July 19, 2017

House Financial Services Monetary Policy and Trade Subcommittee – “Restricting North Korea’s Access to Finance”

Key Topics & Takeaways

  • Cooperating with China: Several panelists encouraged policymakers to design additional sanctions against North Korea in a way that would induce Chinese leaders to cooperate. Harvard University’s John Park stated that there could be common ground for cooperation by addressing Chinese authorities’ concerns pertaining to corruption, narcotics trade and counterfeiting. Rosenberg added that it is possible for the U.S. to “create the conditions” in which China would see it in their interests to cooperate on sanctions.
  • Chinese Banks: The Foundation for Defense of Democracies’ Anthony Ruggiero suggested finding ways to target Chinese banks that are “complicit” in evading the North Korea sanctions regime.  He added that the U.S. Treasury Department is “going after” Chinese banks that facilitate U.S. dollar transactions, but he indicated that this will “take a lot of work” to “reverse the tide of the last ten years.”
  • Know-Your-Customer: Rep. Warren Davidson (R-Ohio) asked whether know-your-customer (KYC) requirements extend to “know-your-supplier.”  The Center for a New American Security’s Elizabeth Rosenberg explained that major global banks need to know “their customer’s customer” and take this issue very seriously.

 

Witnesses

  • William Newcomb, Visiting Scholar, U.S.-Korea Institute, School of Advanced International Studies, Johns Hopkins University
  • Anthony Ruggiero, Senior Fellow, Foundation for Defense of Democracies
  • Elizabeth Rosenberg, Senior Fellow, Center for a New American Security
  • John Park, Director, Korea Working Group, Belfer Center for Science and International Affairs, Kennedy School of Government, Harvard University

 

Opening Remarks

Rep. Andy Barr (R-Ky.), Chairman, House Financial Services Subcommittee on Monetary Policy and Trade

Barr noted North Korea’s ongoing missile testing, continued abuse of political prisoners, inhumane treatment of American Otto Warmbier, and other provocations, and concluded that these actions required increased sanctions on the regime “more realistic and more ambitious.”  He expressed interest in imposing new sanctions on targets that can “influence” North Korea’s behavior – including actors that reside outside of North Korea’s borders.  Barr acknowledged that China will be “central” to these efforts, and cautioned that Beijing’s desire for regional stability should behoove them to act.  He clarified that the U.S.’s “overarching goal” for designing new sanctions is the protection of American lives and territory and thus “stopping North Korea from being able to threaten the U.S. with a nuclear” device.

 

Rep. Gwen Moore (D-Wis.), Ranking Member, House Financial Services Subcommittee on Monetary Policy and Trade

Moore stated that North Korea is a “belligerent nation with nuclear ambitions and an unstable leader.”  She stated that the best tool to confront the North Korean regime is “global leadership and credibility to lead diplomacy and sanctions efforts,” yet she highlighted vacancies in key regional diplomatic roles.  Moore claimed that North Korea is “well versed at sanctions evasion” and thus called for global cooperation on sanctions enforcement.

 

Rep. Brad Sherman (D-Calif.), Member, House Financial Services Subcommittee on Monetary Policy and Trade

Sherman stated that more “rhetoric” will not force North Korea to change its behavior.  He argued that the options for the U.S. are twofold: 1) Pressure China to cooperate on sanctions and threaten to close their access to U.S. markets if they do not do so; or 2) “build fallout shelters.”

 

Rep. Ed Royce (R-Calif.), Member, House Financial Services Subcommittee on Monetary Policy and Trade and Chairman, House Foreign Affairs Committee

Royce mentioned several legislative attempts to expand sanctions on North Korea, but he noted several “loopholes” that undermine their effectiveness.  He referenced his bill, H.R. 1644, the Korean Interdiction and Modernization of Sanctions Act, which passed the House by a 419-1 vote yet is facing “trouble” in the Senate.  Royce added that enforcement and leverage over Beijing are both key to this effort.

 

William Newcomb, Visiting Scholar, U.S.-Korea Institute, School of Advanced International Studies, Johns Hopkins University

Newcomb stated that it is crucially important that sanctions are legally binding among all United Nations (UN) member states.  He stated that the current framework has built-in loopholes that were “insisted upon” by China and Russia, that success was “blunted” by “inadequate action” by most member states, and that implementation is poor even among UN Security Council members.  Newcomb called for more technical assistance where it is needed, challenging those that lack the political will to bolster sanctions, and ensure those that help the regime evade sanctions “face consequences.”

 

Anthony Ruggiero, Senior Fellow, Foundation for Defense of Democracies

Ruggiero maintained that “sanctions remain the best policy option” to counter North Korea’s nuclear ambitions.  He noted the success of sanctions that eventually “brought Iran to the negotiating table.” He highlighted the “disturbing” extent to which Chinese banks help North Korea evade sanctions and recommended that the U.S. “move aggressively” against such enablers. Ruggiero claimed that North Korea used Chinese banks to process at least 2.2 billion dollars through the U.S. financial system between 2009 and 2017.

 

Elizabeth Rosenberg, Senior Fellow, Center for a New American Security

Rosenberg lamented that the current sanctions against North Korea have “limited utility,” which she said was “unsurprising” given the narrow scope and limited implementation (including by China).  She encouraged policymakers to use restrictive measures more comprehensively, close loopholes and strengthen enforcement.  For instance, she suggested expanding the scope to those that raise and launder money for the North Korean regime, focus on “front companies in China and elsewhere,” require all payments be held in escrow outside the peninsula with limitations on how funds can be used, among other things.  She stated that China—North Korea’s “key conduit” to the international financial system—will “not easily be swayed” and will only cooperate on sanctions if it is in their “own interests.”  She also recommended improving financial data to better track proliferation networks; issuing public guidance to aid banks in identifying and curtailing these activities; and providing safe harbor to improve information sharing between the government and financial sector, as well as among banks.

 

John Park, Director, Korea Working Group, Belfer Center for Science and International Affairs, Kennedy School of Government, Harvard University

Park stated that North Korea’s sanctions evasion techniques have significantly improved, and expressed the need to factor in “growing gaps” and consider “underutilized measures” to enhance the sanctions regime. He recommended diversifying policy tools and coordinating with other policy actors to improve sanctions, specifically appealing to China’s campaign to address corruption, narcotics trade, and counterfeiting activities to find common ground for cooperation.

 

Question and Answer

Working with China

Several panelists encouraged policymakers to design sanctions against North Korea in a way that would resonate with Chinese leaders. Ruggiero maintained that “China is not going to” go after individuals and companies that help North Korea evade sanctions. Park stated that there could be common ground for cooperation by addressing Chinese authorities’ concerns. Rosenberg added that it is possible for the U.S. to “create the conditions” in which China would see it in their interests to cooperate on sanctions.

 

Park also noted that it is legal to do business with North Korea under Chinese law, particularly in the economic development, tourism and education industries.  He added that the humanitarian exemption is used as a loophole as legal justification to trade coal.  As such, he recommended considering sectoral bans.

 

Chinese Banks

Ruggiero suggested finding ways to target Chinese banks that are “complicit” or not “asking the right questions” to their clients.  Ruggiero explained that the U.S. Treasury Department is “going after” Chinese banks that facilitate U.S. dollar transactions, but he indicated that this will “take a lot of work” to “reverse the tide of the last ten years.”

 

Know-Your-Customer

Rep. Warren Davidson (R-Ohio) asked whether know-your-customer (KYC) requirements extend to “know-your-supplier.”  Rosenberg explained that it depends on the banking regulator, but clarified that major global banks need to know “their customer’s customer” and take this issue very seriously.

 

Additional information about this hearing can be accessed here.