Sunday, July 9, 2017

Ramping-up Financial Sanctions on North Korea


Ingo Walter

With North Korea intent on developing operational nuclear-capable ICBMs able to strike the continental United States in the foreseeable future, things are coming to a head. There’s been plenty of debate on US military and diplomatic options, yet none are attractive or apparently workable. But one course of action can still be leveraged, does not require broad intergovernmental consensus and is hard to evade: Financial sanctions applied to North Korea and to any global financial organization seeking to assist it by transferring funds on its behalf or on behalf of another financial entity collaborating with Pyongyang. This tactic is workable, if not entirely fail-safe, and can cause the kinds of difficulties for North Korea that they have for Iran and Russia. China’s recent sharp reaction to pretty mild sanctions imposed on only one of its banks for aiding and abetting North Korea’s financial dealings is encouraging.

The sanctions enforcement route now runs through US dollar clearing of international payments. Financial transactions that enable sanctions-avoidance almost always touch the US dollar clearing system, and when they do, they attract US law enforcement. Indeed, US prosecution of major international banks for helping evade sanctions in order to preserve their business with targeted countries has changed the game. Without the intentional cooperation of these banks, economic sanctions cannot be avoided. By raising the cost of violating the rules to significant levels, US bank regulators and the Department of Justice have helped sanctions throttle the financial air supply.

Foreign banks and their home governments may or may not agree with the policies underlying the US sanctions. But the fact is that global banks today continue to settle most of their trade and financial transactions in US dollars. This is an important business for these banks, and they must have access to the US clearing and settlement apparatus to conduct it. Like it or not in the dollar world, US law is the law. Banks must comply or face consequences, pressure that has been escalating steadily since 2005.

Altogether, banks such as HSBC, ABN Amro, Standard Chartered, Lloyds, Barclays, Credit Suisse have each coughed up plenty in fines and penalties. BNP Paribas’ 2014 admission of a criminal violation of US payments sanctions involving Iran, Cuba and Sudan led to an $8.9 billion fine, forced resignation of key executives, and imposed a one-year suspension from dollar clearing. Shares in sanctions-busting banks lost value as a result of the settlements and increased transaction risk exposure - BNP Paribas stock lost about 4% of its value soon after it was reported to be in settlement discussions.

Perhaps more important than the size of the fines, penalties and stock market impact, however, is that enforcement action BNP Paribas was brought under criminal, not civil law. Only regulatory forbearance negotiated in advance avoided the Bank’s suspension from various US businesses. But they were warning shots. The specter of Arthur Anderson demise after a ‘guilty’ plea back in the days of the Enron scandal Enron days is ever-present.

Sanctions that restrict access to the dollar market can be very burdensome for targeted countries like North Korea, particularly those with mineral resources that need to be sold abroad, or that need to import strategic raw materials and components as part of a military buildup. Sanctions long applied to Iran are thought to have been significant in motivating the 2015 nuclear agreement. Sanctions on Russia in the wake of the Crimea annexation and destabilization of Ukraine seem to have had broadly negative effects on the Russian economy in the years that followed, although they did not involve restricted access to the US dollar payments infrastructure.

Still, Vladimir Putin recently said he hopes to switch Russia’s enormous dollar trade in oil to Chinese renminbi in order to reduce the impact of possible financial sanctions. That may be naïve, since the renminbi is neither convertible nor widely used as a currency for international trade. Russia may assume it can find banks willing to help subvert sanctions via the renminbi, but participating banks would run the risk of putting their US dollar business in jeopardy. On the other hand, as North Korea’s key enabler, the evolution of an internationally viable financial market in China could eventually help undermine trade and financial sanctions directed at the toxic regime.

Now and for the foreseeable future, the US can impose financial sanctions unilaterally in the dollar market without the kind of broad agreement required for other international policy issues. And it has the ability and the willingness to detect and meaningfully punish those who violate its laws, including denial of access to its financial market. Dealing with a North Korean threat that could become existential for the United States requires a fully equipped economic, financial, political and military toolbox. With many of those tools thought to be ineffective or too risky, ramping-up financial sanctions presents one realistic option to apply serious pressure on the rogue government.


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