UN Panel of Experts Report on sanctions, part 2 of 3



In the previous post, we began to parse the leaked Panel of Experts report; here, we continue that discussion, focusing on North Korean methods for circumventing the sanctions.

One way of circumventing the sanctions is to play around with product categorizations, which are necessarily imprecise. For example, in a report that had not our knowledge previously come to light, North Korea sought to acquire processing equipment to produce ultrapure graphite concentrate with a stated minimum purity level slightly lower than that banned by the Security Council; technically legal, but clearly intended to circumvent the sanctions.

The luxury goods ban appears particularly leaky in this regard, with even countries like Japan and Italy reporting violations from their territory. The report notes that country categorizations of luxury items vary widely, a point we have made as well.

A disturbing revelation we had not seen was that a number of high-profile interdictions, including the ones in South Africa and Thailand in 2009, turned up evidence that the shipments in question were not one-off, but part of ongoing supply contracts.

But among the more interesting aspects of the report is the detail it provides on North Korea’s transport industry.

The Panel engaged Lloyd’s List Intelligence (LLI), a provider of maritime data, to get insight into North Korean shipping. The majority of ships owned by DPRK entities also sail under its flag, which complicates interdiction under UNSCR 1874. Although the resolution grants powers in conformity with national laws, states are not free to interdict North Korean vessels without their consent unless they are actually in port. The country’s estimated 240 vessels are owned by an array of companies—the report estimates as many as 100—and there is evidence that they are simply renamed following interdiction episodes. But in addition, the country engages in a range of deceptive practices with respect to shipping, for example, most notably exploiting trans-shipment hubs—and presumably customs shenanigans and corruption--to move goods onto foreign-owned and -flagged vessels all the way to their final destination.

The report also has a useful section on the North Korean air infrastructure. The country has very few scheduled flights anywhere  (weekly scheduled flights from Sunan to Beijing, Shenyang, Vladivostok, Bangkok and Kuala Lumpur.) Thus most flights are chartered or special-purpose. Although overflight rights have been denied, the absence of scheduled flight information raises the issue of whether there is Chinese, Russian and other countries’ complicity in air freight, something suggested strongly by the Wikileaks revelations. This problem is compounded by the fact that there is very little information provided to any neighboring countries on what is being shipped on any given Air Koryo flight (which might support a somewhat more benign interpretation of “complicity”) However this could clearly be tightened up and the Panel suggests doing so, essentially arguing that all overflights out of the country should be treated as suspect.

The report provides a lot of detail about standard evasion techniques: falsified bills of lading; concealment; obscuring, altering or falsifying the ultimate source or destination of goods; shipping of knocked-down kits for reassembly; and extensive use of front company and offshore intermediaries. The most pressing concern is illicit re- exportation of prohibited goods through purchasing companies that sign valid end-use certificates, only to later send the unused items to the Democratic People’s Republic of Korea, with no bill of sale recorded.

The report is also pretty clear on how to stop the illicit movement of goods that is worth quoting at length. The prevention of leakage depends on strong export control regimes among the Member States, including principles of due diligence, “catch-all rule”, and the aggressive implementation of “know your customer.” Local suppliers of sensitive dual-use items also need to be held to the standard of consulting with export licensing authorities with regard to “red flag” transactions, particularly one-off transactions. To say that such standards of enforcement fall short in many jurisdictions is to state the obvious.

The financial dimension comes in for a whole section of the report as well. The financial components of 1874 are both stringent in spirit, but also subject to wide discretion in implementation. The resolution calls upon Member States to “prevent and freeze all financial transfers, assets or related monetary transactions by the Democratic People’s Republic of Korea that might contribute to” WMD and missile programs (emphasis added). It also “calls upon” Member States and relevant financial institutions not to enter into new commitments, and reduce current commitments, for grants, financial assistance or loans except for humanitarian and denuclearization purposes. It also call for restraints to match those on trade by asking states to restrain financial services in support of banned trade.

The report notes that one way of circumventing the international financial system is through barter trade.  But the report also highlights the fact that the North Korean government maintains a very elaborate network—operating both inside and outside of its embassies—of ““business merchants” who hold diplomatic passports and work in banking centers in Asia. The issues here are those that face the money laundering community on a daily basis. As with the underlying trade transactions, intermediaries and shell companies are used but with the all-important purpose of either avoiding the major money center banks or laundering assets through them. One transaction is worth citing at length to provide the flavor:

“The Panel learned that (a) the financial transaction between Air West Ltd. (the lessor) and SP Trading Ltd. (the lessee)84 was priced in United States dollars; (b) JP Morgan Chase Bank of New York was listed as the intermediary Bank for Air West Ltd; and (c) SP Trading Ltd. claimed at the time to hold a bank account with the Estonian branch of Sampo Bank, which is a wholly owned subsidiary of Danske Bank. In turn, Sampo Bank used its correspondent relationship with Deutsche Bank to clear the transaction.”

A crucial question in assessing such relationships is whether the DPRK can operate outside the “mainstream” international financial system altogether. The Banco Delta Asia case suggested “no,” but the report suggests that they have subsequently learned and continued to innovate by moving on to new jurisdictions.

Tomorrow, in the last post, we look at some of the specific entities and the new push for FDI, which appears to be more closely linked to military objectives than we had thought.

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