Kaesong is a buffalo jump for amoral politicians & unlawyered cretins

Mark Lambert, who is a “U.S. State Department official in charge of Korean affairs,” and who is also a mensch, is in South Korea this week, where he will meet with Korean officials, and also with “a group of South Korean businesspeople involved in inter-Korean economic projects.” Over the course of 15 years, this blog has followed the various get-broke-quick buffalo jumps that promoters, most of them amoral politicians who specialize in throwing away other people’s money, euphemistically call “inter-Korean projects.”

Whoever knows the history of inter-Korean projects or investments in North Korea generally, and who invests there without learning or heeding that history, proves just how much money there is out there waiting to be parted from the fools who momentarily possess it. But whereas the buffalo herds proved to be finite, the bovine herd lining up to rush over the ledge at Kaesong never exhausts itself. This was already true in 2016 when Kaesong closed down. Kaesong was almost certainly never profitable for anyone but His Porcine Majesty. Kaesong was always dependent on South Korean government subsidies and insurance–and of course, South Koreans’ easy willingness to exploit North Koreans as slaves.

But if the moral hazards of Kaesong aren’t about to change, the legal hazards have—dramatically. Thankfully, the United Nations and the U.S. Congress have both done much in the last two years to make reopening Kaesong much, much harder. The fact that the U.N. has given the U.S. an effective veto over those subsidies and insurance is only the beginning of it.

“32. Decides that all Member States shall prohibit public and private financial support from within their territories or by persons or entities subject to their jurisdiction for trade with the DPRK (including the granting of export credits, guarantees or insurance to their nationals or entities involved in such trade), except as approved in advance by the Committee on a case-by-case basis; [UNSCR 2321]

During his campaign, Moon Jae-in—it is alleged that Moon is a lawyer—promised to reopen and expand Kaesong if elected. Evidently, none of Moon’s legal genius friends at Minbyun bothered to read the U.N. resolutions preventing that before he made his promises. When a few of us cleared our throats and raised our hands, Moon’s surrogates insisted, based on a cramped analysis that was already at least three resolutions out of date, that Kaesong wouldn’t violate U.N. sanctions at all. Eventually, someone in Seoul did bother to read the resolutions and realized that apparently, yes, they would need a U.N. exemption, and they would also need the U.S. to support one. No doubt, Mr. Lambert can think of a more diplomatic response to that request than the unprintable one I have in mind.

Now that Moon’s lawyers have read the U.N. resolutions, the next thing they should read is Section 321 of the Countering America’s Adversaries Through Sanctions Act, a deadly little provision that might be the most damaging law for Pyongyang since Section 311 of the Patriot Act. CAATSA 321 applies a rebuttable presumption that any goods made with North Korean labor are made with of slave labor, and as such, are barred from entering U.S. commerce. In “the slavery capital of the world,” where slave labor is simply a regular part of life for most people, the idea of verifying labor conditions remains sadly laughable. The investors who make self-serving arguments about the liberalizing effects of “engagement” never demand, and Pyongyang never allows anyone to verify, that they provide humane working conditions or pay fair wages. I’m happy to say that our government is enforcing CAATSA 321 aggressively by putting manufacturers on notice that they must purge components and materials made with North Korean labor from their supply chains.

That excerpt comes from this excellent guidance issued by the Homeland Security Department. This week, the Treasury, State, and Homeland Security Departments issued this joint implementing guidance, and I can say on the best of authorities that it’s faithful to the drafters’ intent:

But maybe those prospective Kaesong investors are certain that their wares aren’t going into U.S. commerce. Maybe they’re certain they won’t get caught. So might they require banking services? Of course they will, silly! Historically, they used Woori Bank, which transferred the proceeds of Kaesong to Pyongyang in its currency of choice, U.S. dollars. I don’t know what bank those proceeds went to, but since 2016, nearly every last North Korean bank has been added to Treasury’s list of Specially Designated Nationals. That means that dealing with them—even indirectly—within U.S. jurisdiction carries a ten-year prison sentence. This is to say nothing of EO 13722’s ban on new investment in North Korea (ten years in prison). Or EO 13810’s sectoral sanctions on (among others) North Korea’s manufacturing industry (ditto). Or the criminal penalties that now apply to dealing with a government that’s now a listed state sponsor of terrorism (same).

And now that North Korea is also designated as a primary money laundering concern, foreign banks are required to cut off correspondent relationships with North Korean banks, and to apply enhanced due diligence to prevent dollar transactions with North Korean banks, whether they’re designated or not. Failing either obligation carries the risk of civil penalties or the potential loss of access to the financial system under Section 311 of the Patriot Act. Etcetera:

Thoughtfully enough, our embassy in Seoul also published the guidance on its website, and promises to publish it in Korean, Chinese, Russian, Spanish, and French in the near future. Speaking of China, a development that may or may not be related to section 321 of the CAATSA is a new report that North Korean workers are again streaming home from China.

China orders Dandong companies to deport approx 50,000 illegal NK workers back to #NorthKorea by 7/28. https://t.co/fCGcpmz7wJ

– John Cha (@AuthorJCha) July 25, 2018

What do all of the authorities I’ve linked in this post have in common? None of them applied to Kaesong in January 2016 when it was shut down, and most of them didn’t even exist. One other authority that did exist in 2016, and which I’ve always thought that human rights groups should take greater advantage of, is this provision in Title 19 of the Code of Federal Regulations that allows anyone to petition Customs to hold up goods suspected of being made with slave labor in warehouses on the docks before the enter U.S. commerce.

Mind you, I haven’t told you everything. After all, I’m a lawyer, I’m not your lawyer. Also, if I’d already told you everything, I couldn’t now tell you to go out and hire your own thousand-dollar-an-hour lawyer to advise you to turn back from the cliff. Maybe you’re a faceless link in a global supply chain whose end users might want to keep open the option of exporting to the world’s largest export market. Maybe you just need the access to international capital that most businesses need. Maybe you’re a corporation that’s worried about the bad publicity of using slave labor. Maybe you’re just someone with enough sense to ask yourself, “Why are they stampeding over that cliff, and should I follow them?” If you’re any of those things, the legal risk of investing in Kaesong has become prohibitive. If you’re none of those things, the odds are that your company will never be big, and will not last long. Even assuming that Moon does get his U.N. exemption—and he absolutely shouldn’t—and even if Kim Jong-un doesn’t eventually raise “taxes” and “wages”—and he absolutely will—this dual-key lockout from the U.S. economy puts a low ceiling on Kaesong’s potential.

See also: this, from the Wall Street Journal.

If Seoul restarts this massive subsidy to Pyongyang, it will be the first step toward the great looting of South Korean taxpayers that must have His Porcine Majesty salivating. It will mean the end of maximum pressure, and like the case of the Ningpo 12, it deserves to be a litmus test of whether the U.S. and South Korea continue to share common interests and values.