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North Korea: Witness to Transformation

New Sanctions Legislation: BDA on steroids

by | April 29th, 2013 | 05:51 am

The old joke about North Korea is that if it weren’t a country we’d indict it under RICO.  New sanctions legislation introduced by Rep. Ed Royce (R-Ca), chair of the Foreign Affairs Committee, and seven co-sponsors in the House, the “North Korea Sanctions Enforcement Act of 2013,”comes pretty close.

Frequently overlooked in sanctions analysis are the very different implications of sanctions executed via government bureaucracies and those driven by the commercial self-interest of private parties, i.e. the market. Chinese action toward North Korea is Exhibit A in this regard.  The Chinese Foreign Ministry in essence acts as North Korea’s lawyer within the Security Council, and then once sanctions are passed, actual implementation is handed over to the Customs Administration which displays utter disinterest.  So, for example, until the latest UN sanctions resolution, UNSCR 2094, specified a short list of luxury goods prohibited for export to North Korea, China had never published a sanctions list.  As one enterprising South Korean journalist demonstrated, such a list could not be furnished upon request to businessmen seeking to remain within the law.  The result is predictable: Chinese exports in products sanctioned in accordance with the Security Council resolution by other countries such as Japan or Australia have risen steadily.

The history of the Banco Delta Asia (BDA) case is very different, however.  After the small Macau bank was sanctioned by the US under the Patriot Act, financial flows to North Korea collapsed as Chinese commercial banks made a simple business decision: continuing doing business with North Korea and face exclusion from the world’s largest financial market, or cut ties with North Korea. They did the prudent thing.

The new legislation is fashioned from the same playbook. Its aim is to “ (1) encourage all responsible members of the international community to fully and promptly implement United Nations Security Council Resolution 2094; (2) to sanction the entities, officials, and financial institutions that facilitate proliferation, illicit activities, arms trafficking, imports of luxury goods, severe human rights abuses, cash smuggling, and censorship by the Government of North Korea; (3) to authorize the President to sanction financial institutions and jurisdictions that fail to exercise due diligence to ensure that such financial institutions and jurisdictions do not facilitate proliferation, arms trafficking, kleptocracy, and imports of luxury goods by the Government of North Korea; and (4) to deny the Government of North Korea access to the funds it uses to obtain nuclear weapons, ballistic missiles, and luxury goods instead of providing for the needs of its people.” “Serious human rights abuse” includes “genocide, slavery, kidnaping, peonage, murder, torture, and aggravated sexual abuse” regardless of jurisdiction in which the abuse occurred. “Censorship” is defined as activities that “(A) prohibit, limit, or penalize the exercise of freedom of expression or assembly by citizens of North Korea; or (B) limit access to print or broadcast media, including the facilitation or support of intentional frequency manipulation by the Government of North Korea that would jam or restrict an international signal.”  (With respect to this last provision, I wonder if Representative Royce’s staff met with Anonymous when drafting this legislation—they seem to have omitted the internet.)

On the financial front, the legislation excludes from the US market counterparties of any North Korean bank or entity designated under either the UNSC resolutions or US executive orders, including specialized financial messaging systems. North Korean banks that are not designated are subject to “enhanced due diligence” under Section 311 of the Patriot Act (and by extension, their counterparties are put on notice that they could be next, so to speak). Third country banks that enable North Korean proliferation or arms smuggling, or that fail to comply with the terms of UNSCR 2094, can also be sanctioned. Firms that have transactions with any of these sanctioned entities are required to report these transactions to the Security and Exchange Commission. Treasury is directed to “encourage” foreign governments and banks to block funds that are accumulated through misappropriation (kleptocracy). State and local governments, including their pension systems, are encouraged to divest from firms having any investment relationship with North Korea while the country is subject to sanctions. In short, it’s pretty much a total financial blockade on UN- or US-designated bad actors, with probation for other entities that transact with them.

Proceeds from penalties, sales of seized assets etc. go into a North Korea Enforcement and Humanitarian Fund to support the activities of the North Korean Human Rights Act.

The bill also resurrects the state sponsor of terrorism penalties with respect to US actions in the international financial institutions and multilateral development banks. Under the legislation, the US would not contribute to these institutions unless the institution provided assurance that the funds would not be used for assistance to North Korea, and instructs the US Executive Directors at these institutions to block any assistance to North Korea.

Shipping services constitutes a second front.  Cargo that moves through ports that consistently fail to inspect North Korean cargo, as required by Security Council resolutions, will face enhanced inspection requirements at US ports. In other words, anything that has passed through Dandong should expect delays entering the US.

Humanitarian aid, non-luxury food, agricultural inputs (fertilizer, pesticide, and farm machinery), and medical equipment and supplies are excluded from all these provisions. And the President is given broad waiver authority.

The legislation also directs the President to conduct an Information Technology Study “setting forth a detailed plan for making unrestricted, unmonitored, and inexpensive mass communications available to the people of North Korea.” The Secretary of State is instructed to deliver to the relevant Congressional committees a report on each North Korean political prison camp.

Finally, sanctions are to be suspended or terminated when “the Government of North Korea has—(A) verifiably ceased its counterfeiting of United States currency, including the surrender or destruction of specialized materials and equipment used for or particularly suitable for counterfeiting; (B) taken significant steps toward financial transparency to comply with generally accepted protocols to cease and prevent the laundering of monetary instruments; (C) taken significant steps toward verification of its compliance with United Nations Security Council Resolutions 1695, 1718, 1874, 2087, and 2094; (D) taken significant steps toward accounting for and repatriating the citizens of other countries abducted by the Government of North Korea; (E) taken significant steps toward verification of its compliance with the Joint Statement of September 19, 2005; (F) accepted and begun to abide by internationally recognized standards for the distribution and monitoring of humanitarian aid; (G) provided credible assurances that it will not support further acts of international terrorism; and (H) taken significant and verified steps to improve living conditions in its political prison camps.”

Representative Royce has yet to recruit a Senate co-sponsor, nor has the Administration weighed in on the proposal. So the likelihood of this bill being enacted into law in its current form would appear slim. Nevertheless, the proposal does establish a kind of menu or template of non-military measures that the US could bring to bear on North Korea.