Article Information
Introduction▼
In 2016, the United Nations (UN) and major countries (e.g., the United States) tightened sanctions against North Korea following its series of nuclear tests. Particular attention was drawn to the financial sanctions that were designed to prevent the access of North Korean financial institutions to international financial networks. Thus, the international community could block North Korea’s capital formation and inflows that may contribute to the development of its nuclear weapons. As part of the UN sanctions that were adopted in the wake of North Korea’s fourth nuclear test, Resolution 2270 stated that member states should prohibit the opening and operation of new branches, subsidiaries, and representative offices of North Korean banks, as well as implementing the necessary measures to close such existing financial services or banking accounts within 90 days from the adoption of the resolution in their respective territories. In addition, the states had to proscribe their financial institutions from opening new representative offices or banking accounts in North Korea if such activities seemed to contribute to the country’s weapons of mass destruction (WMD) program. In response to North Korea’s fifth nuclear test, Resolution 2321 deleted the conditional clause associated with WMD as cumulative resolutions and decided that if an individual was working on behalf of North Korean banks or financial institutions, then the member states must expel the individual from their territories.1 The UN’s multilateral sanctions could be comprehensively applied to its member states. However, limited measures were available to enforce or monitor the states’ faithful implementation of this resolution.
Meanwhile, the unilateral financial sanctions imposed by the United States have had considerable effects on the overseas financial transactions of North Korea because these sanctions are capable of comprehensively monitoring or restricting the latter’s capital flows that pass through the USD payment system. In June 2016, the U.S. Department of Treasury introduced powerful sanctions, such as designating North Korea as a jurisdiction of primary money laundering concern based on Section 311 of the U.S. Patriot Act.2 Consequently, U.S. financial institutions are prohibited from opening or maintaining a correspondent arrangement3 with third party financial institutions that conduct transactions related to North Korea. Furthermore, special due diligence requirements are imposed on these institutions to detect illicit transactions through correspondent accounts. On the surface, these measures are subject to U.S. financial institutions. However, they are actually designed to apply additional strong sanctions to third party financial institutions that conduct business with sanctioned countries as observed in the Iran financial sanctions or the Banco Delta Asia (BDA) case.4
The literature on North Korea’s financial transactions is currently limited, although it could provide baseline data in designing additional efficient financial sanctions. Most previous studies rely on anecdotal evidence from surveys of North Korean refugees and Chinese firms engaged in trade with North Korea. For example, Kim explains the decentralization process of North Korea’s foreign settlement system based on his work experience at a North Korean financial institution.5 In his research, the monopolistic system, in which the Foreign Trade Bank exclusively manages foreign exchange, begins to break down when other power groups (e.g., the Party and the military) launch their respective foreign exchange banks.6 Lee and Hong,7 Kim and Jung,8 and the Korea International Trade Association (KITA)9 conduct research based on surveys and interviews. Lee and Hong and Kim and Jung analyze the unique features of the North Korean trade settlement by assessing North Korea’s trade partners located in the China–North Korea border areas. These major features are summarized as follows: the proportion of cash/physical settlement is high, and transactions and settlements are simultaneously facilitated due to a low level of trust. The KITA employs the survey results of South Korean businesses trading with the North and reveals that most of the trade settlements between South Korea and North Korea are conducted through telegraph transfers that pass through Chinese financial institutions. Moreover, the USD is used as a major payment currency in these transactions.
The extant studies merely explain a few fragmentary features of North Korea’s foreign financial transactions. Nevertheless, little research exists that covers both North Korea’s tactics to circumvent financial sanctions and suggesting policy measures to deter such roundabout actions. The current study aims to understand the recent changes in North Korea’s financial transactions through surveys of Chinese companies trading with North Korea, as well as in-depth interviews with a few high-ranking North Korean defectors with experience in trade and finance. Furthermore, this study recommends several response measures to enhance the effectiveness of financial sanctions.
The remainder of this paper is organized as follows. Section II analyzes the major features and patterns of North Korea’s financial transactions; Section III proposes policy measures to intensify the effects of financial sanctions; Lastly, Section IV presents the conclusion.
Survey and Interview Analysis on Financial Transactions▼
Overview
A survey on the financial transactions of North Korea was conducted for 100 Chinese companies, located in Dandong, China and engaged in trade with North Korea. Dandong is North Korea’s main trading gateway to China. Approximately 60 percent of the freight volume of the Sino–North Korean trade passes through Dandong. Particularly, Chinese firms in Dandong are known to play an important role in the two countries’ trade relations.10
This survey was conducted from June to December 2015 by a local consulting firm through face-to-face interviews, mainly with firm owners and managers. Table 1 presents the basic statistics of the survey of Chinese firms. Among the 100 companies, 64 percent are registered firms and 36 percent are individual enterprises that are unregistered as legal entities. In a newspaper interview, the mayor of Dandong stated that around 500 registered border-trading companies were doing business with North Korea in the city.11 Our survey includes both 64 registered and 36 individual firms, covering at least 10 percent of the Chinese firms engaged in trade with North Korea.
Basic Statistics of Survey of Chinese Financial Transactions with North Korea
In terms of the types of business of the surveyed Chinese companies, consignment processing for clothing, exporters and importers accounted for approximately 30 percent, respectively, along with 14.9 percent of firms hiring North Korean workers in Dandong.
To determine the details of financial transaction procedures by business and company type, we conducted interviews with high-ranking North Korean defectors from February to May 2016, as well as company surveys. Most of them had defected from North Korea after 2010; therefore, they were considered very knowledgeable about various methods of circumventing current financial sanctions. The interviewees were required to have one of the following careers in North Korea: company managers, trade representatives of the embassy, or bankers handling foreign exchange-related tasks under the cabinet, party, or military.
Features of Financial Transactions
The survey questions are designed to determine the overall characteristics of North Korean financial transactions, such as the proportion of financial transactions, including bank accounts and major currency used for transactions.
Proportion of Financial Transactions
In a survey of Chinese companies, we analyzed the proportion of each payment plan using the following question: “What about the proportion of each payment measure in trade settlements?” Table 2 summarizes the survey results: the proportion of cash payments is highest at 60 percent; nearly 40 percent is allotted for payments through financial institutions, such as banks; and the remaining two percent is for physical settlements. Cash payments mean that Chinese firms directly deliver cash to their North Korean trading partners. This high proportion of cash payments is due to the unique features of cross-border trading. However, in a similar survey conducted by the Korean International Trade Association (KITA) for inter-Korea trade firms, the proportion of cash payments is revealed to be below 20 percent.12 In this survey, “financial transactions” include all transactions through both official banking institutions and unofficial institutions in China, such as the Korean Kwangson Banking Corporation (hereafter KKBC)13 in Dandong. “Import” and “hiring NK workers” are the types of businesses that demonstrate a high proportion of financial transactions. These businesses import workers and goods from North Korea, and frequently send money to North Korea thereafter. That is, when Chinese companies make payments for North Korean partners, they prefer relatively safe and convenient financial transactions over cash payments of delivering money in person.
Settlement Proportion from China to North Korea (percent, single response allowed)
Figure 1 displays the results of the survey on payment plans based on trade volume: most of the micro-payments below 50,000 USD are settled by cash; however, payments over 50,000 USD are made through financial institutions. This is because in the case of large payments, the risks associated with cash payments are high; accordingly, the proportion of the payments via financial institutions tends to be high.
Settlement Types based on Trade Volume (percent, single response allowed, USD)
Bank Accounts used in Financial Transactions
Table 3 presents the survey results of the bank accounts used for financial transactions. In the case of exporters who receive money from their North Korean trade partners, the proportion of payments through Chinese bank accounts designated by the KKBC is the highest at 81.8 percent. The KKBC is one of the departments in the Foreign Trade Bank; thus, this result implies that the central organization of the North generally controls the overall process when foreign currency flows out of the country. However, such control seems to be relatively loose in the event of capital inflows because Chinese firms often make payments (e.g., consigned processing, and hiring North Korean workers) by sending money to Chinese banks designated by their North Korean counterparts. North Korean companies seem to stay beyond the capital control of the central organization by opening bank accounts under the names of non-North Korean citizens or front companies (hereinafter borrowed–name accounts) in Chinese banks. That is, the bank accounts managed by the KKBC can be directly controlled and monitored by the Foreign Trade Bank. Therefore, some North Korean firms which have a long-term business relationship with Chinese partners open bank accounts under borrowed Chinese names, and separately manage foreign currency funds on their own. In the survey, Chinese firms that have hired North Korean workers all responded that they have sometimes sent money to a specific account designated by North Korean partners. The North Korean firms which are able to dispatch laborers to China usually have a close relationship with authorities: a case in point is an army–affiliated firm.14 These firms typically have long-term business relations with Chinese counterparts. That is, such North Korean firms seem to have a strong tendency to manage foreign currency funds using their own borrowed–name accounts.
Accounts Used in Financial Transactions of Chinese Companies (percent, multiple responses allowed)
Currency used in Trade Payments
As a settlement currency, the USD is more extensively used than any other currency in financial and cash transactions. The Chinese yuan accounts for 30 percent of payments, which is partially explained by the fact that the yuan payment system has been set up relatively early from 2003 in the North Korea–China border trade. In particular, Chinese importers make USD payments in most financial and cash transactions, indicating that North Korea prefers the USD when receiving export proceeds.
Payment Currency Proportion of Chinese Companies (percent, single response allowed)
Figure 2 shows the type of settlement currency based on trade volume in financial transactions. In the micro-payments below 50,000 USD, the USD and the yuan are used in similar proportions. However, for trading over 50,000 USD, the proportion of USD payments increases to over 60 percent. Taken together with the survey results demonstrated in Figure 1, it is found that financial transactions in USD show a high proportion in transactions over 50,000 USD.
Payment Currency based on Trade Volume in Financial Transactions
Types of Financial Transactions to Circumvent Sanctions
This section explains the types of financial transactions used to circumvent financial sanctions based on the interviews with Chinese managers who conduct business with North Korea as well as high-ranking North Korean defectors. In general, there are five types of circumvention techniques: (1) transactions using borrowed–name accounts; (2) transactions through cash depositories, such as the KKBC; (3) transactions through paper companies; (4) transactions using “business-related joint-venture banks”; and (5) transactions through embassies.
Financial transactions via borrowed–name accounts
The most common strategy to avoid international financial sanctions is as follows: dispatching a banker of the Foreign Trade Bank to a foreign country and having the banker open borrowed–name accounts acting as a “personal bank.” Accordingly, North Korea delivers foreign currency to third countries via diplomatic pouches and makes structured deposits in these borrowed–name accounts held by the banker for trade payments (See Figure 3).
Financial Transactions via Borrowed–Name Accounts
In North Korea, separate international settlement banks exist under the party and the military beyond the Foreign Trade Bank, which is an official foreign exchange bank under the cabinet. For the payment volume using borrowed–name accounts, transactions through the international networks of the Foreign Trade Bank are considerably larger compared with any other bank. Given that the Foreign Trade Bank has long been exclusively handling international payments unlike other banks, the overseas networks of the former are well-developed. In addition, the annual accounting procedure of foreign trading companies is performed only for the transactions, which have been made through the accounts in the Foreign Trade Bank.
Settlements of foreign accounts, managed by the employees of the Foreign Trade Bank, are particularly implemented on a daily basis through fax or e-mail. On a monthly basis, the Foreign Trade Bank staff checks the balance of incomes and outgoings. The assessment results are reported daily or monthly to the Foreign Trade Bank headquarters through fax or email.
Transactions through Cash Depositories, such as KKBC
The KKBC in Dandong is a de facto bank branch that serves as an overseas presence of the Foreign Trade Bank. Furthermore, several other existing North Korean offices seem to conduct similar businesses with the KKBC in Shenyang and Dalian.
The KKBC is an unofficial financial institution that is not granted a banking license by the Chinese government. This institution is a type of a credit cooperative, which stores cash and provides simple deposit and withdrawal services. The method of financial transactions through KKBC is similar to that of using borrowed–name accounts, although this organization also offers cash payment services. In particular, Chinese firms are capable of remitting payments to their North Korean partners by depositing cash (in person) because the KKBC has its own vault where such cash is kept. The KKBC performs financial transactions via borrowed–name accounts using Chinese citizen names. In particular, the KKBC reports deposit breakdowns from Chinese firms to the Foreign Trade Bank headquarters via telephone or fax. Meanwhile, the Foreign Trade Bank sends money to North Korean firms inside North Korea, thereby completing the remittances. North Korean firms also remit funds to their Chinese partners in a similar process: the Foreign Trade Bank headquarters checks the firms’ bank accounts and reports remittance breakdowns; and the KKBC sends money thereafter to its Chinese partners by cash or through borrowed–name accounts (See Figure 4).
Financial Transactions via the KKBC
The KKBC has been subject to the financial sanctions of the UN and the United States several times due to illegal practices. However, this organization has managed to maintain its business with the connivance of Chinese authorities. The KKBC became subject to financial sanctions by the United States in August 2009 on the suspicion of offering financial services to Korea Hyoksin Trading Corporation, which had been on the list of sanctioned entities. Accordingly, the Foreign Trade Bank, as the parent financial institution of the KKBC, was also given sanctions in 2013. In June 2016, when the U.S. Treasury designated North Korea as a jurisdiction of primary money laundering concern, the illegal transaction practice of the KKBC was referred to as a major reason for the designation. In addition, the KKBC was given UN sanctions based on Resolution 2270 which was adopted in March 2016.
Financial Transactions via Paper Companies
In several cases,15 North Korea has been confirmed to have established paper companies in offshore tax havens and avoided financial sanctions using their bank accounts. Two reasons explain why North Korean overseas companies conduct financial transactions by opening bank accounts under the names of paper companies.
First, North Korea can use offshore financial centers (OFCs) located in China and other countries through the accounts of paper companies. OFC refers to a financial center that mediates financial transactions between non-residents by exceptionally exempting or reducing limitations on tax and foreign exchange/capital transactions. That is, paper companies can participate in financial transactions as non-residents because their accounts are considered foreign corporation accounts. Accordingly, North Korean companies can circumvent the regulations of authorities on foreign capital flows. In particular, if North Korea opens a dollar account using a borrowed name at a Chinese financial institution, it cannot transfer money to other Chinese financial institutions located in other Chinese regions while receiving overseas remittances. This situation occurs because Chinese citizens are prohibited from transferring dollars domestically, although they can transfer the yuan within China. However, in the case where the establishment of paper companies and the opening of dollar accounts are conducted under the names of foreign corporations in OFCs, such as Hong Kong, remittance transactions with Chinese financial institutions in China become possible, as well as dollar transfers from/to overseas financial institutions (See Figure 5).
Financial Transactions via Paper Companies
Second, when third country exporters require official trade documents to North Korean importers, the latter can use the accounts of paper companies when necessary. For example, if a North Korean company attempts to import petroleum products from Russia, and a Russian counterpart calls for an official document for trade settlements due to certain issues (e.g., export quotas), the former may be compelled to use the accounts of paper companies because it cannot make payments by cash or through borrowed–name accounts.
To date, the following North Korean paper companies have been disclosed by the media: Larivader Solution, Inc. (2004), Chollima Limited (2000), and Chosun Limited, Koryo Telecom Limited (2001) in the British Virgin Islands (BVI); and DCB Finance (2006) and Phoenix Commercial Ventures (2005) in Panama.
Financial Transactions via Business-related Joint-Venture Banks
Transactions using joint-venture banks is a recently developed bypass method as the international community has strengthened financial sanctions on North Korea. Several formal joint-venture banks currently exist in North Korea, and have been established with investments from the following foreign financial institutions: North East Asia Bank, a joint-venture between the ING Group of the Netherlands and Korean National Insurance Corporation; and Daedong Credit Bank between Peregrine Investment Holding Ltd. and Daesung Bank. These joint-venture banks are official financial institutions; however, “business related joint-venture banks” (hereinafter referred to as “joint-venture bank”) mentioned in this section are relatively new institutions that are established via joint-venture contracts between North Korean firms and their Chinese counterparts. This new type of joint-venture bank is an unofficial financial institution but is registered as a foreign investment company.
A joint-venture bank is established through a joint-venture contract between North Korean and Chinese companies, which have built trust on each other based on a long-term trade relationship. A Chinese company provides funds to establish a bank; therefore, the Chinese CEO of this company is often designated as the president of the bank, while the manager of its North Korean counterpart is appointed as the vice president. The practice of conducting financial transactions through joint-venture banks is similar to the practice of Hawala in Islamic countries, which is an informal value transfer system between borders.
The details of financial transactions are as follows. A North Korean company calls for the Foreign Trade Bank to transfer money in its bank account to the joint-venture bank account to settle trade payments. Outside North Korea, a Chinese company remits the same amount of trade payments to a third country company through its corporate account of the bank located in China after confirming the deposit to the joint-venture bank. Thus, the deal is superficially recorded as a financial transaction between the third country and the Chinese company, and the North Korean company does not appear on the document. In the process of this financial transaction, the related information is only exchanged via telephone, fax, or email without a direct fund transfer between the jointventure bank and the Chinese company (See Figure 6).
Financial Transactions via Business-related joint-venture bank
North Korean authorities seem to have no intention of regulating the business of joint-venture banks because of the substantial and stable amount of overseas settlements conducted through these banks. Joint-venture banks provide deposit and withdrawal services in foreign currencies for individuals, including the implementation of foreign payments. To date, around 30 joint-venture banks are operating in Pyongyang, including First Credit bank, Unsong Credit Joint Bank, and People’s Bank of Great China.
For example, Unsung Credit Joint Bank, which also takes deposits from ordinary citizens in Pyongyang, was established as a joint-venture between Unphasan trading corporation of the North and Liaoning Well-Hope Agri-tech16 of China in 2011, and still seems to operate actively. This joint bank is located in Potongang hotel, Pyongyang and reportedly takes foreign currency deposits such as the euro and yuan from ordinary citizens. Given the advertisement of the bank, offering savings with a maturity of a maximum of 10 years, it likely gets considerable confidence from North Korean citizens.
Transactions via Embassy
In a financial transaction disguised as a typical trade deal, a trade representative of the North Korea embassy in a third country connects third country companies with their Chinese counterparts. That is, Chinese companies import goods from North Korea and subsequently re-export these goods to third country companies and vice versa. In this case, the trade transactions seem to be normal on the surface because the official documents are prepared, thereby showing import and export records between China and the third countries. Therefore, judging whether a transaction is subject to sanctions is difficult. For the third country that is friendly to North Korea (e.g., Syria), the role of the embassy employee becomes significant. In the case of weapons-related trade with Iran, payments were made through transactions between an Iranian and a Chinese firm.
Financial Transactions via Embassy
Policy Measures to Improve the Effectiveness of Financial Sanctions▼
This section recommends specific measures to improve the effectiveness of financial transactions: (1) banning financial transactions through business-related joint-venture banks (2) strengthened surveillance of transactions through offshore financial institutions (3) monitoring of non-USD financial transactions and (4) scrutinized analysis of the underlying commodity trade based on North Korea’s financial transaction practices.
Banning transactions through joint-venture banks
One of the important findings in an interview with high-ranking North Korean defectors is that the proportion of financial transactions via business-related joint-venture banks (p. 185) has dramatically increased as international financial sanctions have recently strengthened. According to the testimony of a North Korean defector who had been in charge of trade settlements in foreign embassies in Southeast Asia and defected from the North in 2015, one main reason the North–China trade volume has soared after 2010 is that North Korea set up a new trade settlement system using joint-venture banks. In fact, an Informal Funds Transfer (IFT) or Informal Hawala System has been used as a remittance path of illegal funds; thus, the regulatory framework on this issue is discussed. In October 2001, the Financial Action Task Force (FATF) agreed on Special Recommendations on Terrorist Financing, which included extending anti-money laundering requirements to alternative remittance systems.17 Particularly, the 2017 UN panel report pointed out that, i) banks of the DPRK form joint ventures with foreign companies, ii) foreign companies establishing banks inside the DPRK are important circumvention techniques to negate the impact of financial sanctions. More specifically, International Consortium Bank, Chinese Commercial Bank, Kumgyo International Commercial Bank and First Eastern Bank are referred to as examples.18 Likewise, North Korea’s evasive methods have evolved from simply opening borrowed–name accounts at financial institutions to using overseas non-financial institutions. Although they are not official financial institutions, they offer banking business services such as taking deposits and remitting money overseas for ordinary companies based on long-term business relations and trust. Therefore, banning de facto banking business and financial transactions between North Korea and third country companies having long-term trade and investment ties with the North should be executed.
Strengthened surveillance of transactions through OFCs
The USD financial transaction is still an important method of overseas settlements for North Korea. The proportion of financial transactions increases, and the USD is frequently used as a payment currency as trade volume increases. Furthermore, North Korea prefers dollars when it receives export proceeds. Therefore, in a bid to increase the efficiency of financial sanctions on North Korea, enhancing sanctions on financial transactions using the USD is significant.
According to the testimonies of high-ranking North Korean defectors, a high portion of remittances on behalf of North Korea are executed using the accounts in OFCs (e.g., in Pudong in the Shanghai Free Trade Zone); and many accounts used in foreign trade are opened in a large Chinese bank headquartered in Shanghai. In most transactions, North Korea uses the names of paper companies established in tax havens such as the British Virgin Islands. In the case of OFCs, it is relatively easy to open accounts and to hide North Korean nationality.
OFCs are located within the territory, but their accounts are considered foreign entities in terms of capital movements and financial regulations. Therefore, if doing business by opening accounts under the names of non-resident foreign paper companies at financial institutions in Shanghai FTZ, more liberal financial transactions are possible, being free from burdensome regulations related to capital movement control by the Chinese authority.19
Since the Shanghai free trade zone also has the function of an offshore renminbi center, regulations on the use of the renminbi are relatively loose in international payment and capital movements. In case North Korea opens accounts in OFCs to use the accounts for renminbi settlements, foreign-currency loans and USD remittances, it can easily avoid regulations and procedures required for capital movements within China; however, thus far, the international community and the United States have not sufficiently considered this matter when imposing financial sanctions on the North. Therefore, it needs to come up with measures to block the access of North Korea to OFCs. Even though the North uses paper company names, the effectiveness of sanctions can increase by strengthening the verification of related documents such as powers of attorney (POW) and by thoroughly checking the details of the company when opening the account.
Monitoring of non-USD financial transactions
North Korea is expected to employ more complicated circumvention techniques to nullify the impact of financial sanctions by the international community and the United States as overseas settlements in USD become considerably more difficult. For example, North Korea may shift the currency for financial transactions to the yuan or the Russian Ruble. Indeed, financial transactions in the yuan are likely to increase further due to the expanding trend of yuan settlements spurred by China’s yuan globalization plan. The preceding survey results indicate that the yuan’s proportion in over 50,000 USD transactions is predicted to increase if this currency is mainly used for micro-payments below 50,000 USD.
In addition, North Korea is highly likely to shift its settlement institutions from China to third countries since U.S. authorities mainly keep watch on Chinese institutions. In the survey of this paper, only 5.3 percent replied that they had experience using third country financial institutions for trade settlements (See Table 3). However, this proportion may increase since Chinese financial authorities have recently strengthened surveillance on North Korea-related trade. This possibility is underpinned by the testimonies of high-ranking North Korean defectors who claim that the proportion of trade settlements using Indonesian and Malaysian financial institutions is considerably high.
North Korea is also likely to increase financial transactions using the ruble because Russia is considered to have a weak intention to implement sanctions.20 Indeed, North Korea agreed with Russia on the introduction of the trade payment system using the ruble in the 6th Economic Community Council held in Vladivostok in June 2014. Thus, the correspondent accounts of North Korean banks were opened in the state-run Russian Regional Development Bank (RRDB).21 The Ministry for Development of the Russian Far East explained that the amount of ruble payments reached 3.5 billion rubles in the six months after the introduction of the payment system.22
Scrutinized analysis of the underlying Commodity Trade
As the North uses non-U.S. dollar currencies in financial transactions, it is more difficult to exclusively detect illegal practices only with monitoring illicit financial transactions. One strategy is to combine various commodity trade data (e.g., customs, trade, ship registration, vessel position information, and business registration) accompanied by financial transactions and applying network analysis. In particular, network analysis linked to goods transactions could be a beneficial tool to discover overseas settlements via joint-venture banks. Such illegal practices are difficult to detect due to the person-to-person transaction form and the similar features of the foreign exchange fraud business. The Asan Institute for Policy Studies of Korea and the Center for Advanced Defense Studies (C4ADS) of the United States disclosed the dual-use goods transaction between North Korea and China’s Liaoning Hongxiang using network analysis.23 Network analysis is also utilized in the expert panel research of the UN Sanctions Committee. The panel report stated that 500 loose connections among companies and individuals were initially discovered, resulting from the analysis of diverse financial transaction data. However, as the research progresses, analyzing the expanded network has become possible with 700 individuals, 1,600 companies, and 2,500 institutions.24
Along with the data analysis, scrutiny of goods transactions should be strengthened through a considerably practical approach, such as cargo inspections. That is, the regulation in Resolution 2270, which requires all member states to inspect cargo destined for or originating from North Korea, should be effectively implemented. If illicit transactions are uncovered through cargo inspections, other related information regarding illegal financial transactions can be obtained with the cargo loading document as proven in the Chong Chon Gang case. Through the financial transaction documents of the Ocean Maritime Management Co. (OMM), the owning company of Chong Chon Gang,25 Chinppo Shipping and Senat Shipping in Singapore, and Mariner’s Shipping in Thailand, were revealed to have paid tolls for the Panama Canal on behalf of OMM.26
Conclusion▼
This study analyzes the circumventing practices of North Korea to bypass the financial sanctions imposed on its financial transactions. The current analysis is based on a survey of 100 Chinese firms conducting business with North Korea, as well as in-depth interviews with high-ranking North Korean defectors who had worked in the financial sector.
The survey shows that North Korea prefers financial transactions rather than cash in trade settlements above a certain size. In particular, the proportion of USD transactions remains high. Thus, if the United States is able to properly restrict USD financial transactions via secondary boycott,27 the effectiveness of economic sanctions on North Korea will be significantly improved. In the case of the sanctions on Iran, U.S. authorities imposed huge fines on large European banks and canceled correspondent arrangements with them because these banks had acted as proxy in making settlements related to oil exports. If the sanction measures are enacted, North Korean companies may experience more difficulties in finding individuals or companies that will assist them in opening borrowed-name accounts. Such a possible obstacle could considerably reduce the number of bypassing transactions via the third country financial institutions, along with higher transaction costs.
As the methods of North Korea’s circumventing sanctions have become considerably complicated, finding illicit practices has become difficult as well. In particular, transactions via joint-venture banks and OFCs are pointed to as the most noteworthy among North Korea’s circumvention techniques. In addition, the expansion of non-USD settlements (e.g. renminbi, ruble) has created favorable circumstances for North Korea to diversify its illegal financial transactions. Therefore, simple monitoring of financial institutions is insufficient to trace out illegal deals. Surveillance of financial transactions through non-financial institutions and goods transactions by using network analysis and practical cargo inspections must be intensified.