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Moon Jae-in’s unilateral sanctions violations are decoupling South Korea’s alliance with the U.S. (updated)

A FEW JOURNALISTS HAVE (if belated and partially) figured out that Moon Jae-in’s promises to Kim Jong-un would violate a series of U.N. Security Council sanctions. The latest example of this is Moon’s promise to start rebuilding a railroad connection to Kaesong and points north before the year ends. Let’s go to the resolutions to see what provisions this most clearly offends, starting with UNSCR 2321 …

“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 2375 …

“18. Decides that States shall prohibit, by their nationals or in their territories, the opening, maintenance, and operation of all joint ventures or cooperative entities, new and existing, with DPRK entities or individuals, whether or not acting for or on behalf of the government of the DPRK, unless such joint ventures or cooperative entities, in particular those that are non-commercial, public utility infrastructure projects not generating profit, have been approved by the Committee in advance on a case-by-case basis ….

… and UNSCR 2397.

“7. Decides that all Member States shall prohibit the direct or indirect supply, sale or transfer to the DPRK, through their territories or by their nationals, or using their flag vessels, aircraft, pipelines, rail lines, or vehicles and whether or not originating in their territories, of all industrial machinery (HS codes 84 and 85), transportation vehicles (HS codes 86 through 89), and iron, steel, and other metals (HS codes 72 through 83) ….

Other provisions may also be implicated, including UNSCR 1718, paragraph 8(d)’s requirement that states “ensure” that money they send north isn’t used for WMD programs. None of which stopped Seoul from tacitly violating a U.N. ban on importing North Korean coal, and continuing to do so for ten months, even after being warned by the U.S. government.

This doesn’t even begin to map the minefield of U.S. laws that South Korean banks and their customers would violate by processing transactions through the United States (ie., in U.S. dollars) for new investment in North Korea, or to invest in North Korean industries (transportation, mining, manufacturing) that are under sectoral sanctions. Or engage in any transaction with a state that’s listed as a sponsor of terrorism without a license from the Treasury Department. Or if, God forbid, they so much as indirectly provide correspondent account services to a North Korean bank (for which several Latvian banks are reportedly under investigation), whether knowingly or by failing to conduct “enhanced due diligence.” Or deal, even indirectly, with a North Korean bank or entity that’s blocked by any of the five executive orders that may apply to them. The number of such blocked entities has now risen . Corporate officers can face prison time for knowingly dealing with any of them (just put “Korea bank” in the search window). I could go on, but I’d prefer to leave a few more of those mines undisturbed.

Seoul’s denials that it is violating sanctions have been spurious. They consist of general denials that neither cite nor parse the specific provisions it’s violating.

Will the money associated with these violations flow through the U.S. financial system? I believe so. Pyongyang has historically preferred dollars and has been dollarizing its economy to stabilize it. The Renminbi certainly isn’t a particularly good place to preserve one’s wealth these days. In which case, the U.S. has the legal jurisdiction to block the transactions, forfeit the funds involved in them, and indict parties and co-conspirators. The real question is whether the Trump administration is prepared to sit quietly and let Seoul use the U.S. financial system to undermine its policy. Publicly, the administration holds the line that North Korea must disarm to get sanctions relief. I don’t believe that the Treasury Department and the State Department would be warning South Koreans against breaking sanctions if they didn’t intend to follow through. As I’ve said before, if South Korea doesn’t abide by U.N. sanctions, why should China, Malaysia, Angola, or Turkey? For its entire existence, Seoul’s security policy has relied on the backing of the United Nations and the United States. Seoul can’t have it both ways. Availing itself of the benefits of alliances, coalitions, and communities of nations also obligates it to follow the rules of those it has allied itself with.

My best guess is that the North Koreans–whose public statements seem to prioritize sanctions relief over every other demand–handed Moon or Im Jong-seok a list of demands, knowing full well that they would violate sanctions and put a wedge into the alliance. Moon, either not having bothered to read the sanctions, not caring, or assuming that his influence machine in Washington would cover for him, probably agreed without hesitation. And so, by either willfully or negligently violating U.N. resolutions and U.S. law, Seoul undermines U.S. policy and has forced a confrontation with the Trump administration. Trump has been characteristically tactless in responding to this challenge, but I prefer his tactlessness to weakness in the face of an ally’s betrayal.

Reports that Secretary Pompeo had harsh words for South Korea’s Foreign Minister over a North-South military agreement that had alliance implications reinforce growing perceptions that South Korea is breaking sanctions, acting unilaterally, and decoupling itself from the alliance. Seoul and Washington clearly see their own interests in North Korea very differently, and have chosen to follow divergent rails.

This is what it looks like when an alliance decouples, and Moon deserves far more blame for this than Trump does. If the U.S. owes South Korean voters, bankers, and politicians anything, it is to be clear about the consequences that must follow. It’s hard to escape the conclusion that some early, pointed warnings from Washington might have prevented us from reaching the crisis in the alliance that’s just about to erupt.

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Update: The Joongang Ilbo, which was once a center-right paper but has recently leaned left, has published a Korean-language interview with some South Korean bankers who participated in the call with the Treasury Department officials. Although the Moon administration has tried to paper over any differences on sanctions compliance, this report says that Treasury contacted the New York branches of seven South Korean banks, including Shinhan, Nonghyup, Han, and Woori Bank, which has historically serviced the Kaesong Industrial Complex. The Treasury officials asked to speak to the banks’ compliance officers in Seoul, and seem to have gotten their undivided attention.

For those not familiar with the banking industry, the compliance officer is the person responsible for the bank’s compliance with record-keeping and due diligence rules to prevent money laundering and sanctions violations, to report suspicious activity (like structuring or transactions without an apparent legitimate business purpose), and to keep records required by various regulations in Title 12 and Title 31 of the Code of Federal Regulations. When you read about the Treasury Department penalizing a bank for violations of anti-money laundering regulations, it’s always the compliance officer they call first.

Apparently, the South Korean banks were so clueless about compliance and that sanctions minefield I briefly skimmed above, that they were publicizing their plans to invest in North Korea. Seriously–do any lawyers in Korea actually read laws in English? Is this a language problem, a problem of politically motivated willful blindness, or simply my own conceit for my small part in planting those mines? But the Treasury people made it all simple by reminding the bankers that our sanctions against North Korea are still very much in force.

Evidently, the bankers got the message. One of them told the reporter that 90 percent of his bank’s foreign exchange business is in dollars, through correspondent accounts in such banks as Citi, Wells Fargo, and JP Morgan Chase (which was penalized recently for inadequate scrutiny of the transactions it cleared for foreign banks, to prevent sanctions violations). If those correspondent accounts are frozen–something that’s now a distinct possibility, thanks to section 201 of the NKSPEA and FinCEN’s implementing regulation at 31 C.F.R. 1010.659(b)(3)(iii)–the South Korean banks become sleepy neighborhood won-only banks overnight, or worse. Just ask the directors of FBME Bank or ABLV Bank, if you can find any of the directors of those liquidated institutions (I was unable to find any recent information about the Bank of Dandong). One of the bankers even mentioned the example of BNP Paribas, which was hit with a combined $8.9 billion in fines and forfeitures–an example I’ve mentioned several times here on this blog.

A banker then bewailed the fact that the Moon administration people who were pushing them into this legal minefield by financing investments in sanctioned North Korean industries don’t understand how international finance works, or the risks the banks would face by proceeding with financing those investments. That’s completely consistent with my observations. After all, if all those “human rights lawyers,” Peace Studies majors, and bomb-throwing radicals can’t be bothered to read a U.N. resolution, why should we believe they’ve familiarized themselves with U.S. banking regulations? The bankers are now telling the Blue House that they have to protect their own interests.

In a rare treat, the Joongang Ilbo’s reporter even gets the law right, which the New York Times and the Washington Post seldom do. I’d say kudos to all, except for the part where the reporter says that Undersecretary Sigal Mandelker had a “strong Jewish accent” (유대계 ì–µì–‘ì´ ì§™ì€). WTF? You mean like my Uncle Abe, or Jackie Mason? I’ve met Undersecretary Mandelker, and she most definitely does not talk like Jackie Mason, at least no more so than a Korean-American from New York would. That phrase made me smack my palm against my forehead so hard, I think my wedding ring left a mark.

So how wide is the split between Seoul and Washington now? Moon is even going around the Americans to the IMF and the French, who are politely but correctly telling him that U.N. sanctions bind everyone, and that they aren’t prepared to support sanctions relief until Pyongyang at least starts to disarm. The effect of that has been to isolate Moon, not Trump. Imagine that–the leader of an OECD nation whose policies are so blithely zany, they position Donald Trump as the defender of the international order. That’s some accomplishment. Even the Joongang Ilbo and the most liberal Pope in the history of the Catholic Church seem to think Moon should curb his enthusiasm, or his fear of whatever threat the North Koreans may have made if Moon refused to break sanctions and pay up.

That is to say, Moon Jae-in based the signature policy of his entire presidency on a blithely unilateral, go-it-alone, 우리 민족ë¼ë¦¬ vision that has now run smack into this diplomatic and legal minefield due to his own deliberate legal ignorance and diplomatic arrogance. The upshot of which is that if he drives on anyway, he may well destroy his country’s banking industry, the chaebol, the economy, and his alliance with the U.S., without even getting anything done in North Korea. That’s assuming, of course, that Moon doesn’t find some way to flatter Trump into “repeating the mistakes of the past” and lifting sanctions before Kim Jong-un disarms. That’s not what the administration is saying now, but no one can rule it out.

For now, Treasury is doing exactly what it should be doing when it warns South Korean banks about sanctions risks. But let’s not gloss over the critical point that it should have had exactly this conversation with a select group of Chinese bankers at least a decade ago. Had, say, Barack Obama done that after North Korea’s 2009 nuclear test, we’d be in a very different situation than we are now. Instead, we got eight years of fake sanctions and no policy at all, dressed up in a piece of meaningless newspeak called “strategic patience.” Treasury is right to prevent Seoul from opening another hole in the sanctions, but it still needs to close the much bigger one through China.

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Update 2: The rift is finally breaking out into the open:

The pace of the inter-Korean detente worries U.S. officials, who credit the sanctions campaign with bringing Pyongyang to the negotiating table and fear that any loosening risks undermining Washington’s leverage in disarmament talks.

“The South Koreans don’t seem to be bothered with keeping us in the loop,” said one U.S. diplomat.

U.S. diplomats were concerned that the liaison office would risk violating sanctions. Seoul says the worries are unfounded. The U.S. Treasury Department last month warned South Korean banks about the penalties for violating sanctions on North Korea.

* * *

Chun Yung-woo, a former South Korean national security adviser and his country’s one-time lead negotiator during the six-party talks, warned that loosening sanctions too quickly would remove a major incentive for Pyongyang to relinquish its nuclear arms.

“Giving up on sanctions is giving up on denuclearization,” said Mr. Chun, now chairman of the nongovernmental Korean Peninsula Future Forum in Seoul. [WSJ, Jonathan Cheng & Andrew Jeong]

See if you can read between the lines of this statement, from Ambassador Harry Harris:

“We are, of course, cognizant of the priority that President Moon Jae-in and his administration have placed on improving South-North relations,” he added. “I believe this inter-Korean dialogue must remain linked to denuclearization, and South Korea synchronized with the United States.”

* * *

“There, of course, remains a lot of work to be done,” he added, “But I believe that if the United States and South Korea continue to approach North Korea with a common voice, we can turn the commitments that were made in Pyongyang, Panmunjom and Singapore into reality.” [Chosun Ilbo]

More here. Seoul now recognizes that it needs to persuade the U.S. to support a “consensus” (ie., unanimous) vote for an exemption by the 1718 Committee.

Earlier, a U.S. State Department senior official said in a statement Monday that it expects “all member states to fully implement UN sanctions, including sectoral goods banned under UN Security Council resolutions.”

The previous day, Blue House spokesman Kim addressed reports of a rift between Seoul and Washington over the road and railway project. He underscored that “South Korea and the United States are maintaining the highest level of cooperation,” including on the railway and road issue, adding that the project is “moving along as scheduled.”

The State Department’s mention of sectoral bans on the North could indicate Washington’s concern over certain banned goods entering and leaving the country.

* * *

A government official said, “Currently, the South and U.S. are in the discussion stage, and depending on the results of the negotiations, we may or may not seek sanctions exemptions.” However, details of the agreement are not expected to be revealed. [Joongang Ilbo]

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