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Last week I commented on a Forbes piece on Coca-Cola in Pyongyang. In my review of the piece, I expressed substantial skepticism about the links of the article’s protagonist, Gabriele Schulze, to Coca Cola. I also asserted with great confidence that “every other deal that Schulze has done with the North Koreans—including some equipment financing in 2008—would now be illegal under the unambiguous sanctions order that Obama issued earlier in the year...Needless to say, a Coke investment in bottling–or even distribution–would be out of the question.”
One of our readers challenged this assessment, asking why Schulze's financing of a North Korean mining company's equipment purchases would be illegal. The reader even had the temerity to cite chapter and verse of the relevant statute, Executive Order 13570, on which we had also blogged. In particular:
"Except to the extent provided in statutes or in licenses, regulations, orders, or directives that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the date of this order, the importation into the United States, directly or indirectly, of any goods, services, or technology from North Korea is prohibited."
Touché! We stand corrected.
Well, maybe. US sanctions legislation is extraordinary complex and Treasury has been taking actions which appear to put substantial onus on American firms.
First, while it is true that such equipment financing would not appear to violate 13570, there is a technical issue of whether earning service income from North Korea would be legal under a fine-tooth-comb reading of the statute. At present there is no indication that statute is being interpreted that way. But if US companies started to do a lot of offshore financing and it were seen as violating the spirit of statute, that could change.
But two other issues are a little more significant. UN Security Council Resolution 1874 extends UN Security Council Resolution 1718 in important ways. Not only is trade in WMD and large conventional weapons systems prohibited, but so is trade in “all arms and related materiel, as well as…financial transactions,technical training, advice, services or assistance related [emphasis added] to the provision, manufacture, maintenance or use of such arms.” The US has taken a relatively permissive view of what constitutes a “related” industry, and rightly in our view. It is hard to know what firms are supporting the North Korean military given the state-socialist nature of the economy and the continuing effort on the part of North Korean authorities to conceal their illicit activities.
President Bush made sure that the United States had the authority to act on these concerns even before the first nuclear test. In June 2005, he signed Executive Order 13382 (Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters). The Executive Order allows the United States to block or “freeze” the property and assets of weapons of mass destruction (WMD) or ballistic missile proliferators and their supporters; the State Department website has a list of designated enterprises and individuals. These firms and people are denied access to the United States financial and commercial systems. United States persons, wherever located, including United States financial institutions, are required to freeze their assets and are prohibited from engaging in any transactions with them. This regulation seems written specifically to get at offshore operations.
President Obama made use of this provision in designating a number of firms that the UN sanctions committee identified in April 2009 in the wake of the missile tests; among the first batch of these firms was Tanchon Commercial Bank, Korea Ryonbong General Corporation and Korea Mining Development Corporation (KOMID). All of these—including the mining entity—would not appear to be directly engaged in the arms trade, let alone WMD. Nonetheless, all were designated.
In addition, the Department of Treasury’s Financial Crimes Enforcement Network has been hawkishly pursuing North Korea’s financial dealings. The office issued an an advisory to financial institutions in June 2009 to alert United States them to the provisions of 1718 and 1874. It warns that North Korean entities will seek to hide financial transactions through dummy companies or transactions. The circular provides a long list of particular institutions as examples, and argues that firms need to mitigate risk and assure that they are not in violation of the provisions of the UN resolutions. In our reading, the circular puts the onus of compliance on firms to a significant extent. Obviously, financial transactions are not limited to the activities of financial institutions; firms engage in lending to customers all the time. But a strict reading of this statute would not exempt such activities from due diligence.
Let me be clear: the conclusion that Schulze’s earlier transactions would now be illegal is not warranted by the evidence that we have. We are not saying that anything that Schulze did was illegal, nor that he was engaged in business with any subsequently-proscribed company; we don’t know the identity of his business partners and I am sure that he had good legal counsel. But the world has changed significantly since 2008, and the prohibition on trade and investment is by no means the limit of US sanctions. Moreover, we stand by our skepticism that a Coke deal was or is likely to transpire any time soon, regardless of what the North Koreans or Mr. Schulze might have thought or said.
