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Treasury in ‘hand-to-hand financial combat’ with North Korea

Joe Mont | September 12, 2017

An overview of current efforts and near-future sanctions opportunities to counter the “urgent threat posed by North Korea” through ballistic missile testing and increasingly jingoistic rhetoric by North Korea was presented on Sept. 12 by Assistant Treasury Secretary Marshall Billingslea.

He told the House Foreign Affairs Committee that the Treasury and State departments are “engaged in a full court press on Kim Jong-Un’s revenue generation networks.”

Under the leadership of Secretary Mnuchin and Under Secretary Mandelker, Treasury has developed and is actively implementing a campaign “designed to impose maximum pressure on North Korea’s finances and economy,” Billingslea said.    

This year alone, North Korea has conducted sixteen missile tests, including two intercontinental ballistic missile (ICBM) tests. On Aug. 28, North Korea launched a missile directly over Japan, a violation of United Nations Security Council resolutions. North Korea’s latest test of a nuclear device, conducted over the Labor Day weekend, marks an unacceptable provocation, Billingslea said. Kim Jong-Un has issued multiple threats to target American cities and territories. His recent pronouncements regarding the conduct of salvo missile launches at Guam are just one example

The international community has unanimously enacted multiple UN Security Council resolutions.  “In fact, with each provocation by North Korea’s dictator, the nations of the world have responded with steadily tightening constraints of sanctions and embargoes,” Billingslea said. “Under previous Administrations, the UN had prohibited trade in arms, luxury goods, minerals, monuments, and the maintenance of representative offices, subsidiaries or bank accounts in North Korea. While this clearly had inhibited North Korea’s quest for weapons of mass destruction, it was not enough.

On Aug. 5, members of the Trump Administration worked with the other Permanent Members of the Security Council to pass UN Security Council Resolutions 2371, striking at the core of North Korea’s revenue generation. That resolution, drafted by the U.S., embargoes all importation of North Korean coal, iron, lead and seafood. Also, it now requires nations to cap employment of North Korean citizens sent abroad as workers. 

On Sept. 11, the UN passed Resolution 2375, targeting North Korea’s ability to export textiles, further restricting it ability to acquire revenue from overseas laborers, cutting off over 55 percent of refined petroleum products going to the country, and fully banning all joint ventures.

“The fact is, however, that North Korea has been living under UN sanctions for over a decade, and nevertheless has made significant progress toward its goal of building a nuclear-tipped ICBM,” Billingslea said.

“As both the UN and the U.S. sanctions regimes expand in response to Kim Jong-Un’s reckless behavior, so too does the depth and breadth of North Korea’s sanctions evasion efforts,” he added. “Because of uneven, and sometimes nonexistent, international implementation, North Korea shrugs off the practical impact of many restrictions, and is still exporting prohibited goods such as weapons, minerals, and statues. North Korea’s leadership also continues to smuggle in luxury goods while neglecting the urgent, basic needs of its citizens.”

To finance their excesses, as well as the nuclear and ballistic missile programs, the regime is evading financial restrictions by using overseas financial representatives and a web of front and shell companies.

“North Korea has proven adept at using the interconnected global financial system to its advantage and employing deceptive financial practices to cover its tracks,” Billingslea said. “North Korea is at times very sophisticated in how it sets up financial intermediaries. But in some countries where the will to fully implement and enforce sanctions has been lacking, it can often be brazen in how it accesses financial networks.”

Using all information available to the U.S. government, the Treasury Department says it is mapping out North Korea’s financial and revenue-generating mechanisms and working to cut off Kim Jong-Un’s ability to both raise and move money through the international financial system. U.S. agencies routinely engage with partner nations to conduct detailed forensic investigation and analysis to target North Korean financial networks where they exist.

For many years, coal has been the center of gravity for North Korea’s revenue generation, the Treasury Department says. It estimates that prior to the latest UN Security Council resolutions, coal shipments brought in $1 billion in revenue annually for the regime. Prior to the latest UNSCR, North Korea made another estimated $500 million annually from iron, lead, and seafood. 

In the past, an important source of funding was the export of weapons and missile technology, but now North Korea acquires revenue from exporting commodities, Billingslea explained. “That is why the Aug. 5 UNSCR is important: it prohibits UN Member States from importing any of these items from North Korea.

On Aug. 22, U.S. agencies “struck at the heart of North Korea’s illegal coal trade with China” and designated 16 individuals and entities, including three Chinese companies that are among the largest importers of North Korean coal,” Billingslea said. “We estimate that collectively these companies were responsible for importing nearly half a billion dollars’ worth of North Korean coal between 2013 and 2016.”

“On top of that, we know that some of these companies were also buying luxury items and sending an array of products back to the North Korean regime,” he added. 

The actions that day “sent two clear messages,” he said. To North Korea: “we intend to deny the regime its last remaining sources of revenue, unless and until it reverses course and denuclearizes.” The second message was to China: “we are capable of tracking North Korea’s trade in banned goods, such as coal, despite elaborate evasion schemes, and we will act even if the Chinese government will not.”

On June 1 of this year, the trump Administration targeted a different type of North Korean revenue: labor. It designated three individuals and six entities, including the Korea Computer Center (KCC), a state-run IT research and development center that was operating in Germany, China, Syria, India, and the Middle East. 

Using overseas North Korean laborers, KCC was earning foreign currency for North Korea’s Munitions Industry Department, which is responsible for overseeing the ballistic missile program. 

In addition to these sanctions, behind the scenes, both we and the State Department have “aggressively engaged dozens of countries where North Korean workers were employed, often by so-called construction companies,” Billingslea said. “I am pleased that in many cases, our efforts have led to the scaling back or outright expulsion of these workers, yet another financial blow to the regime.”

“We have singled out 37 specific entities involved in the most lucrative types of trade remaining to the regime, such as coal, iron, and labor, he added. “These are just the companies and people that we have decided to designate publicly. Other parts of the network we have chosen to disrupt through non-public measures, working with friends and allies. North Korea will certainly continue to morph its procurement and sales networks in response to our actions, and we will be relentless in our pursuit.”

As part of North Korea’s efforts to acquire revenue, the regime uses shipping networks to import and export goods, the Treasury Department says. It employs deceptive practices to conceal the true origin of these goods. Pyongyang has been found to routinely falsify a vessel’s identity and documentation, complicating the ability of governments to determine if a vessel docking in their ports is linked to North Korea.

“We are actively increasing our understanding of North Korea’s shipping networks, and we will expose individuals and companies that are providing insurance, maintenance, or other services to North Korean vessels,” Billingslea said.   

In June, the Treasury Department designated Dalian Global Unity, a Chinese company that was reported to transport 700,000 tons of freight annually between China and North Korea. It was also involved in smuggling luxury goods, with middlemen from the company giving specific instructions about how to evade the UN-mandated luxury goods ban. 

“As we constrain North Korea’s ability to generate revenue, we continue to disrupt the regime’s attempts to access the U.S. and international financial systems,” Billingslea testified.

North Korea seeks to use the funds it earns abroad to pay its bills and purchase goods. Because of the robust international sanctions regime in place, however, it is difficult for North Korean individuals and entities to do business in their true names. Representatives abroad who work on behalf of UN- and U.S.-designated North Korean banks and trading companies are helping to conceal their overseas footprint.

Treasury is also closely coordinating with the Department of Justice to target North Korean networks transferring money through the U.S. financial system.  In June and August, they designated a Russian network selling more than $1 million of petroleum to North Korea. The Justice Department also issued a civil forfeiture complaints to seize nearly $7 million held by U.S. banks, belonging to those entities and individuals.

To maintain pressure on North Korea, the U.S. and its allies are working through the Financial Action Task Force to ensure that countries have the regulatory framework in place to detect and freeze assets linked to the nation.

“Treasury is engaged, on a daily basis, in ‘hand-to-hand’ financial combat with North Korea’s illicit networks,” Billingslea said. “We will target North Korea’s economic activities and sanctions evasion schemes regardless of where they occur. We are approaching the problem strategically, but given the urgency of the threat, we will continue to apply maximum pressure on North Korea, and on those countries where the DPRK operates, at every turn.”