Treasury sanctions and the North

Last week the U.S. Department of the Treasury issued a Notice of Finding that designated North Korea for the first time as a jurisdiction of “primary money laundering concern” under Section 311 of the USA Patriot Act. The Section 311 finding essentially means that U.S. banks cannot have a “corresponding banking relationship” with financial institutions engaged in business with North Korean entities. This does not strictly mean that the U.S. government will “sanction” banks in third countries, but given the centrality of the U.S. dollar and American banks to the international financial system, no significant non-U.S. bank can risk being cut off. They will have to self-police and scrutinize whether they have any accounts linked to North Korea. This will be particularly important in China and the Middle East.

This action could significantly constrain Pyongyang’s ability to finance its illicit activities and nuclear and missile programs. It might ultimately be a more significant source of pressure on the North than the unprecedented new sanctions authorized by the UN Security Council in early March under Resolution 2270. When the Bush administration designated the Macao-based Banco Delta Asia (BDA) under Section 311 in 2005, China and many other nations quietly closed down North Korean bank accounts. Technically, the United States did not “sanction” North Korea itself, but the effect of freezing about $25 million in assets in BDA had a ripple effect across the international banking system that trapped many tens of millions dollars more in North Korean money.

Of course, in March 2007 then Assistant Secretary of State Christopher Hill announced that the cash from BDA would be returned to North Korea in order to jump start diplomatic negotiations. Banking regulators and governments around the world stopped paying attention, while the North Koreans began finding other ways to move cash through disreputable institutions or barter. This time it will be important for the U.S. government and like-minded allies to keep up the pressure. And given that the entity being designated is North Korea itself rather than an expendable little bank in Macao, the scrutiny of North Korean finances could be quite severe.

The 311 designation may look somewhat desperate to some, but it is long overdue. First, the United States has known about direct control of money laundering and counterfeiting operations by Kim Jong Il and Office 39 for at least 15 years. And new evidence continues to emerge that Pyongyang has directly ordered a cyber heist in Bangladesh among other illicit financial activities. Second, the U.S. Treasury had to make a decision whether to designate because of reporting requirements under the North Korea sanctions and Policy Act of the U.S. Congress. The Congress basically said, “enough already … if North Korea is engaged in money laundering then tell us so officially.” Treasury did.

Finally, there is no credible diplomatic process to worry about damaging at this point. North Korea has declared publicly in its Constitution and Byungjin policy that it is and will remain a nuclear weapons state (until all nuclear weapons are abolished in the world, which is a meaningless pledge). Former Foreign Minister Ri Su-yong reportedly confirmed that to Chinese President Xi Jinping in their surprise meeting, and North Korean diplomats claim they are only interested in nuclear arms control with the United States as a fellow nuclear weapons state. Pyongyang appears to believe it has deterred the United States and now seeks talks that bypass Seoul. The entirely legitimate reason for the Section 311 designation is North Korean money-laundering, but the diplomatic and strategic logic of freezing North Korean money flows is also compelling.

What will happen next? Skeptics think North Korea will move its money through other means, but even if they do, the impact will be significant. North Korean entities continue procuring dual use and other materials — often in open — in third markets. Those entities will now have to use cash or barter, an important constraint on their operations. The North Korean economy itself is estimated to have grown as much as 6 percent this last year because of trade with China. The Section 311 designation will make banking in China extremely difficult for North Korea — and the Peoples Bank of China (PBOC) will have a major incentive to police other Chinese banks’ questionable activities as China seeks international leadership in the Asia Infrastructure Investment Bank and expanded investment in the United States, Britain and other industrialized economies that have strict investment standards and controls. In fact, that is exactly what the PBOC did when they knew BDA was going to be sanctioned as several Chinese entities sought listing on the New York Stock Exchange.

Over the longer-term, this tightening financial environment could force the leadership in Pyongyang to rethink their current strategy. In the nearer term the sanctions will complicate Pyongyang’s missile and nuclear development strategies. Sanctions are no panacea, of course, but it is clear that they are indispensable.

*The author is senior vice president for Asia and Japan chair at the Center for Strategic and International Studies and associate professor at Georgetown University in Washington, D.C.

Michael Green