Feds unseal 14-count indictment against 33 agents of sanctioned North Korean bank

The U.S. Attorney’s office for the District of Columbia has done it again. Today, its prosecutors unsealed indictments against 28 North Korean and 5 Chinese representatives of North Korea’s Foreign Trade Bank (FTB) who are or were posted in China, Russia, Libya, Thailand, Kuwait, and Austria. The Treasury Department’s Office of Foreign Asset Control (OFAC) designated the FTB for proliferation financing in 2013. The North Korea Sanctions Regulations later put additional restrictions on dealings with the North Korean financial industry.

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The specific charges include:

– Conspiracy. When a defendant forms an agreement with another person to commit an offense and performs an overt act toward completion of the offense, he can be convicted of conspiracy even if the didn’t complete the predicate offense. In fact, one rarely sees an indictment without a conspiracy count. The feds have charged the 33 defendants with conspiring to violate sanctions regulations, commit money laundering, and obtain financial services through the U.S. financial system by evading Treasury and Federal Reserve regulations.

– Violations of the North Korea Sanctions Regulations, Violations of the Weapons of Mass Destruction Proliferation Sanctions Regulations. Any knowing transaction in FTB property or interests in property after March 11, 2013 violated the WMD sanctions regulations. And for those who fret about Pyongyang slipping free of the power of the dollar, starting on page 17, one sees numerous examples of wire transfers from a Point A in China to a Point B that’s also in China, but which still had to clear a correspondent bank in the United States.

– Bank Fraud. Because North Korea is barred from the financial system under the Patriot Act, FTB representatives defrauded banks by cooking up lies to conceal their affiliations with the FTB to obtain financial services.

– International money laundering under 18 USC 1956(a)(2)(A), money laundering conspiracy under 18 USC 1956(h). The wire transfers came from places outside the United States through banks in the United States, and then to other places outside the United States, including China, Russia, Libya, Kuwait, Thailand, and Austria. Lying to bankers about due diligence queries and Know-Your-Customer rules to sneak money through the U.S. financial system is classic money laundering.

– Criminal and civil forfeiture counts. Because criminal forfeiture is only a possibility after the federal government arrests, tries, and convicts a person, the feds typically will only charge 18 USC 982, the criminal forfeiture statute, if they think they might be able to extradite someone. They did that here. By comparison, most of these cases were strictly civil forfeiture, under 18 USC 981. The indictment doesn’t refer to arrests or tell us how much money the feds actually caught. If there were arrests or extraditions in the making, the FBI would announce that, and I haven’t see a press release from them. If I do, I’ll update this post after work. (Update: The FBI made no such announcement. It’s possible the feds are planning to extradite someone and keeping it quiet. It’s more likely they charged the forfeitures under both the criminal and civil statutes in the alternative, which is a smart charging strategy in case Pyongyang is foolish enough to send one of these 33 to a place where they’re subject to extradition.) If the defendants are beyond the reach of extradition and jurisdiction, civil forfeiture is the only real consequence the feds can apply to the FTB and its agents. That’s probably sufficient to serve the purpose if the feds were able to seize a significant amount of money.

What does the timing say about U.S. policy, South Korean policy, or the election? Probably (and hopefully) nothing. Criminal cases can take years of investigation to develop, grand juries are impaneled for months or years before they return a True Bill, and the feds can spend weeks editing and vetting an indictment in a high-profile case before they finally unseal it. This indictment alleges overt acts going back to 2013.

No, but does this mean a change in the administration’s policy? It shouldn’t. Prosecutors are supposed to pursue crimes where they can prove them, without regard to the policy whims of the executive branch. At least, that’s how they’re supposed to work. That’s another reason why we put forfeiture provisions into the law–to allow the Justice Department a greater share of the enforcement authority in case North Koreans bamboozled President Hillary Clinton into hobbling the Treasury Department’s enforcement of the laws. And by all indications, that drafting strategy is paying off now.

One policy opinion I can state with confidence is that the interests and policies of the United States and South Korea continue to diverge, because prosecutors will probably continue to enforce these laws regardless of who wins the next presidential election in either Seoul or Washington. It’s mostly Donald Trump’s fault that our military alliance with South Korea is decaying, but when it comes to sanctions, diplomacy, and every other non-military aspect of our North Korea policy, Seoul and Washington are frenemies at best, and that’s almost entirely Moon Jae-in’s fault. But you can sleep soundly in the knowledge that the alliance between the Korea Foundation and our think tanks remains unshakeable and sealed in blood. Katchi gapshida! (Update: Here’s hoping that South Korean banks will be more reluctant than ever to handle any financial transactions involving North Korea, no matter how much Moon Chung-in or Im Jong-seok might prefer otherwise.)

Is it finally maximum pressure? No. As I’ve said all along, it will be maximum pressure when a Chinese bank gets hit with a nine-digit civil penalty or a serious indictment for violating North Korea sanctions. That remains a distinct possibility for at least three major Chinese banks, but the records in those cases are still sealed and all we know is that they were held in contempt, appealed, and lost, and that the banks’ appellate lawyers withdrew from representing them late last year. What makes pressure maximum isn’t that you sanction or designate actors in the target country itself. What makes pressure maximum is that you attach so much legal risk to dealing with the target government that third-country banks and businesses avoid it. OFAC’s penalty history tells us that both the Obama and Trump administrations applied maximum pressure to Iran because both administration were, at different points, serious about raising very high legal risks against Iran’s enablers. The penalty history against North Korea’s enablers is more than zero but less than Cuba and way less than Iran. Today’s action (along with other recent OFAC actions) will help sustain our pressure at a moderate level, but will not raise it to maximum.

So will this do anything? It could, in several ways. First, it outs the closeness of sanctioned North Korean entities to Chinese nationals, further undercutting China’s denials that it’s deliberately helping Pyongyang violate the same sanctions it voted for at the U.N., and also undercutting Steve Mnuchin’s weak approach to China’s violations. We also see additional evidence in the indictment that the Chinese government–almost certainly among the world’s most controlling when it comes to the presence of foreign nationals on its soil–allowed sanctioned North Korean banks to operate in Shenyang, Zhuhai, Dandong, and Beijing. But of course, the U.N. Panel of Experts has been telling us that for years. Washington Post reporter Gary Shih thinks that a letter from Senators Van Hollen and Toomey, calling for sanctions on Chinese banks to punish Beijing for Hong Kong dramatically raises the political pressure on Trump to do that. But if you’ve been paying close attention to North Korea policy, Van Hollen, Toomey, and dozens of other members have already called for both the Obama and Trump administrations to penalize Chinese banks over North Korea sanctions. I’m confident enough that Congress will eventually act again that I’ve already drafted model legislation.

The second way depends on how much money will be frozen in the defendants’ accounts. (Update: $63,511,387.85 is a very good haul. It might be more than the combined total of USAO DC’s asset forfeiture against North Korean targets since it went to work in 2017. That’s a big enough amount to have a significant ripple effect in the banking industry. By comparison, the Banco Delta Asia action only caught $25 million, and that ripple almost capsized Kim Jong-il. In addition, if any of the defendants are now scurrying and trying to move additional amounts, Treasury or DOJ can also seize that money or file a superseding indictment.) The indictment also reveals that in 2015, banks blocked more than $500,000 in FTB wire transfers that we’re only learning about now. The indictment also references larger payments that the correspondent banks cleared.

Third, as with the Banco Delta case, the amount of money seized or blocked tends to understate the impact of an enforcement action. As with the naming of these other North Korean agents, the naming and indictment of these 33 FTB agents will cause the financial system to exclude them, and to freeze and close their accounts. A few of the defendants are FTB bigwigs in Pyongyang whose names were already associated with it. Others operated previously known FTB fronts, such as Mingzheng International Trading. Yet others–some of them Chinese nationals–operated clandestine branches under fronts or fictitious names like Sumer International Group and Headsoon Trading. One Chinese national named Jin Yonghuan ran the FTB’s covert branch in Libya. By now, their passport numbers are already in the software banks use to stay compliant with Treasury’s Know-Your-Customer regulations.

The designation of specific agents can be a game of whack-a-mole, but we’ve whacked a lot of moles today. The indictment notes that the FTB has about 300 employees in its various branches and subsidiaries; today, prosecutors indicted more than 10 percent of that number. Pyongyang can easily register new fronts in Hong Kong, but it spent years vetting, grooming, training, and embedding the people who laundered money through them, and those people have spent years building contacts and learning tricks. See Paragraph 37. Many of these people will now move to China, but their effectiveness and portability to places like Singapore, Indonesia, Malaysia, and the Gulf states will be very limited. Any of these 33 people could be vulnerable to extradition in those places. Furthermore, the transaction chronologies of some of those FTB branches abroad start to trail off starting in 2017. That may mean that the member state governments have already closed those branches.

Fourth, if the disruption of the network means that other agents can’t make their loyalty payments, they become easier marks for U.S. intelligence officers, and might even be willing to bring their phones or computers with them. Now that South Korea no longer welcomes defectors with open arms, our intelligence agencies have lost both an ally and a competitor. And if today’s action leads to more intelligence windfalls or defections that disrupt the networks even more, the greater “centralized, limited, and vulnerable” network could enter a death spiral.

Fifth, as paragraph 3 notes, the functions these agents performed included “facilitating credit loans, making investments, regulating the use of foreign currency, setting the exchange rate for the North Korean Won, negotiating with foreign banks, facilitating foreign banking for North Koreans, [and] buying and selling foreign currency.” All of these activities prop up the value of North Korea’s currency, maintain the state’s access to foreign exchange, and lengthen the state’s financial life expectancy.

Sixth, this could mean more bad news for Huawei, which is already under indictment in the Eastern District of New York. The indictment references illegal transactions between an FTB front and “Panda International Information,” which was later added to the Commerce Department entity list for sanctions violations. The same company’s name came up in Ellen Nakashima’s reporting for The Washington Post, which revealed that Panda and another company called Dandong Kehua Economic and Trade Company helped Huawei assist the North Korean government with the creation of its censored cell phone network. Another tantalizing reference is to “Chinese Telecommunication Company 2 handsets” that mentions possible export control violations. (Under DOJ policy, indictments don’t usually name unindicted parties, but Panda and Dandong Kehua are named here without being indicted. Panda is not on the SDN List; Dandong Kehua is. The indictment does not mention Huawei by name.) As with China’s banks, China’s megaconglomerates must be disabused of the idea that they’re too big to sanction for enabling Pyongyang.

There are other people who may also have reason to be concerned, including “a North Korean based electronics and telecommunications company”–a phrase that matches the general description of Glocom. The indictment charges transactions that were the subject of previous civil forfeiture suits involving Velmur, Dandong Zhicheng, and Dandong. In some regards, this prosecution seems to be a progression toward the next stage in the government’s enforcement strategy, but obviously, the prosecutors didn’t charge any of those parties this time–either because they don’t think they have the evidence to prove their guilt beyond a reasonable doubt, or because they don’t think it will be possible to arrest them. I’d also love to know the identity of the “Swiss businessman” who told an FTB official how to create falsified documents, but I’ll keep my guess to myself.

A reminder that an indictment only means that 12 grand jurors (out of at least 16, and not more than 23) concurred that prosecutors had presented evidence giving them probable cause to believe that crimes were committed, and that the 33 defendants committed them. An indictment says little about people who are named in the indictment incidentally, and nothing at all about people I might be speculating about.

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Update: The NYT adds up the laundered transactions and reaches a grand total of $2.5 billion.

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Update 2: Quoted in The Washington Post (Spencer Hsu and Ellen Nakashima, both of them consummate, meticulous professionals) and NK News (Jacob Fromer, whose imminent departure will be a great loss to NK News).

Reading through these transaction chronologies, I’m awestruck at the amount of money that flowed through our banks for years. Oddly, there were no Treasury Department or FBI press releases today, but it’s obvious that this indictment reflects a lot of work by their investigators and intelligence analysts. They’ve long been frustrated that their work hasn’t led to strong action. I hope this indictment lifts their morale. We owe our thanks to them, and to the prosecution team—and one member of it in particular. Some, but not all, of the 33 defendants were previously listed by OFAC on the SDN List or this expanded list of agents and aliases. So while Treasury and Justice aren’t rowing to the same rhythm at the executive level, at least they’re both rowing away from the waterfall.

At the end of Hsu and Nakashima’s piece, they suggest that “Chinese Bank 4” in the indictment unsealed today may have been the source of the records implicating Mingzheng International, and that records are the same ones subpoenaed by the U.S. Attorney’s Office. Does that mean that at least one of the banks is cooperating? I want to be absolutely clear that I don’t know, I don’t want to know, and I wouldn’t tell you if I did know, but–not necessarily. The FBI or Treasury could have obtained those records by other means. That’s why these three banks are in such a complex predicament. If they’ve become targets in an investigation, no one wants to be the last target to cooperate, and no one wants to give an incomplete answer to a grand jury subpoena by holding back evidence, only to read in an indictment that the FBI already had it.

Given the choice of a bank’s full cooperation with an investigation and a bank’s demise, cooperation is easily the preferable alternative.

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Update 3: Quoted in the Wall Street Journal; edited and reprinted by Bradley Martin in the Asia Times.