Secondary Sanctions Redux



I am reviewing a variety of proposals for dealing with North Korea (CRF report here, Heginbotham and Samuels here) and will be linking to some more this week. Central to virtually all of them, however, is more aggressive use of secondary sanctions. Samantha Power was recently in Asia, and at a press availability, she noted both the President’s direct engagement with the Chinese on a new sanctions resolution at the UN and the intensity of the technical negotiations. Among the ideas that have been floated are closing the mile-wide “livelihood exemption” in UNSCR 2270—enforcing a real ban on coal exports—as well as measures such as bans on labor exports and tourism. But Assistant Secretary of State Danny Russel rightly made clear that the US reserves its right to impose secondary sanctions regardless of what happens in New York.

Understanding secondary sanctions authorities is not easy because of the complex authorities under which they can be triggered. Under legislation passed earlier in the year and a succession of important executive orders, there is ample power to act in theory: the apparently-sweeping E.O. 13687 of January 2015, which authorized sanctions not only for the country’s nuclear and missile activities but for human rights violations and specifically labor exports, the North Korea Sanctions and Policy Enhancement Act (NKSPEA) of 2016 (analysis here), and E.O. 13722, signed in the wake of the last nuclear test and Congressional action.

E.O. 13722 appears to provide pretty sweeping authority on a plain reading of the text, but ultimately rests on financial intelligence and actual designations. Sections 2 and 6, which outline possible targets of secondary sanctions, include firms dealing with any industry that might be designated (“such as transportation, mining, energy, or financial services”). In addition, the E.O. specifically references companies engaged in trade in metal, graphite, coal or software in line with UNSCR 2270 (with the weakly limiting condition of it contributing to party or state coffers); entities engaged in facilitating human rights abuses or censorship; entities engaged in labor exports (see Marc Noland’s analysis); and firms undermining cybersecurity. One section of the E.O. includes a highly permissive category of facilitators (entities that “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this order,” a category which essentially includes all party and state organs).

Yet when you look for the designated entities under E.O. 13722,  you find about two dozen designated entities and persons, including some ships, banks and trading companies and regime personnel—including Kim Jong Un himself—who are unlikely to fall under American jurisdiction any time soon. Nor is this problem new; it was noted in a 2015 GAO report and has been a theme of this blog and sanctions advocates such as Josh Stanton (see his analysis of the GAO report here).   

In a piece for Foreign Policy Dan de Luce suggests that there is a lively debate within the administration on how far such sanctions should go, no doubt pushed along at least to some extent by political pressure emanating from the Hill. For a sense of Senate sentiment—and in both parties—note the tough questioning posed to Danny Russel and Daniel Fried, State’s coordinator of sanctions policy, at a Senate Foreign Relations subcommittee hearing in late September and the hawkish sentiment aired by Victor Cha, Bruce Klingner, Sue Mi Terry, and David Albright at a similar exercise on the House side; both are long but worth watching for their substance. One of the proposals to emanate from the House side: legislation proposed by Rep. Matt Salmon (R, Ariz.), the Chairman of the House Asia-Pacific Subcommittee, to cut North Korea off from SWIFT entirely, driving it further into cash transactions and the international financial netherworld (our earlier analysis of SWIFT data here). 

But it appears to have been open source reporting done by the C4ADS group that we reviewed several weeks ago that provided a crucial opening to actually impose some serious secondary sanctions for the first time. Treasury not only froze the assets of both Dandong Honxiang and top management associated with its North Korea operations, but the Justice Department indicted them outright for sanctions violations, conspiracy, and money laundering (see Yonhap coverage here). But that was not the end of it. As Josh Stanton pointed out in his close coverage of these actions, the Justice actions included civil forfeiture action that goes after Dandong Honxiang’s accounts, which are of course held in a who’s who of Chinese banking institutions (ie., not only expected enablers like Dandong Bank but the Agricultural Bank of China, China Construction Bank and other top financial institutions). 

Chinese authorities also moved against this firm, so it was a little hard for Beijing to claim that the US action was out of line. But can someone explain why the US is not acting similarly against other entities engaged in such activities, and if we don’t have adequate financial intelligence why we don’t? To be sure, the C4ADS report was unusual in its granularity and naming of names. But only several weeks before, John Park and Jim Walsh issued a terrific report that hinted at the fact that the Dandong Hongxiang case—while admittedly large—was but the tip of a large iceberg of Chinese brokers that are enabling North Korean trade. If these measures were good enough for Dandong Honxiang, why not others in the enabling business?

Moreover, there are additional tools for going after those enablers which have not yet been used. Over the summer, North Korea was designated as a jurisdiction of primary money-laundering concern, which is frequently confused with a sanction but in fact operates differently. The ruling ultimately would require banks to exercise due diligence over their counterparties and assure that those counterparties are not conducting sanctioned business with North Korea; that was the source of leverage over Banco Delta Asia.

But under 31 USC 5318A(b)(5)—commonly known as section 311—Treasury has to publish a final rule in the Federal Register in order to cut off correspondent accounts; the proposed rule on North Korea as a jurisdiction of money-laundering concern can be found here. We are currently waiting for that rule, but the public comment phase allowed Bill Newcomb and Josh Stanton to issue an important Comment on the rule: a requirement that domestic financial institutions obtain information concerning the beneficial ownership of property held by nationals of North Korea or their representatives. As they point out, EU authorities have already done this, so the US is actually lagging on this score. The main point, however, is that these “sanctions” haven’t hit yet, so we don’t know what their effect will be.

The only issue at present seems to be how to play these issues with respect to China. Clearly, China is never going to openly agree to secondary sanctions. Since it is virtually impossible to gauge the real extent of their pique, the US could provide one more window to see what Beijing is willing to do in the wake of the new UNSC Resolution. Who knows? But if China is only haltingly enforcing 2270 and repeats this exercise with a new resolution, the collective approach does not deliver the sense of urgency that should be communicated to Pyongyang. Secondary sanctions will be more central in getting both Pyongyang’s—and Beijing’s—attention. 

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