Vulnerability to Sanctions II: The Asan-C4ADS Report

Stephan Haggard (PIIE) and Kent Boydston (PIIE)



Last Thursday we looked at the recent report by John Park and Jim Walsh “Stopping North Korea Inc: Sanctions Effectiveness and Unintended Consequences” which analyzed the progression of the relationship between Chinese and North Korean firms as they have adapted to new sanctions; the report is based on interviews with defectors involved in state-trading companies. A new report published last week jointly by the Asan Institute and C4ADS complements the Park and Walsh study, but uses some clever new analytic techniques. In combination, these two reports represent a breakthrough in our understanding of North Korea’s political economy. And in contrast to Park and Walsh, the C4ADS report performs the crucial work of naming names.

C4ADS’s methodology relies on fastidiously parsing business registries in foreign countries where North Koreans and associates acting on behalf of North Korean firms operate. The starting point for building the network is to track maritime activities using Windward’s Maritime Analytics System, which organizes and analyzes hundreds of millions of data points on the whereabouts and activities of ships worldwide. After tracking the firms, names under which the firms are registered, and the activities of the ships, C4ADS then uses Palantir Gotham’s network analysis platform to identify the connections between individuals, firms, affiliated firms, and vessels. Although it is not always possible to link particular firms to North Korea, the generation of a network is certainly a promising place to start.

The effort to impose sanctions on North Korea is hamstrung by the fact that North Korean entities—and certainly those involved in proliferation—don’t identify themselves as such but rely on third party intermediaries. The study finds that although 91% of US and 84% of UN designations are of North Korean entities, 74% of the entities identified as being involved in sanctions evasion networks identified by the study were registered in and by third country states and nationals.

The biggest story that came out of this report—and the group that is in fact the centerpiece of the report—is the vast Liaoning Hongxiang Group which controls six different companies, the largest of which, the Dandong Hongxiang Industrial Development Co. Ltd., has had its hand in over $500 million in trade with the DPRK from January 2011 through September 2015. Over half of this trade has been in coal, which might help explain why coal exports remain robust and the North Korean exchange rate and rices prices so stable. According to the research, the company deals almost exclusively with North Korean accounts but has also traded with at least fifteen different US companies. The report notes that the firm’s transactions would have likely been cleared through North Korea’s Foreign Trade Bank, which was sanctioned by President Obama under Executive Order 13382 in 2013. C4ADS provides evidence that the firm traded in dual-use technologies as well and although it is cagey about nailing this trade completely to North Korea, the circumstantial evidence is overwhelming.

According to the report, companies owned by the Vice Chairman of the group have also been linked to business dealings with sanctioned Burmese tycoon Tay Za. Since 2007, Za has been designated by the US Treasury Department as “an arms dealer and financial henchman of Burma’s repressive junta.” Liaoning Hongxiang has also been implicated in weapons proliferation rackets and even insurance fraud in Europe.  

Just two days after the C4ADS report was released China announced it was launching an investigation into Liaoning Hongxiang and has since arrested its chairwoman, Ma Xiaohong. Cause (report) and effect (arrests)? In any case, the analysis of the group is highly consonant with the findings in the Park and Walsh report about how state-trading companies are increasingly relying on third-parties—and particularly Chinese ones—to evade sanctions. 

But it is not just China that is in this game; perhaps because of the fact that Hong Kong actually has meaningful registration requirements, no fewer than 160 of the 248 companies in the dataset were registered in Hong Kong. As the report notes, “a large number of these companies appear to bear the hallmarks of shell companies, including an extremely small share capital, a recent incorporation date, little evidence of significant commercial activity, and obfuscated ultimate beneficial ownership.” More interestingly, the report find that these 160 firms are themselves deeply connected: 82, or 51% of the companies, owning or managing 58 ships, were represented by only six company secretary firms. Although it is again harder to pin the activities of these firms to North Korea, the network is clearly one in which North Korean entities are players. 

Another aspect of this report is its research of maritime shipping behavior, tracking vessel registries, and “flags of convenience.” The report finds that 86 percent of the 147 ships that it tracked were registered in countries other than the DPRK, with Cambodia registering the plurality of them. (See the graphic below.) On average each ship was registered to 2.67 different countries over its lifetime and each ship listed 2.38 different companies as registered owners suggesting what we have called the “whack a mole” problem. 64 percent of the ships were registered under “flags of convenience,” a practice whereby companies can register a vessel under a foreign designation to avoid regulations back home and to assume the same treatment as the flag country under international law. This arrangement has been one method for North Korean vessels to conduct licit and illicit trade without arousing suspicion abroad. It is worth noting that after UNSCR 2270’s passage Mongolia has now revoked the right of North Korean ships to operate under its flag. 

As can be seen above, Cambodia plays a substantial role in registering North Korean ships. (Cambodia has also sold passports to North Koreans in the past too.) The report notes that after a history of malfeasance, the Cambodian Ship registry was reorganized in 2003 and became the International Ship Registry of Cambodia (ISROC), a joint venture between the Cambodian government and a South Korean company, the Cosmos Group. According to the report: “ISROC now lists 27 deputy registrars, one of which is Wang Shau-fun of World Merge Shipping, a member of Jack Intermaritime Group, which is the manager for four of the 10 identified ships, as well as the listed ‘Care of’ manager for two companies in the Liaoning Hongxiang shipping network.” The Liaoning Hongxiang Group doesn’t simply have someone on the take at the Cambodian ship registry but appears to have placed its own affiliate as one of the registrars at the private-public agency.

Going after these actors may be just another game of whack-a-mole. The North Koreans will arguably adapt to these new challenges in its illicit international supply chain. But this is too pessimistic; it is striking how quickly a major group was brought down once the Chinese authorities put their mind to it. Clearly doing this kind of network analysis provides the basis for rapid responses, which do not rely solely on Chinese action but on large groups’ other foreign dealings. The activities of this group and all of its subsidiaries should not only be targeted by China but designated by other countries as well. Second, it is clear that secondary sanctions have a crucial role whenever these groups hit the international financial system in any way. And third, the simple monitoring of ships can go a long way to seeing if prohibitions on the export of coal as well as other illicit exports are taken seriously by third countries. As sanctions expand, so the bar for finding the activities of commercial trading vessels suspicious.

What these reports show clearly is that the “sanctions don’t work” litany is deeply misleading. This trope assumes a hardy North Korean regime ready to resist any pressure no matter how intense. That is simply not the story; rather, the story is that North Korea has not been forced to make any adjustments because it has been able to conduct business largely if not wholly as usual. How does that show that sanctions don’t work?

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