The North Korea Sanctions Enforcement Act of 2014

Proponents of sanctions against North Korea come at the task with a variety of aims, ranging from the strategic objective of nudging Pyongyang back to the Six Party talks and signaling the Chinese, to limiting proliferation and other illicit activities, stopping support for terrorism, advancing the cause of human rights, and bringing the regime down altogether. Last year, one of us summarized the precursor to the current bill, which passed the House of Representatives on a voice vote at the end of July.

In re-introducing the bill, Representative Ed Royce made a number of small changes to the legislation that made it less sweeping in scope and less mandatory in enforcement, granting the administration somewhat greater discretion (these changes are analyzed by the National Committee on North Korea here.)  However, at its core, not much has changed; we enclose below a summary of the legislation provided to us by the House Foreign Affairs Committee, with our own annotation on a number of the sections; the full legislation can be found here in .pdf.

The legislation remains what Josh Stanton has called a financial constriction strategy against the regime. It is a wide-ranging and purposefully ambiguous strategy that not only goes after proliferation, illicit activities, and human rights abusers but seeks to blur the line—to date, very carefully maintained—between the targeting of illicit and commercial trade. The justification for doing so is legitimate; in such a highly centralized regime, it is difficult if not impossible to draw the line between non-commercial and commercial activities. Nonetheless, to date the US—and the UN Security Council resolutions—have sought to draw such a line, in part to provide incentives to North Korea to come around, in part to leave scope for an expansion of sanctions if developments were to seriously worsen, for example through a fourth nuclear test or more credible evidence of a capacity to miniaturize. Indeed, this legislation—which currently has no Senate sponsors and will not be enacted imminently—is probably best interpreted as a pre-emptive signal of US policy in the event of a fourth nuclear test.

A key question for a sanctions strategy is how the US—which does virtually no trade with the country—can exercise leverage? A core component of the strategy—borrowed from the Banco Delta Asia playbook—is to use US market power to induce desired behavior by foreign commercial entities. The pursuit of secondary sanctions against those doing proscribed business with North Korean essentially offers market players a choice: do they want to do business with the giant US market or throw in their lot with North Korea? The strategy neatly sidesteps the need to rely on possibly reluctant foreign governments (read China) for enforcement by encouraging foreign entities to do the commercially prudent thing.

Given the multiple targets the legislation aims to hit, it is hard to assess its chances of success. Do we really think that a regime that survived a self-imposed famine that killed between 600,000 and a million people will be brought down by a tightening of sanctions?  It is doubtful to us that the regime will change its approach to the nuclear question in the face of such external pressure either. Proponents of such sanctions point to BDA as a success in gradually bringing North Korea back to the table after its nuclear test in October 2006. But this assessment confuses a tactical move with a broader get-tough policy that showed few signs of success and in fact probably contributed to North Korea’s determination to go nuclear in 2006. The limited progress made during 2007-8 rested on the lifting of the BDA sanctions and offers of assistance as well. There can be little question that BDA had financial effect; it is much less clear it had political effect. Nonetheless, extending the measures to “legitimate” commerce would deny the regime resources for its military program or at least raise the implicit costs of maintaining those expenditures.

Ultimately, the sanctions need to be coupled with a strong statement of our willingness to engage if North Korea showed signs of interest in doing so. The legislation provides plenty of sticks; the administration will have to continue to articulate the carrots in a way that is credible. As we point out below, his (or her) ability to do so would be seriously compromised by the extraordinarily high hurdles the legislation places on lifting the sanctions. Indeed, seems that a central purpose of the legislation is precisely to limit the discretion of the president to engage in negotiations that the bill’s sponsors deem as fruitless.

It is also important to remember that over the long-run, our objectives with respect to North Korea are decidedly mixed. Everyone would be happy to see the regime go, but those predicting imminent collapse have continually been confounded by its durability. If the regime is likely to persist in something resembling its current form, we have other objectives as well, namely, to encourage the country’s opening and reform. If this legislation has this effect, it would be through some initial phase of even greater isolation and autarcky. Much will thus depend on how the China and North Korea respond to such a dramatic tightening of the screws.

That said, we strongly endorse the effort to target North Korea’s proliferation activities and those engaged in its egregious human rights violations as well; we side unambiguously with the Commission of Inquiry findings that the latter group in particular should be brought to justice.

But we also need to recognize that post-BDA and since the ascent of Kim Jong Un in particular, North Korea has clearly sought to diversify its trade, investment and financial links. This approach has already induced  major Chinese commercial banks to exit the market, with or without guidance from Beijing. But the KPA and its associates have developed relationships with financial entities that are not concerned with access to the US, both in China and outside it; Russia will be particularly interesting to watch in this regard but there is also the open field of the Middle East for the North Koreans to roam around in. Throughout, the legislation calls on the administration to conduct a vigorous diplomacy to close these loopholes, and gives it some interesting tools to do so; for example, it allows the US to impose sanctions on jurisdictions—down to the level of individual ports—that are not exercising due diligence. But while this legislation will probably disrupt the North Korean economy, it will not be a death blow to proliferation activities and particularly those the regime sees as most central, namely procuring materiel for the missile and nuclear program that are the core of its overall military strategy.

Given our concerns about the humanitarian dimensions of the North Korean problem, we were concerned with the possibility that the legislation could affect the ability of NGOs to operate in the country; again, the National Committee on North Korea provides a reasoned analysis of the issue here. The worries about the ability of NGOs to pay local salaries and import needed goods are legitimate, but the legislation does not disallow such activities.

Our suspicion is that if this legislation is ever introduced in the Senate, it will be subject to substantial amendment, in part to increase the president’s discretion. If we have high hurdles to beginning negotiations with the North Koreans now, they are nothing compared to the way this current legislation ties the president’s hands. But in the end, the North Koreans—and the Chinese--have beaten us down; we just can’t seem to get their attention on the issue. The effects of this legislation are likely to be felt in China and much as North Korea, and that is a good thing.

House Foreign Affairs Sectional Analysis of the North Korea Sanctions Enforcement Act of 2014 with Witness to Transformation Commentary (in red)

Section 104.  This section describes the conduct and entities subject to sanctions.  It mandates blocking sanctions (the prohibition on any transfers in financial instruments or other property) against persons that have materially contributed towards North Korea’s nuclear, ballistic missile development and other unconventional programs.  While this prohibition is contained in existing Executive Orders, this legislation makes such violations mandatory, rather than discretionary.  It sanctions persons that engage in other destructive activities—from importing or exporting into North Korea related WMD materiel, to producing training or advice to their unconventional and conventional weapons programs.  It also levies mandatory sanctions on those who import luxury goods into North Korea, or enable its censorship efforts or continuing human rights abuses.  Finally, it strikes at the heart of their efforts to fund their illicit activities by requiring sanctions against those who have engaged in money laundering, counterfeit goods manufacture, or narcotics trafficking.

This section also provides the Administration the necessary tools to sanction North Korea’s third-party enablers transferring or the facilitating the transfer of financial assets and property of the North Korea regime.

WTT. This is the core of the secondary sanctions piece of the legislation. The designations pertain to those who are “knowingly engaged” with North Korea in the ways delineated. However, given the highly centralized nature of the regime it could be read to include virtually any commercial activity with the country if that activity could be interpreted as generating foreign exchange that the regime used to maintain itself. A key question is whether the ambition of the legislation may have the perverse effect of leading potential violators to shrug it off rather than comply.

Section 105.  This section seizes assets forfeited for violations of North Korea sanctions laws, and provides it to the US Treasury.

Title II-Sanctions against North Korean proliferation, human rights abuses, and illicit activities.

Section 201.  This section instructs the Secretary of the Treasury to determine whether North Korea is a “primary money laundering concern.”  If such a determination was made, that would block North Korean banks from direct or indirect access to the U.S. financial system, and require “special measures” against designated persons, North Korean government entities, and banks that provide financial services to entities found to have engaged in sanctionable conduct.   Such a designation could have a debilitating effect on North Korea’s ability to access the international financial system.

WTT. This section reviews the history of trying to bring North Korea into line with its so-called AML/CFT (anti-money laundering/combating the financing of terrorism) obligations, something on which we have reported at length (most recently here on SWIFT).  The section is a little weaker in that it is a “sense of Congress” language, but it requests the administration to determine whether North should be designated as a jurisdiction of primary money-laundering concern.

Section 202. This section finds that all states and jurisdictions are obligated to implement and enforce UN Security Council resolutions and provides as a sense of Congress that the President should intensify efforts to implement a diplomatic strategy to protect the global financial system from North Korean threats.

WTT. Basically directs the US to engage in a more vigorous diplomatic campaign on these issues.

Section 203.  This section re-imposes sanctions under the Export Administration Act and the Arms Export Control Act that applied to North Korea until it was removed from the list of state sponsors of terrorism in 2008.  The provision will statutorily prohibit the export of munitions to North Korea and severely restrict export licenses for the for controlled good and technologies, and sanction those who send or receive lethal military equipment from North Korea as if the regime were still designated a state sponsor of terrorism.

WTT. Seems gratuitous, but is emblematic of the effort to shut down any loopholes.

Section 204.  This section bars designated persons, their officers, and their subsidiaries from receiving U.S. government contracts.  If a person is enabling or facilitating the regime’s destructive policies, they should not be eligible to receive US Government contracts.

WTT. Ditto.

Section 205.  This section requires the Administration to provide briefings identifying foreign seaports and airports whose inspections of vessels originating from North Korea are deficient.  Cargo coming from ports that consistently fail to inspect North Korean cargo, as required by U.N. resolutions, may be subject to increased inspection requirements at U.S. ports.  It also allows for the seizure of ships or aircraft used for smuggling.  This provision is critical as that it protects the US homeland from ports that deliberately fail to sufficiently inspect North Korean cargo.

WTT. A very interesting and new second sanction; pressure on foreign countries to inspect by basically targeting any cargo coming from that port “if there are reasons to believe that such cargo contains goods prohibited  under this Act.” Much will depend on how liberally used.

Section 206.  This section allows the President to deny the entry into the U.S. of any alien who is a person that has been sanctioned under this Act.  If a person is an enabler of the North Korean regime, you should not be granted a visa or access to the United States.

WTT. Completely justified, but hopefully will not throw sand in the granting of visas to any and all North Koreans; our motto remains “get people in, get people out,” even—indeed, particularly—lower-level officials, academics and others.

Section 207.  This section provides for exclusions and waivers from sanctions for humanitarian aid, consular activities, for cooperating witnesses and banks, and when vital to the economic or national security interests of the United States.

WTT. Again, the National Committee on North Korea airs its concerns here.

Section 208. This section finds that a United Nations Panel of Experts issued a report that North Korea continues to “trade in arms and related material” and that “there is no question that it is one of the country’s most profitable revenue sources.”  It also provides a sense of Congress that the U.S. should work with other nations to implement UN Security Council Resolutions 1695, 1718, 1874, 2087, and 2094.

WTT. Again, the objective is to urge the administration to keep this front-and-center with countries—particularly developing countries—that may not be exercising due diligence in enforcing the sanctions..

Title III—Promotion of Human Rights.

Section 301.  This section requires the President to study the feasibility of bringing unmonitored and inexpensive cellular and internet communications to the people of North Korea, to break the information blockade the regime has imposed on its own population.   This information has proven crucial in changing the perception of the North Korean people about the nature of the Kim regime and the outside world.

WTT. We strongly support increasing the permeability of the border to information. Yes, there are risks for those caught, but our view is that they are capable of assessing those risks and that focusing on the supply side is a legitimate activity.

Section 302.  This section requires a report by the State Department on North Korea’s political prison camps, which are estimated to hold up to 120,000 men, women, and children.  It is meant to focus greater public attention on North Korea’s grave and pervasive crimes against humanity.

WTT. This provision comports directly with a similar objective articulated by the Commission of Inquiry.

Section 303. This section requires a report by the State Department that identifies severe human rights abusers in North Korea, utilizing information collected in the recent U.N. Commission of Inquiry Report on North Korean human rights abuses, the most comprehensive such report to date.  This will bring needed attention to the North Korean human rights disaster.

WTT. The Commission of Inquiry was careful to was very careful to repeat that it was not a prosecutorial body. But those entities responsible for the most egregious human rights violations, such as executions and the prison camps, should be named and shamed.

Title IV— General Authorities.

Section 401. This provision provides for a one-year suspension of sanctions, renewable for one consecutive year, if North Korea takes significant steps toward disarmament and reform, while preventing the premature relaxation of sanctions for false North Korean promises.

WTT. The legislation sets incredibly high hurdles for reversing the sanctions once imposed, which has the effect of making it extremely difficult for the administration to engage in any more incremental negotiations or to advance any inducements; again, that seems to be an unstated purpose of the legislation. For sanctions to be lifted, the government of North Korea has to:

• verifiably cease its counterfeiting of United States currency, including the surrender or destruction of specialized materials and equipment used for or particularly suitable for counterfeiting;

• take significant steps toward financial transparency to comply with generally accepted protocols to cease and prevent the laundering of monetary instruments;

• take significant steps toward verification of its compliance with United Nations Security Council Resolutions 1695, 1718, 1874, 2087, and 2094, in effect, take “significant steps”—undefined—to denuclearize and cease and desist in its missile program;

• take significant steps toward accounting for and repatriating the citizens of other countries abducted by the Government of North Korea;

• take significant steps toward verification of its compliance with the Joint Statement of September 19, 2005;

• accept and begun to abide by internationally recognized standards for the distribution and monitoring of humanitarian aid;

• provide credible assurances that it will not support further acts of international terrorism;

• take significant and verified steps to improve living conditions in its political prison camps and;

• added from the last version of the bill, make significant progress in family reunions with the South.