanctions enforcement effort in multiple federal agencies, including the Treasury Department.

Second, it’s far from clear that Treasury possesses the political will to make sanctions as effective as they must be–by forcing Kim Jong-un to choose between his nukes and his life, or by undermining his domestic support enough to help instigate a coup d’etat. Treasury certainly has run up the score on the number of designations, so I can no longer argue (as I could until 2016) that our North Korea sanctions are weaker than those we have against Belarus and Zimbabwe. And Treasury has destroyed two small banks (one in China and one in Latvia) that were laundering the money Kim Jong-un uses to build nukes and missiles, pay his army and security forces, and keep himself in power. This is a good start, but it’s far from enough to do what must be done, when it must be done.

As I’ve said all along, I’ll believe our pressure is really maximum when we do to North Korea’s enablers in the financial industry what the Obama administration did to those who enabled Iran, Sudan, Burma, and Cuba—hit them with nine-digit civil penalties:

10/20/2015   |   Crédit Agricole    |   Sudan, Cuba, Burma, Iran   |   $329,593,585

3/12/2015   |   Commerzbank   |   Iran, Sudan, WMDPSR*, Burma, Cuba   |   $258,660,796

06/30/2014   |   BNP Paribas (Fr)   |   Sudan, Iran, Cuba, Burma   |   $963,619,900**

06/05/2014   |   Fokker Services (Neth)   |   Iran, Sudan    |    $50,922,208***

01/23/2014   |   Clearstream Banking (Lux)   |   Iran   |   $151,902,000

12/11/2013   |   Royal Bank of Scotland   |   Cuba, Burma, Sudan, Iran   |   $33,122,307

11/26/2013   |   Weatherford Int’l (UK)   |   Cuba, Iran, Sudan     |    $91,026,450 ***

Oddly enough, the financial system did not collapse after Treasury imposed these penalties. Iran returned to the bargaining table, negotiated a nuclear agreement, and became a verdant, peaceful land of civil liberties, mini skirts on summer days, double rainbows, and chocolate fountains (OK, maybe not that last part). The point stands that civil penalties were one of several effective tools to impose financial pressure to deter European banks without destroying them or the financial system.

Even before the Iran deal, Congressman Ed Royce foresaw how a similar strategy might work against North Korea. In 2016, Congress overwhelmingly passed his North Korea Sanctions and Policy Enhancement Act (NKSPEA), section 104(a) of which mandated that the President freeze the assets of “any person” who “knowingly, directly or indirectly, engages in money laundering … that supports the Government of North Korea or any senior official or person acting for or on behalf of that Government.” Section 201 effectively forced the Obama administration to declare North Korea a primary money laundering concern, bar its banks from our financial system, and require banks around the world to exercise “enhanced due diligence” to prevent North Korea from accessing the financial system indirectly. Enhanced due diligence requires, as a bare minimum, complying with “Know Your Customer” rules to identify suspicious or deceptive practices, like the use of false names, fictitious addresses, patterns of suspicious transactions, or associations with known sanctions violators.

A year later, Congress passed by similarly overwhelming margins, and President Trump signed, an escalation of that pressure that requires the designation of banks that knowingly provide correspondent account services to North Korean banks, and authorizes criminal penalties for those who do so. Because Royce also foresaw the risk that such a powerful sanction could have unintended effects, he wrote humanitarian and national interest waivers into the law that would allow Treasury to avoid crashing the Bank of China. Alternatively, Treasury could find that the violations were not knowing, but lapses of due diligence warranting lesser penalties under 31 C.F.R. 1010.659, lesser special measures under section 311, civil forfeiture actions, or criminal prosecutions like those against the French bank BNP Paribas or the Chinese conglomerate ZTE.

And yes, we still have a problem with China’s banks. There is ample and recent evidence that banks around the world, and specifically in China, are “exerting insufficient scrutiny of the activities of bank representatives of [North] Korea residing in, or moving through, their territory.” The latest report of the U.N. Panel of Experts informs us that North Korean bank branches and known money launderers continue to operate on Chinese soil (para. 162, Annexes 43-44). The U.N.-sanctioned arms smuggler Glocom, which reports to the Reconnaissance General Bureau or RGB, still operates by laundering money through front companies in Hong Kong and turning it into bulk cash (para. 160, 176). Another RGB money launderer made “numerous cash withdrawals in Rome as well as Beijing, Kuala Lumpur, Moscow and Shanghai” (para. 171). The luxury goods procurers OCN and T Specialist made “repeated transfers in both euros and United States dollars” for U.N.- and U.S.-sanctioned Korea Kwangson Bank “to Chinese companies for various consumer goods, payments for foreign vessel port fees,” and other expenses (para. 185). And lest we single out China, it’s also clear that Malaysian and European banks also have considerable room to improve their due diligence and Know-Your-Customer compliance. (Indeed, Pyongyang may be making an orchestrated effort to seek refuge in the euro system.)

Lest anyone say that enforcing American laws amounts to American unilateralism, the U.N.’s sanctions closely align with, and are mutually complementary with, U.S. sanctions laws. The U.N.’s requirement for “enhanced monitoring” is broadly synonymous with “enhanced due diligence,” and the U.N. banned correspondent relationships and joint ventures with North Korean banks not long after President Obama signed the NKSPEA in February 2016. China voted for all of those resolutions.

There are already some promising signs that sanctions could work. There’s a legitimate debate about whether Kim Jong-un is negotiating from nuclear strength, financial weakness, or because he perceives political weakness in presidents Trump and Moon. In fact, all of those things could be true, even discounting how many North Korea watchers are invested in the sanctions-never-work narrative. There is no financial crisis in Pyongyang today, but I doubt that Kim Jong-un would have shifted his tactics from “offensive” to “charm” or altered his public stance on going to nuclear talks at all if he couldn’t see one coming. A recent analysis in the Financial Times quotes a South Korean expert who reads the evidence to “suggest [that] sanctions are strong enough to create a currency crisis . . . at the end of 2018 or the beginning of 2019.” It also publishes this chart, telling us that after a year of running widening trade deficits, Pyongyang has finally begun to reduce imports. That may suggest that its cash reserves are running low.

[“Starting to bite” is the new “rare glimpse.”]

With the caveat that the FT is citing “data from China,” which are always subject to manipulation, it predicts that “Pyongyang could soon face a balance of payments crisis and potentially a run on its currency.” The economist and former CIA analyst Bill Brown offers a similar assessment:

They said leader Kim Jong-un’s recent visit to Beijing was aimed at seeking sanctions relief and easing cash drainage in the reclusive regime.

“I think the February Chinese data shows Pyongyang is running short of cash, hence they have cut back sharply on their essential imports from China,” William Brown, adjunct professor at Georgetown School of Foreign Service, told The Korea Times.

“Kim’s ship is full of holes and a few patches won’t help much. I’m pretty sure that’s why Kim felt he suddenly had to go to Beijing.”

According to data from Global Trade Atlas, China’s imports from North Korea stood at $9 million in February, down 95 percent from a year ago. Its exports to the North fell by 32 percent to $103 million during the same period. [Korea Times]

Which is why it’s so frustrating to watch Mnuchin blow it—at the worst possible time.

U.S. officials alarmed by public displays of Pyongyang’s nuclear and missile technology last summer considered taking the provocative step of blacklisting two of China’s biggest banks from the U.S. financial system for doing business with North Korea, three people familiar with the matter said. [Bloomberg]

That is to say, the Secretary of the Treasury was presented with two binary options—to do nothing, or to completely destroy one or more of the world’s largest banks, which as I’ve already explained, is a false choice. If Steve Mnuchin still doesn’t know better after more than a year in office, he is unfit to serve. If he does, he is willfully failing to execute this nation’s laws.

But the idea of a U.S. ban was soon shelved, primarily because of fears that punishing lenders of that size might send shock waves through the global financial system, the people said. After conducting an economic impact analysis, officials worried about potential systemic damage and retaliatory measures from China, they explained.

Trump has started a trade war with China and has threatened a nuclear war with North Korea, and yet we’re supposed to believe that enforcing our laws and assessing civil penalties against banks that are laundering North Korea’s money is a red line that we must not cross?

The Chinese lenders that were spared, at least for now, are Agricultural Bank of China and China Construction Bank, according to the people. The reluctance to sanction them demonstrates how integral they are to the global banking systems. It also highlights the tension between hard-liners in Congress, who argue that nothing short of a “maximum pressure” campaign to isolate North Korea will derail its nuclear ambition, and some former Treasury Department officials who caution that harsh action could result in severe secondary economic and diplomatic consequences.

Let’s be clear about what Mnuchin has just done here. He has declared that the corrupt banks of a hostile foreign power will continue to enjoy unimpeded access to our financial system because they’re “too big to sanction.” He has given a preemptive grant of immunity to China’s banks to continue to break our laws, including one that President Trump signed with his own hand. Treasury has thus made a decision—undoubtedly at its very highest levels, which is why Mnuchin is responsible for it—to put a higher value on the interests of dirty Chinese bankers than the survival of 75 million Koreans, the elected representatives of the American people, and the laws they passed. China’s bankers must be gleeful. So are Kim Jong-un’s money launderers, who must be withdrawing funds with ecstatic abandon at the very moment when the President needs financial leverage the most.

Congress would be understanding if Treasury levied civil penalties without invoking the nuclear options of a total asset freeze, or a 311(b)(5) designation. In addition to its menu of enforcement options against Chinese banks that would not crash them or the global economy, Treasury could use its summons authority to make U.S. correspondent banks turn over certain information about transactions involving the major Chinese banks named in this indictment. From there, our options escalate to civil forfeiture actions, civil penalties for violating regulations excluding North Korea from the financial system (see above), criminal prosecutions similar to the recent actions against Dandong Hongxiang and major Chinese conglomerate ZTE, and lesser special measures under section 311 of the Patriot Act, such as increased record-keeping requirements.

But as it is, I expect Congress to be furious. It has demanded the enforcement of our laws to prevent Kim Jong-un from laundering money through our banks in two acts of Congress, and a series of letters to the Treasury Secretary and his predecessor:

Sen. Markey, Jan. 2016: “Mandatory UN sanctions could be imposed on non-North Korean entities, including banks, that facilitate and participate in North Korea’s efforts to evade existing trade restrictions on conventional arms, luxury goods, and nuclear and missile technologies.”

Sen. Cruz, Feb. 2016: “Lax enforcement of U.S. laws has made China complacent in policing the illicit financing of regimes like North Korea and Iran ….”

Sens. John Boozman (R-AR), Shelley Moore Capito (R-WV), Tom Cotton (R-AR), Ted Cruz (R-TX), Steve Daines (R-MT), Deb Fischer (R-NE), Johnny Isakson (R-GA), Jerry Moran (R-KS), David Perdue (R-GA), James Risch (R-ID), Jeff Sessions (R-AL), Pat Roberts (R-KS), Mike Rounds (R-SD), Marco Rubio (R-FL), Ben Sasse (R-NE), Richard Shelby (R-AL), Dan Sullivan (R-AK), Roger Wicker (R-MS), Sept. 2016:

First and foremost, you must begin to designate entities that are assisting the North Korean regime, especially those based in China — the country with which North Korea currently conducts an estimated 90% of its trade and that has historically served as Pyongyang’s largest military and diplomatic protector. 

As you know, Section 102 of P.L. 114-122 mandates, not simply authorizes, investigations against all entities, no matter where they are based, “upon receipt by the President of credible information indicating that such person has engaged” in illicit conduct outlined in the legislation.

As the Wall Street Journal wrote in an editorial on August 18, 2016: “The promise of secondary sanctions is that they can force foreign banks, trading companies and ports to choose between doing business with North Korea and doing business in dollars, which usually is an easy call…  But this only works if the U.S. exercises its power and blacklists offending institutions, as Congress required in February’s North Korea Sanctions and Policy Enhancement Act. The Obama Administration hasn’t done so even once.”

Reps. Royce & Young, Oct. 2016: “The administration has yet to impose sanctions on the array of Chinese companies and banks that, according to a recent U.N. report, continue to support the North Korean regime.”

Sens. Cruz, Tillis, Toomey, Gardner, Rubio & Perdue, Feb. 2017: “[F]reezing the assets of a handful of entities is a far cry from what is necessary: a determined, sustained, and well-resourced campaign to investigate, uncover, and sanction the complex web of similar Chinese, Middle Eastern, and other third-country companies and banks that fund Kim Jong-un’s regime, facilitate proliferation, and break sanctions….  [I]n may cases, Chinese banks, including the Bank of China, have disregarded their obligations to enforce U.N. sanctions on North Korea and have ignored their Know-Your-Customer obligations, thus facilitating North Korean proliferation.”

Reps. Yoho & Sherman, Aug. 2017: “This detailed and credible [U.N. Panel of Experts] report adds to the extensive evidence that China’s banking industry has failed to comply with its obligations under U.N. resolutions, and with U.S. sanctions and money laundering laws.”

Donald Trump’s voters elected him to “drain the swamp,” not to coddle crooked bankers and hostile powers. They wanted a president who would reassert American interests, make our government more responsive to their interests, and break the grip of foreign and special interests. What Mnuchin has done here goes in the very opposite direction. The choice to immunize China’s banks—and to leak this public grant of immunity now, at the worst possible time—cuts the knees out from under the President’s policy and his negotiating position. That is why someone must be in charge of coordinating our North Korea policy across all departments of the government. Whether that coordination comes from John Bolton, Mike Pompeo, Jeff Sessions’s prosecutors, or Donald Trump’s Twitter feed, someone must make it clear that whoever said this to Bloomberg “misspoke,” was “confused,” or will soon be returning to the private sector. Failure is not an option.

~   ~   ~

* The Weapons of Mass Destruction Proliferation Sanctions, found here.

** These are exporters, not banks, as with Chinese entities like ZTE, Dandong Hongxiang, and Minzheng International.

*** BNP Paribas also agreed to forfeit a much larger sum in lieu of prosecution, for a grand total of $8.9 billion.

~   ~   ~

Update: Related thoughts from Gordon Chang, at The Daily Beast.