Great New Work on Sanctions from (the Good) ISIS and C4ADS



A surprising development in sanctions enforcement is the rise of high-quality open-source reporting on North Korean trade and investment. If these activities and their enablers are identified, it generates new targets for the diplomacy of enforcement. Two new reports are exemplary of this sort of work, one by David Albright, Sarah Burkhard, Allison Lach, and Andrea Stricker at the Institute for Science and International Security (ISIS) titled Countries Involved in Violating UNSC Resolutions on North Korea; the second from C4ADS is titled The Forex Effect: US Dollars, Overseas Networks, and Illicit North Korean Finance. 

The ISIS brief is part of a larger project called the Peddling Peril Index (PPI), the title of Albright’s outstanding book on proliferation networks. The PPI ranks 200 countries, territories, and entities “according to their capabilities and demonstrated success in implementing strategic export controls.” The index comes replete with a color-coded ranking of countries on the quality of their export control regimes and the likelihood of corruption. The report identifies no fewer than 49 countries involved in sanctions violations and of four types: military-related (13); non-military related that involved facilitating front companies, financial transactions, and other business activities (18); import of sanctioned goods (19); and reflagging of ships and shipping-related violations (20). The main point of the ISIS brief is to show the accuracy of the PPI in predicting these violations. But the list actually contains a lot of surprises: Sri Lanka, Germany, France, Brazil, Mexico, Peru, Barbados. The takeaway: North Korea has and will continue to exploit jurisdictions with weak or nonexistent export and proliferation financing controls. Sanctions will remain leaky unless these countries are held to account or provided appropriate assistance, for example, through the Financial Action Task Force.

The C4ADS reports pursues Deep Throat’s injunction to follow the money. As the North Korean economy has simultaneously become more open, more dollarized and more exposed to sanctions, it has been forced to offshore key financial functions. Traditional socialist-style foreign exchange banks that historically played this role—such as the Foreign Trade Bank, Korea Kwangson Banking Corporation, and Daedong Credit Bank (DCB), a sanctioned subsidiary of Korea Daesong Bank (KDB)—have been blocked from doing so directly. Rather these institutions now work “as large-scale accounting firms, moving money held in accounts in the name of front companies to maintain the balances of their domestic North Korean customers,” including the regime itself and entities under it such as the Reconnaissance General Bureau. These financial brokers have included diversified Chinese groups such as Hongxiang, a handful of regional Chinese banks such as the Bank of Dandong, and a network of smaller middlemen and brokers who undertake the high-risk, high-return sanctions-evasion business of running front companies and offshore accounts. The report illustrates these networks with some nice examples and flow charts the include Malaysian and Hong Kong connections; the report names names.

The main argument is that the larger players in these networks such as Hongxiang or the Chinese banks are themselves vulnerable to the due diligence done on the part of the banks that provide them with financial and clearing services. Moreover, there have been significant cases of outright seizures. According to the report, “since September 2016, [the Department of Justice] has filed civil forfeiture complaints against funds held by North Korea-linked companies, including DHID, DZMM, and Mingzheng International Trading Corporation…. In the DHID forfeiture action alone, it sued to forfeit 25 bank accounts in 12 banks, including Agricultural Bank of China, China Construction Bank, and Industrial and Commercial Bank of China.” Funds placed under civil asset forfeiture from these networks total $85 million.

In his recent talk at the Atlantic Council, which I will talk about tomorrow, Secretary of State Rex Tillerson alluded to the retail nature of sanctions enforcement; it is a whack-a-mole problem. But everything we have seen over the last year suggests a decreasing space to operate these networks, in part thanks to reports such as these. We should expect continued innovation as obvious sources of foreign exchange are constrained by UNSC resolutions 2371 and 2375 and Executive Order 13810.

ISIS Enumeration of Countries Violating Sanctions Regime

Military-related sanctions violations: Angola, Cuba, Democratic Republic of the Congo, Egypt, Eritrea, Iran, Mozambique, Myanmar, Namibia, Sri Lanka, Syria, Uganda, and the United Republic of Tanzania.

Non-military related cases of sanctions violations that involved facilitating front companies, financial transactions, and other business activities: Angola, Brazil, Bulgaria, China, Egypt, Ethiopia, Germany, India, Iran, Malaysia, Namibia, Poland, Romania, Russia, Singapore, Sri Lanka, Sudan, Syria, and the United Arab Emirates.

Imports of sanctioned goods and minerals from North Korea: Barbados, China, Costa Rica, Egypt, El Salvador, France, Germany, India, Indonesia, Iran, Ireland, Malaysia, Mexico, Pakistan, Philippines, Sri Lanka, Syria, and Vietnam.

Re-flagging of vessels and providing other assistance for shipments: Brazil, Cambodia, China, Egypt, Fiji, Greece, Japan, Kiribati, Malaysia, Marshall Islands, Mongolia, Palau, Panama, Peru, Russia, Sierra Leone, Singapore, Tanzania, Thailand, and Togo.

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