Lost in all the attention paid to President Donald Trump’s threat of unleashing “fire and fury” on North Korea is his promise to bring the country to heel with tough sanctions. It hasn’t worked so far, because of Russia, China and shadowy middlemen tied to both nations.
North Korea has successfully skirted sanctions for two decades and developed a nuclear arsenal thanks to a network of Chinese middlemen, rogue Russian partners and no shortage of people willing to help, even at a steadily escalating price.
Trump’s threat makes him the fourth consecutive U.S. president to promise that he’d change North Korea’s behavior by blocking its access to the global financial system. But China and Russia have both long eased any pain to North Korea caused by the economic clampdown through a series of investments that have allowed Pyongyang to direct its cash into weapons programs.
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Russia, for instance, enjoys a long-term lease at a terminal in North Korea’s relatively new port of Rajin on the Sea of Japan, and there is a new ferry service connecting the two countries. China has boosted railroad infrastructure near Dandong, its border chokepoint for trade with North Korea. Plus, both Russia and China give North Korea a trading lifeline.
China’s General Administration of Customs said in April that trade with North Korea had expanded more than 37 percent in the first three months of 2017, despite tighter global sanctions. Over the weekend, China pledged to halt imports of iron, lead and coal from North Korea. Russia appears to be backfilling what China pulls back, especially North Korean coal, according to reports citing the Russian state-owned news site Sputnik.
Indeed, despite years of sanctions, Pyongyang shows no sign of a financial squeeze.
North Korea manages to skirt financial sanctions mostly through the use of Chinese nationals who lend their name and businesses for transactions in exchange for a handsome payoff, according to spies and defectors.
The illicit money washes through banks in Hong Kong, Singapore, Malaysia and sometimes even the United States, and eventually back to China, where North Korean officials can access it.
“It’s like whack-a-mole. Every time there is a set of (sanction) designations that come out, a new company or front person emerges as a primary interlocutor,” said Scott Snyder, director of the U.S.-Korea policy program at the Council on Foreign Relations. “If you had 100 percent Chinese (sanctions) enforcement, won’t there always be a Chinese partner willing to be paid for the growing risk as a supplier for what North Korea needs?”
The latest round of UN sanctions, passed unanimously by the Security Council, is unlikely to have any greater effect. While China said over the weekend it would ban imports of North Korean coal, lead and iron, tougher sanctions are only likely to raise the premium demanded by middlemen, but they are unlikely to tie North Korea’s hands.
A recent report by the policy-analysis group C4ADS said sanctions have failed in part because “the system of North Korean financing and procurement is practically invisible, making it nearly impossible to expose.”
The group suggested a solution has been hiding in plain sight — a more targeted effort, focused on identifying middlemen of Chinese and other nationalities who are key cogs in a limited pipeline.
It’s a view shared by Marcus Noland, who advises presidents and policymakers on North Korea. He thinks the grip has been slowly tightening on North Korea in recent years but not because of sanctions per se.
“Because of North Korea’s size and culture — and isolation — it appears that North Korea has a relatively thin bench of people who are capable of operating an international sanctions-evasion network,” said Noland, executive vice president of the Peterson Institute for International Economics.
One example: A North Korean-born man, Kim Il Song who had Chinese residency was nabbed in a sting operation, traveling to Hawaii to buy military-grade night-vision goggles for Pyongyang. He was sentenced in February 2016 to three years in U.S. prison. A UN report earlier this year documented how a small number of front companies in Singapore allegedly helped North Korea conduct arms sales.
In both cases, there were a relatively small number of people involved in the transactions.
“The number of those Chinese intermediaries is not that big,” Noland said.
Still, it is next to impossible to plug all the holes in the dike.
Take North Korea’s $100 million arms deal with a company in the United Arab Emirates. UAE emails leaked in 2015 and reported then by The New York Times show that the Persian Gulf nation’s ambassador was called into the State Department for a dressing down and was warned that the arms purchases were funding North Korea’s nuclear program.
UAE’s neighborhood rival Qatar was found to have about 1,000 North Korean nationals working there in 2015, down from an earlier 3,000 or so, the Washington Post reported in July. Their wages help fund the North Korean regime.
The real way to pressure North Korea is to attack the banks, particularly in China and to a lesser extent Russia. The banks do business with the middlemen who serve as proxies for Pyongyang’s trade and finance activities outside its borders.
“Somehow they have to go after the banks,” said Anthony Ruggiero, who worked in both the State and Treasury departments combating the illicit finance that helps rogue nations seeking nuclear materials. He pointed to similar — and effective — U.S. efforts to isolate Iran that resulted in $15 billion in fines levied on European banks that helped it skirt sanctions from 2012 to 2015.
But that could deal a direct blow to the U.S. economy. China would likely respond in kind.
“That is obviously fraught with possibilities of harming the U.S.-China trade relations, and having an impact on both economies,” said Ruggiero, now a senior fellow at the Foundation for Defense of Democracies.
The Trump administration took steps in that direction on June 29 when Treasury’s Financial Crimes Enforcement Network announced a proposed rule that would, for practical purposes, shut out China’s Bank of Dandong from the global financial system. The Chinese bank and government have until the end of this month to comment.
Treasury invoked a controversial portion of the USA Patriot Act called Section 311, which allows the accused to know very little about what information the government has on them and gives them very little room to challenge the findings.
Section 311 is a blunt tool, lifted only through compliance. The George W. Bush administration used it against 13 financial institutions, most famously a Macau bank — Banco Delta Asia — accused of helping the North Korean regime. The Obama administration used the provision seven times.
By blocking any U.S. bank or its partners from having any banking relationship with the cited financial institution, Treasury effectively turns them into in a pariah lender. European and Asian banks steer clear, not wanting the penalties and reputational hit.
In many respects, going after Bank of Dandong makes sense: It is located in a border city where about two-thirds of China’s trade with North Korea occurs.
But Bank of Dandong is a small lender without broad global ties. Going after a bigger Chinese bank that is globally integrated would send a much more serious message.
Hitting larger Chinese banks may have unintended consequences, Noland warned. It might isolate small-time local politicians or Chinese criminal groups, or it could touch higher.
“If somehow we hit somebody like (President) Xi Jinping’s nephew … things could get a lot more messy,” he said. “How far are we willing to push the Chinese on secondary sanctions to elicit cooperation?”
On June 1, the Treasury Department went after some of these secondary targets, hitting alongside North Korean front companies a Russian oil company run by Eduard Khudainatov, who ran Russia’s oil giant Rosneft until President Vladimir Putin replaced him in 2012 with a close associate.
For two decades, the isolated family-run dictatorship in North Korea has survived through illicit activities, including weapon sales, trafficking in ivory, cigarette smuggling and even allegedly making perfect counterfeits of U.S. and Chinese currency.
North Korea relies on offshore companies to help hide its financial transactions. That was clear from the Panama Papers published last year by McClatchy and its partners at the International Consortium of Investigative Journalists.
Among the findings was that a British banker, Nigel Cowie, established an offshore financial vehicle called DCB Finance to allow North Korea to sell arms to fund its nuclear program. North Korean-linked offshore front companies often also used the names of poor people in Asia to populate their boards of directors.
A new McClatchy review of the offshore documents finds that the Panamanian law firm Mossack Fonseca actively sought clients in Chinese border city of Dandong — even as pressure on North Korea mounted and it was labeled by President Bush as a member of the “axis of evil.”
Internal documents from the law firm show that representatives from its Hong Kong office courted the head of a company called Huashang Overseas Investment Co. Ltd. in late September 2007.
“We will keep in touch with them,” read one message from Austin Zhang, a Hong Kong employee of Mossack Fonseca, back to headquarters about the Dandong-based firm.
Huashang Overseas openly boasts on the internet of being an access point for North Korea.
“Our company plays an important role in the area of North Korea investment,” it said in a Jan. 5, 2015, posting on a business-promotion website. “We are specialized in North Korea Business and we can help anyone or any company who has the ability and idea to do business in North Korea.”