For many years, common wisdom held that North Korea was one of the most heavily sanctioned countries on earth and therefore one of the most isolated. Shortly after Pyongyang’s third nuclear test, in 2013, one commentator, expressing a widespread view, asked, “Is there anything left to sanction in North Korea?”1
Only three years later, the UN Security Council showed that there was in fact much more that could be done. On March 2, the council passed Resolution 2270 in reaction to North Korea’s fourth nuclear test and subsequent satellite launch. Until now, the sanctions regime against North Korea has evolved slowly, incrementally expanding the authority of previous resolutions. By contrast, Resolution 2270 adds numerous, qualitatively different restrictions.
The resolution’s practical effect, however, may be more limited than the changes on paper. Pyongyang’s international isolation—largely self-imposed, though compounded by sanctions—has created unique trade and finance dynamics. In particular, it has cemented China as the primary trade and finance pathway for North Korea and therefore the linchpin for sanctions effectiveness. China’s decisions over the next few months will largely determine the size of the barriers to North Korean prohibited activity created by Resolution 2270.
By contrast, North Korea’s sanctions evasion skills will determine whether these barriers are surmountable. Such skills, including the creation of opaque corporate structures and the holding of assets offshore, have helped it cope with the UN sanctions regime to date and have given it a head start in overcoming any added challenges created by the new resolution.
An Evolving Framework
The trigger for UN sanctions on North Korea was the country’s first nuclear test, in October 2006. Although countries such as the United States had previously restricted interactions with North Korea by their nationals or companies, it was not politically possible to attract Chinese or Russian support for multilateral sanctions until North Korea publicly crossed the nuclear threshold. Resolution 1718, adopted on October 14, 2006, five days after North Korea’s nuclear test, contained a basic framework, built specifically to counter North Korean activity directly relevant to its nuclear and missile programs. It includes an embargo on trade in any goods or services related to nonconventional weapons or missiles; an embargo on trade in large conventional weapons systems, the revenue from which the Security Council argued would flow into the same coffers that fund Pyongyang’s nuclear and missile development; a ban on luxury goods; and a freeze on assets held outside of North Korea by listed individuals and entities violating the resolution.
That framework expanded in the same way it was born: in reaction to North Korean testing of nuclear weapons. In 2009, after Pyongyang’s second test, the arms embargo was expanded to include all conventional arms and related materiel and services,2 and a panel of experts was established to monitor implementation of the resolutions. In 2013, after the third test, the Security Council approved new provisions calling for states to refrain from providing certain financial services or establishing financial relationships with North Korea if there were reasonable grounds to believe they could contribute to prohibited activities. Among other things, the council decided that states should restrict bulk cash transfers by North Korea and inspect cargo going to or coming from the country if they could contribute to prohibited programs. It also called on states to “exercise enhanced vigilance” over North Korean diplomatic personnel, but it did not clarify what this vigilance should entail in practice.
In response to North Korea’s nuclear test on January 6, the United States drafted Resolution 2270 and presented it to China, but the resolution saw little progress for several weeks. When Beijing did show movement and propose amendments, which were fewer and less extensive than expected, bilateral negotiation of the resolution proceeded rapidly. In substantive terms, the resolution goes far beyond previous measures. Its key provisions require countries to expel all representatives of designated entities and close their offices,3 “inspect” all cargo going to and coming from North Korea, deny port access for or impound certain North Korean-controlled vessels, cease purchases from North Korea of certain minerals, limit coal and iron ore imports from the country, ban exports of airplane fuel to North Korea,4 cut off any relationships with North Korean banks outside North Korea, and forbid their financial institutions from opening new offices, subsidiaries, or accounts in North Korea.
The new resolution represents a departure from the sanctions regime’s earlier focus on restricting North Korean activity only when member states have information suggesting that the activity could contribute to prohibited programs. That focus meant the regime was designed primarily to prevent illicit arms-related activities and stop ongoing proliferation incidents. Many of the new obligations in Resolution 2270, including commodity-based sanctions on trade in rare earth minerals, demonstrate that this time the measures are partly punitive. Restrictions of this type, although they may constrain a general revenue stream for North Korea, have no direct, conclusive connection to North Korea’s weapons development or proliferation. Their purpose is instead to make clear to Pyongyang that its actions can have a wide range of consequences. South Korean President Park Geun-hye, for instance, clarified that the United Nations should make North Korea feel “bone-numbing pain” through sanctions.5
Since North Korea’s fourth nuclear test, Japan, South Korea, and the United States have solidified the substantive shift toward more general trade and finance sanctions by instituting their own new unilateral restrictions.6 Although their promotion of such a shift may have been foreseeable, the fact that notoriously sanctions-averse countries such as China and Russia consented came as a greater surprise.
Beijing and Moscow were eager to send a strong warning to Pyongyang that its actions would risk alienating even those who had given it political cover at the UN. This resolution squares that desire with their continued objection to the idea that sanctions can and should play a decisive role in resolving the nuclear dispute with North Korea. Both countries insisted on inserting major caveats and ambiguities into the text of the resolution that lighten the implementation burden. Restrictions on coal purchases from North Korea, for example, exempt transactions that are for undefined “livelihood” purposes—language that Beijing can use as cover if it wishes to do so. China’s insertion of major exemptions for commodity-based sanctions in this way suggests that it wished to buy itself leverage over North Korea that it claimed it previously did not have. In practice, it is therefore likely that China will vary its enforcement of the provisions in reaction to North Korean behavior, taking action only sporadically.
Previous rounds of sanctions against North Korea have never covered as much ground or as much paper. Yet, even the unprecedented length of the new resolution has not been enough to address all of the practical challenges with implementing member state obligations. There already are signs that implementation will be a challenge for those who wish to be compliant. Under Resolution 2270, states are required to freeze all assets of the designated North Korean shipping firm Ocean Maritime Management (OMM) Co., including by impounding its vessels, listed in an annex to the resolution. As required, the Philippines diligently impounded the MV Jin Teng.7
This action has raised numerous issues. For a few weeks, it was unclear whether Manila would have to detain the ship indefinitely. The nature of an asset freeze is such that those vessels should remain “frozen” as long as OMM is designated.8 Because few individuals realistically foresee North Korean capitulation on its nuclear and missile programs as a result of sanctions, few believe the company will ever be removed from the sanctions list. Would the Philippines incur the costs of berthing the vessel in port indefinitely? Could it sell the ship instead?
Ultimately, China insisted that the UN sanctions committee on North Korea delist four of the vessels because their ties to OMM could not be proven. This included the MV Jin Teng. Issues over reimbursement of the port berthing costs incurred during the period of detention persist. Such growing pains are unsurprising considering the speed at which the new resolution was amended in negotiations between China and the United States, and they are sure to materialize again in the near future.
A Decade of Sanctions Evasion
North Korea already has numerous tools and tactics that it will use to circumvent the new restrictions. As discussed above, the multilateral sanctions regime against North Korea has evolved relatively slowly in line with Pyongyang’s nuclear testing activities. This decade-long evolution has given the country’s overseas networks the time to hone an array of evasive tactics in three areas: corporate structures, logistics, and finance.9
Corporate structures. In terms of corporate structures, North Korea enjoys a significant presence in neighboring countries, especially China. The diaspora of ethnic Koreans in China remains actively involved in cross-border trade, and North Korea deploys countless businesspeople to neighboring countries to establish companies. To give a sense of scale, more than 300 companies in Liaoning province alone are registered formally as North Korean owned.10 Many more fronts and shells are registered by Chinese nationals or North Korean dual nationals. Although they are not listed officially as having foreign ownership, they could in fact have North Korean beneficiaries. Another approximately 1,000 companies in Liaoning have recorded official trade with North Korea in the past five years although these companies are not necessarily North Korean controlled.11
The majority of these firms list their business as “general import and export.” In almost every instance investigated by this author where a Chinese-registered company has been involved in illegal North Korean activity, the company in question also had licit business. In one recent example, the representative of a North Korean-controlled company in Liaoning was found to be trading headphones, pasta machines, solar water heaters, and nonferrous metals now banned under Resolution 2270. North Korea exploits these dynamics to make the task of detecting illegal activity comparable to finding a needle in a stack of needles.
Beyond China and Russia, North Korea does not have a substantial and loyal diaspora that it can co-opt into illegal activity. Instead, it draws on its diplomats and foreign trade representatives for its prohibited activities, having them serve as facilitators of prohibited activity. In 2015, for example, the United States accused the North Korean ambassador to Myanmar of facilitating deals for his country’s primary arms trading firm. Pyongyang also consistently deploys representatives of designated entities abroad and often embeds them in foreign companies. Representatives from North Korea’s designated OMM are known to have embedded in local firms in Singapore and Hong Kong, for example. Similarly, North Koreans operating abroad have bought or otherwise secured access to passports of convenience, further obscuring their personal links to North Korea and the links of any companies they subsequently register.12 In many circumstances, North Korea has managed to co-opt foreign nationals into registering companies and opening bank accounts overseas on its behalf. Research into North Korea’s foreign operations and recent revelations from the Panama Papers show that the country’s corporate networks commonly extend into traditional tax havens and jurisdictions with poor transparency requirements, such as the British Virgin Islands.
The result of these elaborate efforts is that, on paper, when one examines a network that facilitates North Korean trade, whether licit or illicit, there is very rarely obvious and conclusive evidence of the involvement of a North Korean national. This makes detecting the beneficial owners, rather than the on-paper owners, immensely difficult for private sector organizations and governments that wish to avoid inadvertently facilitating or otherwise participating in North Korean trade, especially illegal trade.
Trade flows. The vast majority of North Korea’s maritime, air, and overland trade flows into China as a first port of call. The bulk of the North Korean commercial shipping fleet stays in North Korea’s neighborhood, making repeated trips to and from Chinese ports.
The portion of this fleet that flies the North Korean flag is steadily decreasing. The country repeatedly carries out major campaigns to reflag its vessels, it frequently changes their corporate structure, and it involves foreign partners in vessel chartering and operations in order to further distance a ship from any North Korean connection on paper.
Once in China, goods destined for foreign countries are transshipped or re-exported and often put on vessels or other forms of transport that do not have an obvious North Korean identifier or are not North Korean controlled, including vessels of major shipping firms.
An illustrative example of this pattern is the 2009 seizure by South African authorities of North Korean conventional weapons and parts en route to the Republic of Congo. The relevant containers had been shipped from North Korea through the Chinese port of Dalian, where a North Korean-controlled company in China arranged for them to be booked aboard the CGM Musca bound for Malaysia. There they were again transshipped and loaded onto the MV Westerhever, which was chartered at the time by a subsidiary of the French firm CMA CGM.
North Korea commonly falsifies the documentation accompanying its shipments to conceal the true nature of the goods and the parties involved. It may mislabel the goods or alter the documents for a number of reasons—for example, to give the impression that the goods originated outside of North Korea. As those consignments travel, the average eye will likely not be able to immediately identify anything potentially suspicious.
The reverse of this scenario—goods going to North Korea—involves similar patterns. Investigations by the UN panel of experts on North Korea and by this author show that Pyongyang continues to procure a range of legal and illegal goods by declaring false end users in China, including Hong Kong, who are commonly part of North Korea’s wider trade networks. Products are then re-exported to or rerouted by the declared end user or other intermediaries in the transaction. This was exemplified by a recent attempt by a North Korean-linked businessman in China to procure high-tech cameras from the United Kingdom, with the intent to re-export them for North Korea’s unmanned aerial vehicle program.13
Financial flows. North Korea’s evasion activities are as sophisticated in the financial realm. In particular, North Korea is accustomed to amassing its assets offshore. It generates revenue abroad in various ways, including through illegal activity, and holds the funds in overseas accounts. Those accounts may be attached to companies with no immediate North Korean identifier or to foreign nationals co-opted by North Koreans abroad. Contrary to popular belief, North Korea continues to be able to open and maintain accounts with major global banks. North Korea’s primary construction firm operating abroad, Mansudae Overseas Projects, uses one of South Africa’s “big four” banks to conduct its Namibian transactions, for example. Its activities are insured by Old Mutual, a South African-owned financial institution on the Financial Times Stock Exchange 100 Index.14
Where North Korea manages to collect assets in offshore accounts, it uses them to process a wide variety of transactions relating to legal and illegal national business overseas. When money needs to be transferred into North Korea itself, evidence shows that one of the primary methods used is to withdraw the cash needed and carry it into the country. North Korean diplomats have been caught recently in Sri Lanka doing just that.15 In short, Pyongyang is highly accustomed to moving money through the formal financial system in support of its overseas activity in a way that masks the North Korean source or beneficiary of the funds. As with its trade documentation, the start or end of the financial paper trail visible to a bank will rarely be in North Korea.
Implications. North Korea’s sanctions evasion activity over the course of the last decade highlights the country’s head start in circumventing the stronger measures just put in place by Resolution 2270. When taken together with the already limited global presence of North Korean banks, Pyongyang’s familiarity with offshoring practices means that the bulk of the financial restrictions imposed by the new resolution, which focus on relationships with North Korean banks, will likely fail to substantially impede North Korea’s access to the formal financial system. The ability of North Korean networks to use elaborate corporate structures and the cooperation of foreign nationals to hide their beneficial ownership of companies and the bank accounts they open only add to the difficulties of getting to the heart of illicit North Korean finance.
As with the movement of funds, the country’s ability to hide evidence of North Korean involvement while its goods are in transit will continue to help it engage in the prohibited activities identified by Resolution 2270.
Chinpo Shipping Co. in Singapore is a ship chandler that has conducted its entire business with North Korean ships since its incorporation in the 1980s. Until 2013, Chinpo’s director, Tan Cheng Hoe, allowed North Korea to use his Bank of China account to process hundreds of foreign remittances totaling nearly $40 million.1 North Korea would transfer money into Tan’s account from accounts belonging to non-North Korean companies overseas. Tan would be instructed by officials from North Korea’s Ocean Maritime Management Co. to execute payments to other foreign accounts although those payments were unrelated to his own business.
When Pyongyang needed to move some of the assets in Tan’s account back into North Korea, a diplomat would withdraw up to $500,000 and carry the cash out of Singapore by hand.2 The diplomat was stopped at the border once, but subsequently released. Tan was ultimately caught and charged when North Korea used his account to pay a Panamanian firm for the Panama Canal passage of the Chong Chon Gang, which was seized while smuggling conventional weapons from Cuba to North Korea in 2013. In 2015, he was found guilty of aiding North Korean proliferation and processing remittances without a license.
2. Sangwon Yoon, Sam Kim, and Andrea Tan, “How North Korea Funnels Cash Into the Country,” Bloomberg, February 21, 2016, http://www.bloomberg.com/news/articles/2016-02-21/china-at-the-heart-of-north-korea-s-illicit-cash-flow-funnel.
The Enforcement Landscape
As mentioned above, North Korea will likely encounter few insurmountable difficulties in moving goods or funds from a foreign destination to China or vice versa. The key question is how much scrutiny North Korean cargo will encounter in its travels to and from China. Some of the new provisions in Resolution 2270 would be more acutely felt by North Korea than other provisions would be if they were systematically implemented by Beijing. Obligations to inspect cargo are foremost among them. A decision by China to undertake systematic inspections of North Korean land, air, and sea freight—an enormously burdensome endeavor—undoubtedly would punish Pyongyang by slowing bilateral trade and hamper North Korea’s ability to sell and buy illicit goods internationally.
By contrast, the value of Chinese implementation of provisions requiring that OMM ships be denied entry into foreign ports or be impounded will decline over time. North Korea almost certainly will bring the remaining 27 designated OMM ships home, keep them close, and later attempt to sell some of them, perhaps to others in the North Korean shipping network who can challenge the Security Council’s assessment that they are OMM controlled. Countries on the UN committee on North Korea sanctions, including China, should seek to pre-empt this possibility by agreeing on the criteria by which vessels are deemed to be OMM owned and thus subject to an asset freeze.
Curbing North Korea’s coal and iron exports would also be significant, as China is Pyongyang’s largest customer. As described above, however, there are notable caveats in the resolution that permit coal trade for “livelihood” purposes and for transactions unrelated to generating revenue for prohibited activities. Financial flows from general commodity sales to prohibited programs are extremely difficult to prove in practice, meaning that China will be able to continue to buy large quantities of North Korean coal and argue that it is adhering to the resolution.
Whether China will opt to systematically change its practice with respect to any of the aforementioned sanctions obligations remains to be seen. Over the last decade, it has failed to show adequate vigilance over high-risk trade with North Korea, such as consignments aboard charter flights on North Korea’s national airline, Air Koryo. It has been largely unresponsive to intelligence shared with it about ongoing prohibited activities. Furthermore, it allows offices of designated entities to remain open on its territory, permitting their representatives to go about their business and travel freely.
Many hope that the substantive leap encompassed in the text of Resolution 2270 represents a dissolution of Chinese apathy toward sanctions implementation. In the weeks since the resolution’s adoption, news reports have quoted unnamed traders and bankers as saying that China has been putting more resources into cargo screening at the border, turning away North Korean ships, and issuing directives to Chinese banks.16 Although some designated North Korean vessels appear to have been denied port access, the Chinese Ministry of Foreign Affairs has directly contradicted the claim in some media reports that it has decided to turn away all North Korean ships.17
Beijing’s other actions point to the conclusion that North Korea’s nuclear test did not instantly increase China’s appetite for robust, burdensome sanctions implementation. Most recently, Beijing reportedly infuriated Samantha Power, the U.S. ambassador to the UN, by demanding that the Security Council delist four of the 31 OMM vessels it agreed to designate only weeks before and vowing to withhold cooperation on other issues if the ships were not stricken from the sanctions list.18
Ultimately, it is unlikely that any pressure exerted by Western nations on China will succeed in convincing Beijing to implement more systematically the restrictions on North Korean trade and finance to which it has agreed. North Korea’s own behavior may be the only variable that can bring about this change of heart. Until such a development transpires, North Korea’s illicit networks will continue to use China as a commercial base and primary trade and finance pathway. Combined with Pyongyang’s prowess in evading sanctions evasion, its unfettered access to China will make it more difficult for countries in other parts of the globe to detect and inhibit North Korea’s prohibited activities. Pyongyang will be able to camouflage much of its involvement in a particular transaction behind Chinese-incorporated companies; Chinese nationals, including dual nationals; or Chinese bank accounts.
Although this may make the sanctions implementation task for countries in other parts of the globe more difficult, it does not make it impossible or unimportant. Panama searched the Chong Chon Gang, throwing a wrench into the North Korean-Cuban military relationship. Singapore prosecuted the financiers of the Chong Chon Gang shipment, shutting down an important financial pathway for OMM. Comparable actions by cooperative countries can have a similarly disruptive effect in the future on individual nodes in North Korea’s networks.
As a result, even if Chinese cooperation is not forthcoming, the dissemination of up-to-date information on North Korea’s current evasive practices and the obligations encompassed in the new resolution still must be given high priority. If these dynamics are not well understood internationally, there could be numerous ramifications. National laws could inadequately reflect UN requirements, resulting in the inability of officials to act on an ongoing incident of prohibited activity. Directives might not be given to customs officials or port operators, for example, or those that are given may be out of step with the requirements of Resolution 2270. The UN panel of experts on North Korea already has done an admirable job in improving international awareness of the sanctions regime and the tactics employed by North Korea to circumvent it, but by its own account, much more outreach is needed.
The latest UN Security Council sanctions resolution on North Korea is a significant step on paper, in terms of the removal of the narrow focus on trade that is determined to be proliferation sensitive and the type of new measures imposed—for example, restrictions on commodities that are not related to weapons. The fact that notoriously sanctions-shy countries such as China and Russia agreed to the resolution is equally noteworthy. Their acquiescence is a large warning to North Korea: its provocations risk alienating even its key partners. The design of the new provisions suggests that China wished to buy itself additional leverage over North Korea and that Beijing may now intend to vary its implementation of individual sanctions in reaction to North Korean developments.
This will be important to bear in mind as those who championed Resolution 2270 seek to measure its practical effect. Large gaps in enforcement left by Chinese or Russian inaction or variable interpretations of the resolution’s provisions will undercut not only the chances that other countries will be able to successfully detect prohibited activities and take action, but also the significance of those actions on North Korea’s broader networks, trade, and finance. As long as illicit goods and funds can cross North Korea’s borders into neighboring states, Pyongyang’s sanctions evasion techniques and networks will allow the majority of them to flow unhindered through other jurisdictions, even those cooperating with UN sanctions.
The next few months will be crucial in a number of respects. As evidenced by the discussions over the fate of the OMM vessel impounded in the Philippines, practical growing pains will continue to affect the reformed sanctions regime against North Korea. Beijing’s implementation approach also will become apparent, confirming or contradicting some of the initial “leaks” to the media about the state of Chinese action. Countries in other parts of the world will similarly be required to understand North Korea’s current tactics and implement national laws and procedures reflective of Resolution 2270. Although China may not welcome implementation assistance, countless other governments are open to it. Countries and civil society representatives with expertise should do all they can to support efforts to raise awareness about the North Korea sanctions regime.
National approaches ultimately will determine the number and size of the barriers that North Korea will have to use its sanctions evasion skills to surmount. Without active and informed participation by countries, especially those in North Korea’s neighborhood, any barriers erected will be insufficient to regularly prevent illicit activity, punish North Korea for its latest nuclear test, or change Pyongyang’s calculations concerning the desirability of its nuclear and missile programs.
1. Colum Lynch, “Is There Anything Left to Sanction in North Korea?” Foreign Policy, February 13, 2013, http://foreignpolicy.com/2013/02/13/is-there-anything-left-to-sanction-in-north-korea/.
5. Ju-min Park and Tony Munroe, “South Korea Calls for ‘Bone-Numbing’ Sanctions on North for Nuclear Test,” Reuters, January 13, 2016, http://uk.reuters.com/article/us-northkorea-nuclear-usa-congress-idUSKCN0UQ2MK20160113.
6. A few countries have chosen to go beyond Security Council resolutions and pass more-expansive measures. Japan and South Korea have newly introduced shipping sanctions forbidding vessels that have recently called in North Korea from calling in their ports. In February, U.S. President Barack Obama signed the North Korea Sanctions and Policy Enhancement Act of 2016 into law. It calls for extensive action by the Department of the Treasury to designate those assisting Pyongyang’s illicit aims, sets in motion a process for the introduction of secondary sanctions against foreign financial institutions processing North Korea-related transactions, and could lead to enhanced restrictions on trade with foreign ports deficient in their North Korean cargo screening requirements.
7. Elizabeth Shim, “Philippines Seize Second North Korea-Operated Ship,” United Press International, March 15, 2016, http://www.upi.com/Top_News/World-News/2016/03/15/Philippines-seize-second-North-Korea-operated-ship/2611458059392/.
8. In the case of Resolution 2270, the Security Council actually listed the 31 vessels it believed were controlled by the Ocean Maritime Management Co. in order to clarify the grounds for asset freezing by member states. China subsequently negotiated the delisting of four of the vessels, including one of the ships held by the Philippines, the Jin Teng, which has since been released.
12. Andrea Berger and Ching N. Fung, “Business or Pleasure? A N. Korean-Cambodian Arrested in Hawaii,” NK News, August 7, 2015, https://www.nknews.org/2015/08/business-or-pleasure-a-n-korean-cambodian-arrested-in-hawaii/.
13. UN Security Council, “Note by the President of the Security Council,” S/2016/157, February 24, 2016, pp. 33-38 (containing “Report of the Panel of Experts Established Pursuant to Resolution 1874 ”).
15. “N. Koreans Detained in Sri Lanka After Carrying Cash,” Yonhap, March 17, 2016, http://english.yonhapnews.co.kr/northkorea/2016/03/17/65/0401000000AEN20160317010500320F.html.
16. Ju-min Park et al., “Chinese Banks Freeze North Korean Accounts: South Korean Media Report,” Reuters, February 22, 2016, http://www.reuters.com/article/us-northkorea-satellite-china-banks-idUSKCN0VV09S; “China Strengthens NK Cargo Inspections: Source,” Yonhap, March 16, 2016, http://english.yonhapnews.co.kr/northkorea/2016/03/16/0401000000AEN20160316010100315.html.
17. “China Denies Reports of Entry Ban on All N. Korean Vessels,” Yonhap, March 23, 2016, http://english.yonhapnews.co.kr/news/2016/03/23/0200000000AEN20160323008200315.html.
18. Michelle Nichols, Louis Charbonneau, and James Pearson, “U.N. Lifts North Korea Sanctions on Four Ships at China’s Request,” Reuters, March 22, 2016, http://www.reuters.com/article/us-northkorea-sanctions-china-usa-exclus-idUSKCN0WN287.
Andrea Berger is deputy director of the Proliferation and Nuclear Policy Program at the Royal United Services Institute in London. She is author of the 2015 paper “Target Markets: North Korea’s Military Customers in the Sanctions Era.”