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.