The North Korea Sanctions Enforcement Act of 2016

January 15, 2016 7:00 AM

The fourth nuclear test has had its first substantive impact on US policy. On Tuesday, the U.S. House of Representatives passed HR 757, the North Korea Sanctions Enforcement Act, on a 418-2 vote; a useful chapter-by-chapter summary can be found here. The bill was sponsored by Congressmen Ed Royce (R-CA), Chairman, and Eliot Engel (D-NY), Ranking Member, of the House Foreign Affairs Committee and modifies an earlier version of the legislation that we reviewed in some detail.

The final disposition of the legislation, however, will depend on what happens in the Senate and in conference, and we will therefore forego a complete analysis until that process unfolds. Josh Stanton’s One Free Korea has the most detailed coverage of the politics on the Hill. Current information suggests that Senate Foreign Relations will mark-up the legislation later in the month with the objective of moving it quickly to a vote. The mark-up will probably take the form of a Senate amendment to the underlying Royce bill based on one of two competing versions proposed by Senators Menendez (S. 1747) and Gardner (S. 2144). Thanks to the good work of the National Committee on North Korea, we have an updated comparison of the major provisions of each, which hinge in part on how much discretion the President will have in imposing secondary sanctions (Menendez more, Gardner less).

For now, we will only take note of several issues that will influence the broader politics of the response to the first test. First, the core of the legislation is to be found in Section 104, which outlines secondary or “blocking” sanctions against entities or persons that have knowingly (and this qualification is important): contributed to North Korea’s nuclear and ballistic missile development; imported luxury goods into North Korea; enabled its censorship efforts or continuing human rights abuses; or engaged in money laundering, the manufacture of counterfeit goods, or narcotics trafficking. The most likely targets are a matter of classified financial intelligence, but no doubt include Chinese and perhaps European banks (NYT coverage here; testimony by Bonnie Glaser and Bruce Klingner at House Foreign Affairs also notes that we know where at least some of this money is).

The nuclear option—to exploit the metaphor—would be to go after none other than the Bank of China itself, which recently handled the funds transfers for a firm--Chinpo Shipping—that was convicted in a Singaporean court over the Chong Chon Gang incident. This strategy of going after the central bank was used vis-à-vis Iran. Such an escalation is unlikely. But the teeth of the legislation will come in naming the names of financial entities—probably starting with smaller ones--who will be forced to choose between correspondent banking relations with the US and their North Korean accounts.

These measures will be supported by a second central feature of the legislation (Section 201) that goes back to the Banco Delta Asia precedent: instructing the Secretary of the Treasury to determine whether North Korea is a “primary money laundering concern.” Such a determination would force American banks to exercise due diligence with respect to their correspondent banks in a way that would also severely restrict North Korea's indirect access to the American financial and clearing system. For good measure, the legislation also stipulates “special measures” against designated persons, North Korean government entities, and banks that provide financial services to entities found to have engaged in sanctionable conduct.

For now, the most immediate question on the horizon is how this will affect the politics of the issue with respect to China, which we discussed earlier in the week. The response so far has been predictable: China is retreating into its even-handed mantra. It appears unlikely to be cooperative on imposing the kinds of sanctions that the administration is now saying are necessary, including a variant of the financial ones in the House legislation and further limits on North Korean shipping. The problem for China: it has studiously avoided cutting into North Korea’s commercial trade, allowing UNSC sanctions on WMD-related trade, large-scale conventional weapons systems and luxury goods but no more. But there is no more room in this space. One way or the other—with or without UNSC cooperation—some form of secondary sanctions are coming down the pike. Will China acquiesce or double down on Pyongyang and put up a fight? Advocates of sanctions are betting on the former, and China may be angry enough to allow some ratcheting of sanctions through a UNSC resolution. But the second possibility cannot be ruled out: that China will protect the Kims and North Korea will retreat more and more deeply into the Chinese shadow economy.

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lee,yang-woo

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