Gold: More on Sanctions Compliance and Enforcement
Last week, Marc Noland reported on the Conflict Minerals Trade Act, ultimately included as an amendment to the Dodd-Frank financial legislation. The law requires firms to submit public reports to the Security and Exchange Commission (SEC) on the sourcing and chain of custody of four potential conflict minerals: columbite-tantalite, also known as coltan; cassiterite (tin oxide); wolframite (tungsten ore) and gold. In addition to company reports, the legislation requires a certified, independent, SEC-compliant audit and authorizes penalties for violators.
In the last week, we have learned a bit more about the North Korean gold angle initially broken by Jamila Trindle at FP.com, including in a a follow-up piece by Trindle. (See also the Bloomberg and Wall Street Journal stories).
According to Claigan International, which helps firms with compliance audits, 1,277 U.S. companies reported on conflict minerals prior to the SEC deadline, and 68 listed the Central Bank of the DPRK in their filings. The Claigan site has an excellent summary of the legislation as well.
In short, a law designed to monitor imports of conflict minerals from places like the Central African Republic has ended up revealing violations of US sanctions against North Korea. Those sanctions include not only goods exported directly from the DPRK to the US but—according to a Treasury spokeswoman quoted in the second Trindle piece, also “services, and technology from North Korea that are used as components of finished products of, or substantially transformed in, a third country."
The issue is of broader substantive interest because it shows how complex it is to design sanctions regimes in the face of complex, multi-tiered supply chains. As Marc Noland speculated, firms were probably buying gold from China, which in turn had sourced from North Korea. WE checked Noland's intuition by looking at UN COMTRADE data, and it would appear that only Hong Kong and Singapore are possible sources of the leakage: there were only five importer entries reported over the last five years, all accounted for by the two city-states.
However, this is not the end of the story. It turns out that the Chinese government does not publish its gold trade statistics, but substantial volumes are probably entering the country unrecorded. Specifically, there were rumblings last year that North Korea had sold China some of its very large gold reserves—estimated as high as 2,000 tons—in 2012. The original source of this story was a Chosun Ilbo piece valuing the two-ton sale at $100 million. Rumors of more large gold sales to China resurfaced in December 2013 right around Jang Song Thaek’s ouster. While we cannot say how much gold has been traded between the two countries—and what proportion makes it onto the open market rather than the PBoC's coffers —it is a good bet that China is one of the main channels by which North Korean gold trickles into the international supply chain.
Speaking of misleading trade statistics, there is one further wrinkle to this story which also reflects a common problem we noted recently in our posts on North Korea trade: the confusion of South and North Korea. In July 2013, another compliance organization called CFSI posted spreadsheets used by companies to report the smelters in their supply chain; those spreadsheets listed the DPRK’s central bank as one such smelter, but the country code showed the central bank as South Korean.