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North Korea: Witness to Transformation

The Devil in the Details: Financial Sanctions

by | March 12th, 2013 | 07:00 am
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In an earlier post, we provided a broad-brush analysis of the sanctions and noticed one particular feature that constituted a potentially large escape clause. The resolution has a “credible information” clause: activities are proscribed subject to provisos that the proscribed activities “could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by [past] resolutions.” If a member state does not want to enforce the resolution, they can claim they lack credible information. Even if provided with such information, they can claim either that it did not meet the standard of “reasonable grounds” or that it did not adequately “contribute to the DPRK’s nuclear or ballistic missile programs” to warrant control. As can easily be seen, this is a cat-and-mouse game.

Thanks to the indefatigable Josh Stanton’s One Free Korea blog, we were alerted to an interesting leak to the Chosun Ilbo that shows how the rubber of the sanctions resolution hits the Chinese road of careful crafting of language to limit the damage.  Thanks to South Korean and American financial forensics, we now appear to have credible information on accounts in Shanghai and elsewhere in China that are believed to belong to Kim Jong Un and the top regime leadership; these accounts hold hundreds of millions of dollars. Yet apparently the fate of these accounts was a major reason why the negotiations over the resolution were so prolonged, as the Chinese government refused to bring them more directly under the ambit of the resolution. In effect, China is saying that it is OK for Kim Jong Un and the regime to maintain slush funds abroad, a classic example of capital flight.

When asked whether sanctions work, we are always careful to say “it depends.” In general, they have not because of the willingness of the regime to pass on the costs to the population and for China to provide just enough resources—directly and through commercial trade—to keep the regime afloat. But we know that the financial sanctions on Banco Delta Asia in the mid-2000s clearly caught the North Korean’s attention and were one reason why—following the detour of the nuclear test of 2006—negotiations resumed and made some limited progress in 2007 before once again crashing and burning in 2008. In short, we have some pretty credible evidence that the Chinese are knowingly limiting financial sanctions that could have more marked effect on North Korean behavior.

For those interested in the details of how the resolution sidesteps these questions, the following commentary on the relevant sections of the sanctions represents a cynical legal parsing of obligations.

“11.  Decides that Member States shall, in addition to implementing their obligations pursuant to paragraphs 8 (d) and (e) of resolution 1718 (2006), prevent the provision of financial services or the transfer to, through, or from their territory, or to or by their nationals or entities organized under their laws (including branches abroad), or persons or financial institutions in their territory, of any financial or other assets or resources, including bulk cash, that could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, including by freezing any financial or other assets or resources on their territories or that hereafter come within their territories, or that are subject to their jurisdiction or that hereafter become subject to their jurisdiction, that are associated with such programmes or activities and applying enhanced monitoring to prevent all such transactions in accordance with their national authorities and legislation;”

SH. The reference at the start of this paragraph is to language in 1718 on asset freezes on “designated entities” that are “engaged in or providing support for, including through other illicit means, DPRK’s nuclear-related, other weapons of mass destruction-related and ballistic missile-related programmes, or by persons or entities acting on their behalf or at their direction….” This language tries to get at problems of evasion and calls for “enhanced monitoring” but “in accordance with their national authorities and legislation.”

“12.  Calls upon States to take appropriate measures to prohibit in their territories the opening of new branches, subsidiaries, or representative offices of DPRK banks, and also calls upon States to prohibit DPRK banks from establishing new joint ventures and from taking an ownership interest in or establishing or maintaining correspondent relationships with banks in their jurisdiction to prevent the provision of financial services if they have information that provides reasonable grounds to believe that these activities could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), and this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution;”

SH. There is a lot of ambiguity in this paragraph, but we were struck by the language of “opening of new branches…” and “new joint ventures…” This limits expansion of financial entities—subject to the “credible information” constraint—but does not go after existing ones.

“13.  Calls upon States to take appropriate measures to prohibit financial institutions within their territories or under their jurisdiction from opening representative offices or subsidiaries or banking accounts in the DPRK if they have information that provides reasonable grounds to believe that such financial services could contribute to the DPRK’s nuclear or ballistic missile programmes, and other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), and this resolution;”

SH. Note again the gerund: “opening representative offices or subsidiaries or banking accounts…”

“14.  Expresses concern that transfers to the DPRK of bulk cash may be used to evade the measures imposed in resolutions 1718 (2006), 1874 (2009), 2087 (2013), and this resolution, and clarifies that all States shall apply the measures set forth in paragraph 11 of this resolution to the transfers of cash, including through cash couriers, transiting to and from the DPRK so as to ensure such transfers of bulk cash do not contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution;”

SH. Given constraints on its banking activities and concerns about expropriation of accounts, we have long suspected that North Korea operates on a cash-and-carry basis. Stopping cash transfers for purchases of proscribed goods is virtually impossible; due diligence has to be exercised through customs at the border and is almost certainly leaky. But greater diligence could be exercised by banking institutions over large cash deposits, as is currently done in the US for any deposits over $10,000. Don’t hold your breath that China will institute such scrutiny.

“15.  Decides that all Member States shall not provide public financial support for trade with the DPRK (including the granting of export credits, guarantees or insurance to their nationals or entities involved in such trade) where such financial support could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution;”

SH. Again, if enforced this could have significant effect on North Korea trade, although we know surprisingly little about China-DPRK trade financing. We suspect, however, that at least the larger Chinese firms rely to some extent on bank financing of trade and Chinese banks are state-owned. This would appear to imply that they should not “provide public financial support for trade with the DPRK,” although you can hear the arguments that such entities are run on a purely commercial basis. Do we need to state our doubts on that score?