Last Wednesday, the United States Treasury added to its economic pressure campaign against North Korea, sanctioning a variety of entities the Kim regime uses to evade international, multilateral sanctions. In announcing moves against these targets on January 24, the Treasury Department said that “[t]oday’s sanctions target agents of the Kim regime financing or otherwise supporting North Korea’s WMD programs and other illicit businesses.”
While the administration and its allies in the region have relied on military deterrence and ratcheting up of sanctions, there is a missing component: a concerted international effort to roll back North Korea’s abuse of the global financial system to aid in the procurement of weapons of mass destruction, which those who study the issue call countering proliferation finance (CPF).
These new designations follow a number of high-profile cases underscoring how North Korea evades international sanctions. At the end of 2017, South Korean authorities announced that they had seized a Panamanian-flagged oil tanker suspected of transferring oil to North Korea, in violation of international sanctions designed to deter the country’s further pursuit of nuclear weapons capability. This is the second such seizure since November 2017 and underlines the sophistication of North Korea’s proliferation networks. While many states have engaged in transnational financial criminal behavior — money laundering and sanctions evasion — the threat emanating from North Korea is unique. Its ability to exploit weak spots in the global financial regulatory and nuclear nonproliferation regimes is unparalleled.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Countering proliferation finance requires additional layers of investigatory sophistication compared to other forms of economic national security tools. Matching account holders against lists of sanctions designations provided by governments, which banks can do in a straightforward way with screening software and existing know-your-customer (KYC) policies, is insufficient. Banks need to be more proactive in recognizing activity patterns that are the tell-tale signs of a proliferation network.
North Korea’s past behavior has underscored the multifaceted nature of the threat. The September United Nations Panel of Experts report lists examples of covert North Korea financial activity in places as widely dispersed as Italy, Hong Kong, and Singapore. In these cases, recognizing those patterns requires a high-degree of awareness of the underlying issue and coordination at multiple points: within the global operations of a single bank; between banks themselves; and between banks and the different regulatory, law enforcement, and intelligence agencies of their home governments.
A serious countering proliferation finance effort is indispensable for the U.S. response to North Korea. Targeting North Korea’s proliferation networks would be less disruptive to the international financial system than envisioned by the administration’s recent Executive Order which gives the Treasury Department broad authority to target any financial institution in any jurisdiction which has handled significant transactions on behalf of North Korea. Some of the measures also target natural resources trade (principally with China) which would require a tremendous amount of resources to monitor and interdict.
By contrast, a robust CPF strategy can follow much of the investments already made by intelligence agencies, law enforcement, financial regulators, and the private sector (especially banks) in related fields: anti-money laundering, export control regimes, countering the financing of terrorism, and preventing sanctions evasion. To protect its own business model and to comply with the requirements of national and international regulators, banks and other financial services firms have invested in personnel and technology to comply with the increasing focus of the United States and its allies and partners on the use of targeted financial sanctions to curtail illegal activity and achieve foreign policy goals. CFP requires building on that foundation with a further level of investment and engagement.
The good news is that there exists a road map for implementation of CFP measures; the bad news is that it is poorly coordinated among the public and private sector in many jurisdictions and many states which want to do more on the issue find they lack sufficient legal authority and capacity to do so.
A North Korea-focused CFP regime would necessitate banks obtaining granular information about their customers, reporting suspicious financial activity in a prompt way to relevant law enforcement or intelligence authorities, and integrating themselves into information-sharing mechanisms that ensure their access to the most up-to-date warnings about emerging threats.
The United States, working with other national- and international-level partners can do a lot to make these efforts more seamless. The United States should raise awareness about the issue among the variety of public and private sector actors who are bound by United Nations Security Council Resolutions. U.S. officials should highlight, in particular, the extent to which proliferation finance is distinct from other financial crime threats. Additionally, after raising these concerns, the United States should encourage multilateral fora like the Financial Action Task Force (FATF) to expand its risk assessment work.
Some of this activity may be seen as intrusive, especially by states concerned by government surveillance and intelligence services knowing too much about their citizens financial activity without appropriate safeguards. Those reservations have merit, and reconciling different privacy standards will remain a roadblock to cooperation.
However, given the nature of the threat, privacy worries must be balanced by the need to head off the next generation of Pyongyang’s sophisticated attack capabilities. Not doing so risks a catalytic event, like the successful mating of a nuclear warhead to an intercontinental ballistic missile, leading to a knee-jerk imposition of a much more intrusive and broad regime of economic surveillance, with potential macroeconomic consequences.
Every day that Pyongyang abuses the international financial system to finance its proliferation activity is another day which contributes to an atmosphere of crisis in East Asia. For U.S. deterrence to be credible, it needs to coordinate an aggressive strategy to close off these avenues of illicit finance. Doing so would both move the international community to achieving an important arms control goal and maintain the integrity of the global financial system.
Neil Bhatiya is a Research Associate for the Energy, Economics, & Security Program at the Center for a New American Security (CNAS).