How Chinese Front Companies Help North Korea Evade International Sanctions

Here is why UN sanctions do little to stop North Korea from receiving foreign currency to sustain the regime and their weapons programs:

The North’s ability to finance itself, despite growing international sanctions, can be credited to a broad range of illicit activity that spans the world, according to experts. For example, schemes employed by the regime to garner profits include currency and cigarette counterfeiting, insurance fraud, illicit drug production and trafficking, weapon sales and even wildlife and human trafficking, according to U.N. and Congressional reports.

A 2008 Congressional Research Service report estimated that North Korean criminal activity could rake in anywhere from $500 million to $1 billion per year.

But these activities represent just a fraction of the North’s profits, according to experts. Its most lucrative gains, they say, come from a complex web of illicit networks set up largely within China that allow it to maintain access to international markets.

“When you’re talking about these Chinese networks, you’re talking in the hundreds of millions or billions of dollars,” said David Thompson, a senior analyst at the Center for Advanced Defense Studies, a nonprofit research firm based in Washington. “The more small-scale illicit activity is definitely going to help fund their overseas presence, but I don’t think it’s anywhere close to the scale of these China-based networks.”

The proceeds from these networks are far-reaching: some help Pyongyang procure goods from abroad, while others help it maintain a stable economy.

Much of the rest is believed to finance weapons and missiles. As the Obama administration concluded in 2016, North Korea’s “state-controlled financial institutions and front companies” are used “to conduct international financial transactions that support the proliferation and development of WMD and ballistic missiles.”

To access the global financial system, North Korea has been known to establish business relationships with Chinese companies, which effectively act as middlemen for the regime and allow Pyongyang to mask illicit dealing under the cover of more legitimate trade activity. These companies sell North Korean exports, but rather than send that money back to North Korea — which is almost entirely cut off from international markets — the money is transferred to overseas bank accounts set up within established front companies.

When North Korea needs certain products — from raw materials for its nuclear weapons program to goods ranging from sugar to cell phones — these China-based companies can then buy the goods via the front companies.

“Almost all trade and finance, legitimate or illegitimate out of North Korea, flows through China on its way into or out of North Korea,” said Andrea Berger, a senior research associate at the Middlebury Institute of International Studies. “And that’s not just for the nuclear program — that’s for legitimate goods, that’s for sanctioned commodities, that’s for dual use goods, that’s for finance. And that pattern applies quite widely.”  [PBS Frontline]

You can read more at the link, but it seems the Trump administration is going to have to sanction individual Chinese banks that get caught doing business with these Chinese front companies linked to North Korea.  If the Chinese banks fear being cut off from the international banking system they will be more vigilant to ensure no transactions involving North Korea are flowing through their banks.

Right now it seems like there is very little incentive for these banks to crackdown on these front companies.  Of course sanctioning these Chinese banks will lead to likely retaliation of some kind from the Chinese government.  However in the past sanctioning a Chinese bank has actually changed regime behavior.  Long time readers may remember the reaction from North Korea during the Banco Delta Asia lockdown of their funds by the Bush administration.  There was a noticeable change in North Korean behavior over the short-term before the found other businesses and banks to move their money.

Should China Militarily Take Over North Korea?

I doubt the Chinese would want to overnight take on responsibility for the basket case that is North Korea, but if they did it seems this would be one of the least bad options for the United States to resolve the nuclear issue:

Flags of China and North Korea are seen outside the closed Ryugyong Korean Restaurant in Ningbo, Zhejiang province, China, April 12, 2016.

A longtime editor of a magazine that specializes in global power politics recently put forth a scenario where China would stage a takeover of North Korea, giving Washington and the rest of the world a nuclear weapons-free Korean Peninsula.

Bill Emmott, the former editor-in-chief of The Economist magazine, said such a move by China would not only gain Beijing a solid foothold on the Korean Peninsula, but also the opportunity to strengthen its own geopolitical position, enhance its global power status, perhaps even the ability to claim the reputation of a peacemaker.

That is the “least bad military option” vis a vis North Korea, Emmott said, in that it would avoid subjecting U.S. allies in Asia, including South Korea and Japan, to North Korea’s retaliation that could potentially devastate large parts of South Korea.

China’s takeover of North Korea, as Emmott sees it, would put North Korea “where the country’s post-Korean War history suggests it belongs: under a Chinese nuclear umbrella, benefiting from a credible security guarantee.”

He also said he sees incentives for North Koreans to go along with the plan: “Whereas a nuclear exchange with the U.S. would mean devastation, submission to China would promise survival, and presumably a degree of continued autonomy.”

Emmott said this strategy could win over a majority of North Korea’s military, “except those closest to Kim.”  [VOA News]

You can read more at the link, but considering the importance of race based nationalism in North Korea getting the military to go along with this idea I think would be a very tough sell.

The Historical Context of the Adversarial Relationship Between North Korea and China

Noted journalist Blaine Harden has a good piece published on the PBS Frontline website that explains why North Korea has such an adversarial relationship with China despite the Kim regime being dependent on their aid:

Kim Il-sung grew up in northeast China, where in the 1930s he became a guerrilla leader and fought alongside Chinese Communist partisans against Japanese occupiers. Without warning, local Communists turned on Kim and his men. Several hundred ethnic Koreans were tortured and murdered in a racist purge based on the party’s paranoid, and false, belief that they were secretly working with the Japanese.

Kim was arrested in China in 1934 and was lucky to survive. He later called the purge “a mad wind … [Koreans] were being slaughtered indiscriminately by [Chinese] with whom they had shared bread and board only yesterday.”

During the Korean War, his bitter memories were compounded by a painfully public loss of face. Kim Il-sung started the war in 1950 by invading South Korea with the backing of Stalin’s Soviet Union. But his army was soon obliterated by an American-led coalition and North Korea all but disappeared — until Chinese forces entered the fight and forced Kim to the sidelines of his own war. China’s top general, Peng Dehuai, chided Kim for his “extremely childish” leadership, telling him, “You are hoping to end this war based on luck.”

Kim Il-sung would never forget how he was treated. After the war, he made sure that China’s role in saving and rebuilding his state was largely erased from official histories. His resentment was compounded in 1980, when China publicly denounced as feudalism his decision to transfer absolute power to his son, Kim Jong Il, a succession that made North Korea the world’s only hereditary Communist kingdom.

Ill feelings between North Korea and China have often been mutual. Mao Zedong regarded Kim Il-sung as rash and doctrinaire — once describing him as “a number-one pain in the butt.” In 1992, China infuriated the Kim family by establishing diplomatic relations with South Korea, the archenemy of the North.  [PBS Frontline]

You can read more at the link, but just like his grandfather Kim Jong-un is being a “pain in the butt” to China.  However, he knows he can be adversarial because the Chinese will likely do nothing to remove the Kim regime because of the alternatives to the “pain in the butt” are worse.  That is why the Chinese will never completely abandon the regime until there is a better alternative offered.

Picture of the Day: North Korea Tells Chinese News Media “To Mind Their Own Business”

N.K. blasts Chinese media on nuke coverage

An article carried by the Rodong Sinmun, the organ of North Korea’s ruling party, on Sept. 22, 2017, blasts Chinese media for criticizing the North’s nuclear program. The article, published on Page 6, called out different outlets of China, the biggest patron of the North, by names and called their news coverage “an act of the blind whose eyes are open and the deaf and dumb” who cannot understand the essence of the nuclear issue. “They had better mind their own business, before impudently pointing an accusing finger at others,” it said. (Yonhap)

After Latest North Korean Missile Launch Congress Wants Tougher Action

It appears that some in Congress want to force China to make a tough decision of either supporting the Kim regime or remain part of the international banking system:

Frustrated U.S. lawmakers called on Tuesday for a high-powered response to North Korea’s nuclear tests, saying Washington should act alone if necessary to stiffen sanctions on companies from China, Russia and any country doing business with Pyongyang.

“I believe the response from the United States and our allies should be supercharged,” said Representative Ed Royce, chairman of the House of Representatives Foreign Affairs Committee.

“We need to use every ounce of leverage … to put maximum pressure on this rogue regime,” the Republican congressman told a hearing on North Korea. “Time is running out.” (……)

“We can designate Chinese banks and companies unilaterally, giving them a choice between doing business with North Korea or the United States,” said Royce, who had breakfast on Tuesday with Secretary of State Rex Tillerson.

“We should go after banks and companies in other countries that do business with North Korea the same way,” he said.  [Reuters]

You can read more at the link.

Picture of the Day: Cemetery for Chinese Soldiers Killed in the Korean War

S. Korean cemetery for fallen Chinese soldiers

Flowers are laid at the tombs of Chinese soldiers, killed in the 1950-53 Korean War, in the city of Paju, north of Seoul, on Sept. 12, 2017. China fought on the North Korean side in the war against South Korea aided by the United States-led Allied Forces. (Yonhap)

Russia and China Successful In Efforts to Water Down UN Sanctions on North Korea

As expected the United Nations sanctions in response to North Korea’s nuclear test have been watered down by the Russians and the Chinese.  The cuts in oil imports and ban on textile exports will inconvenience the Kim regime, but I see nothing in these sanctions that will be a game changer in regards to changing the current status quo on the peninsula which is what the Chinese and Russians want to maintain:

Nikki Haley, left, U.S. ambassador to the United Nations, and Liu Jieyi, right, China’s ambassador to the United Nations, vote in favor of a Security Council resolution to impose fresh sanctions on North Korea over its latest nuclear test at the UN headquarters in New York on Monday. [XINHUA/YONHAP]

The UN Security Council on Monday unanimously adopted new sanctions against North Korea following its sixth nuclear test, imposing a cap on exports of crude oil to the country, though it fell short of a complete ban.

The 15-member council based in New York approved Resolution 2375, which imposes a cap on the supply, sales or transfer of crude oil to North Korea to the level of the past 12 months, some 4 million barrels, and limits exports of refined petroleum products to the country to 2 million barrels a year. It also bans the sale of condensates and natural gas liquids to the North.

However, the latest resolution fell short of the complete oil embargo called for in an earlier U.S.-drafted resolution, which would have needed the support of veto-wielding members China and Russia.

The resolution, though considered a watered-down version of the U.S. draft, will reduce oil provided to North Korea by around 30 percent, according to the U.S. mission to the United Nations, and cut off over 55 percent of refined petroleum products going to the country. China is the largest supplier of crude oil to the North.

It also includes a ban on North Korean textile exports, which was the country’s second largest export category in 2016 after coal and other minerals, and is expected to reduce its revenues by up to $800 million.

The latest resolution does not include North Korean leader Kim Jong-un or his sister on its blacklist, as initially proposed.  [Joong Ang Ilbo]

You can read more at the link.

Are North Korea’s Recent Provocations Timed to Embarrass China?

The timing of the recent provocations could just be coincidence, but maybe the Kim regime is trying to embarrass Chinese President Xi:

“There’s a lot of domestic politics in North Korea where this young leader who isn’t well-known, he’s not proven yet, especially has to show that he’s not in the pocket of Beijing,” said John Delury of Seoul’s Yonsei University. “I think he made the decision first to keep Hu Jintao and then (current President) Xi Jinping really at bay.”

Within months of coming to power, Kim telegraphed North Korea’s intentions by amending its constitution to proclaim itself a nuclear state. The execution of Jang in 2013 sealed Beijing’s distrust of the young leader.

“Of course the Chinese were not happy,” said a foreign diplomat in Beijing focused on North Korea. “Executing your uncle, that’s from the feudal ages.”

In an attempt to warm ties, Xi sent high-ranking Communist Party official Liu Yunshan to attend the North’s October 2015 military parade marking the 70th anniversary of the founding of the Workers’ Party of Korea.

Liu hand-delivered a letter from Xi praising Kim’s leadership and including congratulations not just from the Chinese Communist Party but Xi’s personal “cordial wishes” in a powerful show of respect.

Xi’s overture has been repaid with increasingly brazen actions by Pyongyang, which many observers believe are timed for maximum embarrassment to Beijing. Sunday’s nuclear test, for example, took place as China hosted a BRICS summit, while in May, the North launched a long-range missile just hours before the Belt and Road Forum, dedicated to Xi’s signature foreign policy initiative.  [Reuters]

You can read more at the link.

President Trump Says Military Strike Not First Action After Call with President Xi

Here is the latest on the follow up actions from the Trump administration after North Korea’s weekend nuclear test:

President Donald Trump left war with North Korea on the table as an option if Pyongyang doesn’t behave after a call with China’s Xi Jinping on Wednesday that the the U.S. leader described as ‘very, very frank.’

Trump told reporters as he was leaving the White House for a tax speech outside Washington, ‘We will not be putting up with what’s happening in North Korea.’

War is ‘certainly not our first choice,’ he said in response to a shouted question, ‘but we will see what happens.’

The administration has repeatedly said it is keeping every option on the table as it grapples with the threat from North Korea. The president’s remark is likely to stir new worries, however, that Trump is actually mulling military action. [Daily Mail]

You can read more at the link, but why shouldn’t the President consider all options available to him?  It is pretty clear the Chinese option is the one he is pursuing and giving a chance to work before even contemplating a military response.

World Responds to Sixth Nuclear Test Conducted By North Korea

So what is South Korean President Moon Jae-in going to do after this latest provocation?  Just last month he said a red line for him would be if North Korea developed a nuclear weapon that could be outfitted on an ICBM and that is what the Kim regime is claiming they have done:

North Korea said Sunday that it has successfully conducted a test of a hydrogen bomb that can be loaded into its intercontinental ballistic missile (ICBM) in what could be the most powerful detonation.

In an “important” announcement, North Korea said that it carried out the sixth nuclear test at 12:00 p.m. (Pyongyang Time), calling it a “perfect” success.

The announcement came hours after an artificial earthquake with a 5.7 magnitude was detected near North Korea’s nuclear site in the northeastern area.  [Yonhap]

Here is what Moon Jae-in’s response is to crossing a “red line”, more sanctions:

South Korea strongly condemned North Korea’s latest nuclear test Sunday, vowing to push for fresh and the most powerful sanctions by the U.N. Security Council to completely isolate the communist state.

“President Moon Jae-in said the country will never allow North Korea to continue advancing its nuclear and missile technologies,” Moon’s key security adviser Chung Eui-yong said at a press briefing on the outcome of the National Security Council (NSC) meeting held earlier in the day.  [Yonhap]

The Japanese Prime Minister’s word are in line with Moon’s in regards to taking North Korea to the UN Security Council:

The nuclear test was confirmed by the Japanese government, which said the North had conducted the blast, but criticism of the test was rife around the globe.

In Tokyo, Prime Minister Shinzo Abe slammed the test as “absolutely unacceptable” and vowed a tough response at the United Nations.  [Japan Times]

Some how I doubt the Kim regime is impressed by threats of taking them to the UN Security Council.  I guess we will see if the nuclear test will be enough to get the ROK government to move the blockade preventing the installment of the remaining four THAAD launchers in Seongju.

North Korean leader Kim Jong-un reportedly inspecting the loading of a hydrogen bomb onto a new intercontinental ballistic missile, according to North Korea’s state media, a claim that some outside experts doubt but one that intensifies already high levels of concern on the Korean Peninsula. [AP/YONHAP]

It appears this and other issues are reaching a boiling point with President Trump who heavily criticized President Moon over Twitter:

It appears that President Trump is about to put significant pressure on South Korea over the US-ROK Free Trade Agreement despite the nuclear test:

On trade, the president’s top economic advisers remain deeply divided over a possible withdrawal from the United States-Korea Free Trade Agreement, as negotiators from both countries struggle to rewrite the five-year-old deal.

In recent days, a frustrated Mr. Trump has pushed his staff to take bold action against a host of governments, including the one in Seoul, that he has accused of unfair trade practices. But many of his more moderate advisers, including the chairman of the National Economic Council, Gary D. Cohn, believe that such a move could prompt a trade war that could hurt the United States economy.

An industry publication, Inside U.S. Trade, first reported late Friday that the administration was considering withdrawing from the treaty as early as next week.

“Discussions are ongoing, but we have no announcements at this time,” a White House spokeswoman said in an email.

But Mr. Trump, asked during a trip to the Gulf Coast on Saturday whether he was talking with his advisers about the trade deal, said: “I am. It’s very much on my mind.”

The idea of potentially withdrawing seems to have been prompted by the breakdown in negotiations between South Korean officials and the United States Trade Representative, Robert E. Lighthizer, an American official with knowledge of the situation said.  [New York Times]

I think a country that should be concerned about US economic retaliation is China if President Trump follows through on a threat to cut all trade with nations doing business with North Korea:

In recent days, the president has said more sanctions, coupled with implied and explicit threats of military action, would motivate Pyongyang to change its behavior.

The Treasury secretary, Steven Mnuchin, said on Sunday that he planned to draft a new sanctions package that would cut economic ties with anyone who did business with North Korea.

“There’s a lot we can do to cut them off economically, much more than we’ve done,” Mr. Mnuchin said, speaking on “Fox News Sunday.” He called Pyongyang’s actions “unacceptable” and stressed the need for stronger steps.

Mr. Trump went so far on Sunday as to threaten to stop “all trade with any country doing business with North Korea,” an extremely unlikely prospect that, if carried out, would have cataclysmic consequences for the global economy. China is just one of the dozens of countries that trade with the North.  [New York Times]

With 90% of trade into North Korea going through China it is pretty obvious the only way for sanctions to work is to focus on China.  However, the consequences of an embargo on Chinese made products would have significant repercussions on the US economy until manufacturers could reestablish product lines in other countries.  Because of this it seems the sanctions on China need to be incremental to give manufacturers enough time to move out of China.

Here is what China had to say about the nuclear test:

China urged North Korea to stop its “wrong” actions, after the reclusive said it had a successful test of hydrogen bomb that can be mounted onto its inter-continental ballistic missiles on Sunday.

In a statement on its website, China’s Foreign Ministry said China resolutely opposed and strongly condemned North Korea’s actions, and urged the country to respect U.N. Security Council resolutions.

North Korea “has ignored the international community’s widespread opposition, again carrying out a nuclear test. China’s government expresses resolute opposition and strong condemnation toward this,” the ministry said in the statement.  [Korea Times]

Judging by this statement it doesn’t appear China is prepared to do much against North Korea in response to the nuclear test.  The coming days should be interesting to see how the Trump administration responds.  It is pretty clear increased sanctions are going to happen, but will there be any military response as well?