Since mid-2005, the United States has sought to impede financial transactions by the Democratic People’s Republic of Korea (DPRK or North Korea) as a means of constraining its missile and nuclear programs and curbing its illicit activities to secure foreign exchange through counterfeiting and drug trafficking. With the recent inclusion of sanctions in the Security Council resolutions adopted after North Korea’s July 5, 2006, missile tests (Resolution 1695) and after its October 9, 2006, nuclear detonation (Resolution 1718), the international community, acting collectively, is also applying pressure to North Korea’s financial networks in an effort to impede the country’s unconventional weapon programs and to persuade Pyongyang to abandon its nuclear ambitions. [1] Available evidence, including media reports and apparent changes in North Korean diplomatic positions, suggest that these sanctions have focused on a sensitive dimension of the DPRK’s activities and are having a tangible economic impact on the country, although it is not clear that they have led the DPRK to curtail its missile or nuclear programs.

Washington Applies Pressure; China Reportedly Follows U.S. Lead
For well over a year, the United States has been applying direct and indirect pressure on North Korea’s financial system in an effort to roll back the country’s nuclear program. In particular, on June 28, 2005, President George W. Bush issued Executive Order 13382 (E.O. 13382), which authorizes the freezing of assets held by proliferators of weapons of mass destruction (WMD) and their supporters. The annex to E.O. 13382 designated three North Korean entities for sanctions, and eight additional North Korean entities were added on October 21, 2005. [2] Furthermore, the U.S. government has implemented measures against the DPRK under the authority of the USA PATRIOT Act, initially passed following the September 11, 2001, terrorist attacks and renewed most recently in March 2006. The law empowers the U.S. government to track and investigate financial transactions that support terrorism and WMD proliferation. [3]

Under the authority of the USA PATRIOT Act, the U.S. Treasury Department on September 15, 2005, designated Macao-based Banco Delta Asia as a “primary money laundering concern” and imposed sanctions on the bank for providing financial services to North Korean firms allegedly engaged in the money laundering of counterfeit U.S. currency. The sanctions prohibited any U.S. banks or firms from conducting transactions with Banco Delta Asia unless the bank froze the assets of the North Korean firms. The sanctions resulted in a run on Banco Delta Asia that required the Chinese government to temporarily take over the bank’s management. [4] The amount of frozen North Korea assets is about $24 million and the sanctions apparently had an immediate impact on North Korea’s ability to conduct foreign trade. In retaliation, the DPRK suspended its participation in the Six-Party Talks, which are aimed at eliminating the North Korean nuclear weapon program and whose other participants are China, Japan, Russia, South Korea, and the United States. [5]

During 2006, Washington sought to expand the group of countries restricting transactions between North Korea and entities supplying it with goods to support its missile and nuclear programs. One vehicle for this U.S. effort has been to solicit
support from the states participating in the Proliferation Security Initiative (PSI). The PSI is a U.S.-initiated arrangement involving more than 75 states, which seeks to coordinate their efforts to interdict WMD, advanced delivery systems, and their components in transit to or from proliferant states. Although few details have been disclosed, one of the principal outcomes of the June 23, 2006, High Level Political Meeting of PSI participants in Warsaw, Poland, was the agreement of these states to consider how to utilize or strengthen national laws and capabilities “to identify, track and freeze the assets and transactions of WMD proliferators and their supporters.” [6] If this undertakening is widely implemented with the DPRK as its target, North Korea’s ability to operate within the global banking system could be significantly curtailed.

As the United States pressed to expand restrictions on WMD-related financial transactions, Asian media reported that in the wake of the Banco Delta Asia controversy, some banks in China had voluntarily stopped doing business with North Korean firms, slowing cross-border trade with the DPRK. In addition, the Bank of China, one of four large, Chinese state-owned banks, reportedly froze North Korean bank accounts following an advisory warning in early 2006 from Beijing concerning North Korea’s illicit financial activities. [7] While Chinese officials have refused to discuss the details, press reports suggest the Bank of China freeze started in late 2005, with other Chinese banks following in early 2006.

A report in the Japanese newspaper Shukan Asahi, which cited a Japanese intelligence official, as well as statements by South Korean National Assemblyman Pak Chin of the opposition Grand National Party (GNP), suggested Beijing had an additional reason to freeze North Korean accounts. The Shukan Asahi article reported that Pyongyang has been counterfeiting Chinese renminbi (or yuan), in addition to U.S. dollars, prompting a retaliatory response by the Chinese government. [8] National Assemblyman Pak is said to have learned the same from U.S. officials; he has suggested the possibility that China and the United States may have cooperated on the matter. [9]

Security Council Resolution 1695
In the wake of North Korea’s July 5, 2006, missile tests, which included the failed launch of a missile with potential intercontinental range, the UN Security Council adopted Resolution 1695 on July 15. Among other terms, the Resolution prohibits UN member states from engaging in missile-related trade with the DPRK and bans financial transactions in support of such trade.

As part of its efforts to implement the Resolution, on September 19, 2006, Japan’s Cabinet approved financial sanctions against 15 entities suspected of being engaged in activities related to production of North Korean missiles or weapons of mass destruction. [10] Seoul’s response to the missile tests was to suspend the delivery of fertilizer and other economic assistance that Pyongyang had requested, and although the Administration of President Moo-hyun pledged to support Resolution 1695, South Korea did not impose any new sanctions against North Korea.

Security Council Resolution 1718
On October 14, the UN Security Council responded to the DPRK nuclear test, which took place five days earlier, by adopting Resolution 1718. The resolution was adopted pursuant to Chapter VII (“Action with Respect to Threats to the Peace, Breaches of the Peace, and Acts of Aggression”) of the UN Charter, making it binding on all UN member states. Among other measures, Resolution 1718 bans trade with North Korea in WMD- and missile-related commodities; prohibits transfers to North Korea of major conventional weapon systems and luxury goods; calls on all states to inspect cargo going to and from North Korea to prevent transit of WMD- and missile-related commodities; and requires the freezing of assets of entities engaged in supplying WMD- and missile-related commodities to North Korea.

The Japanese government, under its new prime minister, Shinzo Abe, who took office on September 26, 2006, imposed sanctions against the DPRK immediately following the October 9 nuclear test – ahead of the adoption of Resolution 1718 – resulting in a ban on all North Korean imports and the prohibition of North Korean vessels from entering Japanese ports for six months. North Korean officials have also been banned from traveling to Japan for the same period. [11] On November 14, 2006, the Japanese Cabinet adopted a list of 24 “luxury goods,” such as jewelry, liquor, cigarettes, and perfume to be banned from export to North Korea in accordance with Resolution 1718. [12] The moves come as no surprise considering that many members of the Japanese government and Diet had pressed for additional punitive measures against Pyongyang after the July missile tests.

The added Japanese sanctions, it may be noted, came in the wake of revelations in the fall of 2006 that Banco Delta Asia had handled the funds used to finance the illegal export to North Korea of a Japanese-made freeze dryer four years earlier; this equipment is subject to export controls because it can be utilized for the production of biological weapons. [13] This revelation may have also played a part in Finance Minster Koji Omi’s recent promise to “firmly continue financial sanctions” against North Korea. [14]

Since the October nuclear test, which a Chinese Foreign Ministry statement described as “flagrant conduct,” Chinese banks in Dandong and some other towns near the DPRK border have refused to conduct financial transactions involving North Korean parties. [15] However, on November 20, 2006, China is reported to have lifted the nation-wide freeze on some North Korean accounts. [16] The reports estimated the sum at issue to be less than $12 million and to have been held in accounts unrelated to illegal North Korean activities. The unfreezing of North Korean funds has reportedly been denied by the Macao Monetary Authority, however. [17]

In South Korea, President Roh Moo-hyun’s Administration has been reluctant to apply sanctions that might jeopardize its policy of engagement and reconciliation with the North. Indeed, the Roh Administration has steadfastly promised to continue the South Korean-sponsored Mt. Kŭmgang tourism and Kaesŏng industrial projects in North Korea. It has done so despite growing domestic criticism that it failed to respond adequately to the DPRK missile and nuclear tests and despite efforts by the United States to persuade Seoul to halt these projects, which Washington argues provide desperately needed foreign currency to the Pyongyang regime.

Nevertheless, South Korea’s engagement is not completely unconditional. After the nuclear test, Seoul immediately suspended relief aid that was intended to help summer flood victims in the North. [18] Furthermore, the South Korean government also decided in the days following the nuclear test to cease paying subsidies for South Koreans to visit Mt. Kŭmgang. The visits, which have been estimated to average 40,000 per month, have reportedly generated a total of $850 million in royalties for North Korea since the project opened in 1998. [19] The South Korean opposition Grand National Party claims the total amount of government funds transferred to the North is roughly $1.2 billion, and it has complained that the government has not conducted a full audit of these transfers.

North Korea Reacts
North Korea has responded indignantly to the wave of financial sanctions during 2005 and 2006. On December 2, 2005, for example, in the wake of the freeze of Banco Delta Asia funds, a spokesman for the DPRK Foreign Ministry stated that lifting U.S. financial sanctions was a “prerequisite to the progress of the Six-Party talks.” [20] In an attempt to appear cooperative, however, later that month, North Korean Vice Foreign Minister Kim Kye-gwan reportedly told Chinese Vice Foreign Minister Wu Dawei that Pyongyang was willing to use North Korean domestic laws and “consider dealing with” illegal financial activities, if the U.S. government presented evidence of illicit activities. [21]

Following the adoption of both UN Security Council resolutions, North Korea rejected the imposition of sanctions as being part of a U.S.-led “declaration of war.” [22] North Korea also warned South Korea that joining the U.S.-led sanctions would be considered “a grave provocative act” that could lead to conflict. [23]

As the scope of financial sanctions has increased, Pyongyang has tried to circumvent them in order to continue its international transactions. At least several North Korean firms that had dealt with Banco Delta Asia, including Jogwang (Chogwang) Trading Company, have moved their offices to Zhuhai, a Chinese special economic zone bordering Macao. [24] According to South Korea’s National Intelligence Service, the DPRK has opened at least three new bank accounts, in Russia, Vietnam, and Mongolia, since its Banco Delta Asia accounts were frozen in September 2005. [25] An unidentified “joint intelligence” report, written in Japanese, states that North Korean accounts have been opened at 23 banks in ten countries since September 2005. [26] The United States, however, has tried to counter such moves. Throughout 2006, U.S. officials from the State and Treasury Departments met with Asian leaders to discuss North Korea’s illicit financial activities, and in August 2006, Stuart Levey, the U.S. Treasury Department’s Under Secretary for Terrorism and Financial Intelligence, reported that banks in Vietnam, Singapore, China, Mongolia, and Hong Kong had stopped doing business with North Korea. [27]

Pressure Leads to Six-Party Talks
U.S. financial sanctions and related pressures appear to have been significant factors in the DPRK regime’s decision to rejoin the Six-Party talks. Security Council Resolutions 1695 and 1718, which led to the participation of both Beijing and Seoul (albeit to a lesser degree), were probably the final impetus in Pyongyang’s decision. While the ultimate impact on DPRK policy is still uncertain, North Korea appears to be paying a high price for continuing its nuclear weapon and ballistic missile programs. According to the Korea Institute for International Economic Policy (KIEP) in Seoul, tough sanctions against North Korea, which is heavily dependent on trade with its neighbors for food and energy supplies, are likely to lead to a sharp decline in the North Korean economy that will be “greater than the [dire economic] situation in the mid-1990s.” [28]

Conclusion
UN Security Council Resolutions 1695 and 1718 have raised the costs for the DPRK of persisting in the development of weapons of mass destruction and ballistic missiles. According to DPRK government statements, North Korea is still committed to a Korean Peninsula free of nuclear weapons, and Pyongyang has agreed to return to the Six-Party talks. Whether the DPRK will eventually abandon its nuclear ambitions is uncertain, but financial sanctions are now part of the international economic landscape it confronts. The sanctions target luxury goods in an effort to impose direct costs on the DPRK leadership, as well as conventional arms, WMD, and missiles, but it is feared that because the sanctions are also injuring North Korean trade unrelated to these areas, the North Korean people may end up bearing most of the burden the sanctions impose.

Economic sanctions require close international cooperation to succeed and, historically, their effectiveness has been mixed. The current DPRK case is thus important not only for addressing North Korean proliferation, but also because it may provide important lessons for similar proliferation cases in the future.

Daniel Pinkston and Dave Kim – Monterey Institute Center for Nonproliferation Studies