Countering North Korean Sanctions Evasion
International Cooperation Remains Key to Maximum Pressure Campaign
Neil K. Watts and William J. Newcomb
The story of the international effort to seize the North Korean vessel Wise Honest for illicitly transporting the regime’s coal to China, Russia and other countries reads like a spy novel, with many twists and turns. The case shows how the Kim Jong Un regime, aided by a network of complicit actors and sanctions profiteers, applies sophisticated, interwoven strategies and obfuscation techniques to circumvent multiple sanctions across multiple jurisdictions and undermine sanctions implementation and enforcement in the Indo-Pacific region.
The Wise Honest case culminated, after a multinational enforcement operation with support from Indonesia, Malaysia, Vietnam and others, with the U.S. federal court-ordered sale of the vessel in September 2019 to compensate the families of two victims of North Korean torture; the most recent was Otto Warmbier, the U.S. student who died in 2017 after Kim’s regime released him in a vegetative state after detaining and torturing him for allegedly attempting to steal a propaganda poster, the Navy Times newspaper reported.
The first such seizure by the United States not only sheds light on the complexities of sanctions enforcement against North Korea but also exemplifies the U.S. commitment to maintaining maximum pressure on the Kim regime to abandon all nuclear weapons and existing nuclear programs in a complete, verifiable and irreversible manner.
Despite the successful forfeiture of the 177-meter Wise Honest, one of North Korea’s largest sanctions-busting vessels, North Korea’s illicit ship-to-ship transfers of coal and petroleum continued unabated in mid-2019, according to the August 2019 United Nations Panel of Experts report on North Korea. Instead of declining, the illegal transfers increased in “scope, scale, and sophistication,” after already ramping up in 2018, the report said. Moreover, North Korea continued to access the international financial system through its banking agents and front companies operating abroad, the report found.
Another China-based company, Weihai World Shipping Freight, despite being added to the U.N. Security Council’s sanctions list in March 2018, continued to operate a fleet of six to seven vessels and use its network involving United Kingdom front companies to smuggle North Korean coal to China and Vietnam, according to a 2019 Royal United Services Institute report.
The international community must stop North Korea from winning the ongoing contest of action-reaction.
In recent years, North Korea resumed testing nuclear weapons and ballistic missiles, once again defying the U.N. Security Council’s determination that such actions threatened international peace and security. In response, the Security Council in 2016 and 2017 adopted a much more aggressive stance to put significantly more pressure on North Korean authorities to halt prohibited programs and push them to seek a diplomatic solution.
The People’s Republic of China (PRC) and Russia, usually cautious about imposing tough sanctions, agreed to these measures. The sanctions included banning North Korean exports of its main hard currency earners, such as precious metals, ferrous and nonferrous metals, coal, agricultural products, seafood and textiles, all predominantly destined for Chinese markets. Additionally, the U.N. Security Council banned imports of machinery, vehicles, certain metals and oil. Sanctions also ramped up in the areas of shipping, including prohibitions on ship-to-ship transfers, and finance to better tackle North Korean evasion practices and further cripple its ability to fund nuclear and missile programs.
Increases in the breadth and depth of sanctions implicitly show that the approach taken by the Security Council shifted from a focus on narrowly targeted measures back toward the former reliance on comprehensive sanctions. However, the broader measures also included carefully crafted exemptions for coal and oil and an expressed willingness to consider, case by case, humanitarian exemptions to avoid unintended consequences that plagued earlier sanctions programs, such as those against Iraq, and undermined international support.
Transfers at Sea
The U.N. resolutions specifically prohibit ship-to-ship transfers, regardless of whether they are to or from North Korean vessels, of any goods or items that are being supplied, sold or transferred to or from North Korea, even if indirectly. A ship-to-ship transfer involves a vessel going alongside another to transfer its cargo at sea, without having to disembark the cargo in a port.
In addition to the total coal ban, refined petroleum product transfers are also prohibited but are subject to certain exemptions. These ship-to-ship transfers, which constitute the primary means of importing refined petroleum, nearly always take place in international waters and are intended to circumvent sanctions compliance controls at ports and to conceal the destination or origin of the transferred cargo. Vessels conducting these illicit ship-to-ship transfers typically switch off their automatic identification system (AIS) prior to and during the transfer to evade detection.
While these types of transfers at sea are not illegal per se, North Korea specifically exploits this method to evade scrutiny by port authorities, to avoid export controls and circumvent export accounting and reporting to undermine the resolutions, which impose an annual cap of 500,000 barrels on North Korean imports of refined petroleum. Experts calculated that the annual cap was breached within four to five months of 2018 and 2019, on the basis of the detected number of illicit transfers, according to the March and August 2019 U.N. Panel of Experts reports.
The first two of 11 planned illicit transfers of refined petroleum by Chen Shih-hsien, a Taiwan-based operative, were worth U.S. $4.5 million and U.S. $8.5 million, respectively. South Korean and U.S. authorities detected in 2017 that the tanker vessel Lighthouse Winmore, registered in Hong Kong and operated by the Billions Bunker Group, which Chen owned, violated sanctions by providing fuel to North Korea, the Taiwan News newspaper reported. Chen committed suicide in June 2019 by jumping from the sixth story of a building after being indicted by Taiwan authorities, the website reported.
North Korean coal exports are estimated to generate more than U.S. $1 billion in foreign revenue annually. The average illicit transfer is worth millions of dollars and must be paid for in U.S. dollars with funds confirmed by the broker to be available before the transfer at sea. North Korea relies on its coal trade to fund its nuclear weapons and ballistic missiles programs, experts believe.
Investigators valued the 26,500 million tons of coal carried on board the Wise Honest at the time of its detainment in 2018 by Indonesia at about U.S. $3 million, the August 2019 U.N. Panel of Experts report said. The Wise Honest, which was registered to North Korea but falsely claimed to be sailing under the Sierra Leone flag, had on a previous voyage illegally transported heavy machinery to North Korea, also in violation of U.N. and U.S. sanctions.
Funds to facilitate the illicit coal transfer, via ship-to-ship transfer to a Russian vessel near Balikpapan, Indonesia, were transferred by a complicit Chinese company, Huitong Minerals, from North Korea’s Jinmyong Joint Bank to an Indonesian bank. Jinmyong is part of the Korea Songi network that includes Korea Songi General Trading; the Wise Honest’s owner, Songi Shipping; and Korea Yin Myong Trading. This network falls under the aegis of the Kim-controlled Korean People’s Army, court documents revealed in July 2019.
A man named Jong Song Ho, who claimed to be president of Jinmyong, orchestrated the 2018 shipment during meetings at North Korea’s embassy in Jakarta. He arranged payment of U.S. $760,000 to Huitong Minerals via an Indonesia broker through bank transfers facilitated by JPMorgan Chase, according to bank and other records, The Washington Post newspaper reported in April 2019. Indonesia said Enermax, a South Korean company, was the intended recipient of the Wise Honest’s coal, The Associated Press reported. Enermax denied it had imported the coal but acknowledged it had received an offer for coal from “someone who seemed to be a local broker in Indonesia,” the wire service reported. However, in July 2019 The New York Times reported that Enermax was also implicated in the illegal shipping of Mercedes Benz limousines to North Korea, which transport Kim Jong Un at parades and summits.
The advantages of using a Chinese company include giving North Korean front companies access to the banking system; the ability to launder renminbi, the PRC’s official currency, into U.S. dollars; and use of alternative financial routes, such as ledger transactions and barter arrangements, to repatriate profits. A combination of these complicit companies, using split payments, funds activities of local facilitators.
Disrupting Illicit Transfers
North Korea is constantly evolving the scope and sophistication of its deception and evasion tactics. Its schemes involve multiple levels of front companies, offshore jurisdictions and fragmentary financial transactions. The vessels are physically and electronically disguised through AIS manipulation and so-called identity spoofing — assuming the identity of another vessel. Further, the vessels undertake circuitous, uneconomical voyages and loiter off foreign ports to support falsified documents indicating a foreign port of loading and origin. North Korea favors using ports in the Russian Far East because the region is a big coal exporter in East Asia.
The case of the Wise Honest reveals the complexities of techniques North Korea employs to circumvent U.N. and U.S. sanctions. It also demonstrates successful disruption of illicit transfers but, conversely, how effective implementation of sanctions is being undermined by shortcomings in legal frameworks that North Korea targets and exploits.
Indonesian authorities intercepted and seized the Wise Honest, a more than 17,600-ton, single-hull bulk carrier ship, in its waters for illicitly smuggling North Korean coal in April 2018, a month after it was photographed at the port of Nampo, North Korea, where a load of coal was placed on board, according to CBS News. The captain of the ship was charged in Indonesia with violating Indonesia’s maritime laws and convicted.
The District Court in Balikpapan, Indonesia, in sentencing the captain for false declarations overreached by ruling that the illicit North Korean coal shipment be returned to the local facilitator/broker. Then, adding insult to injury, it authorized the coal’s reexport. The complicit broker, Eko Setyamoko, promptly arranged for the illicit coal (later documented as of Indonesian origin) to be transferred to another vessel linked to the first transgression, the Panama-flagged Dong Thanh. However, upon arrival at a Malaysian port, the ship was refused entry by authorities; subsequently, the vessel and its illicit coal were interdicted by Vietnam in June 2019. Both actions were consistent with the effective implementation of the resolutions, according to the 2019 U.N. Panel of Experts report.
In May 2019, Indonesian authorities surrendered the Wise Honest over to the United States, which towed it to American Samoa. The event marked the first time the U.S. has seized a North Korean cargo ship for international sanctions violations, the U.S. Justice Department said. A U.S. federal court distributed proceeds from the sale of the Wise Honest in September 2019 to the parents of Otto Warmbier as well as the brother and son of the Rev. Dong Shik Kim, who was kidnapped, tortured and executed by North Korean agents in 2000, the Navy Times reported.
The Wise Honest and Dong Thanh cases demonstrate that international cooperation is crucial to effectively disrupt North Korean networks that operate in multiple jurisdictions and evolve daily. Detractors would say such cases are indicative of a failure of sanctions. Yet, closer examination reveals that the costs and risks of doing business with North Korea are steadily being driven upward and the pressure is taking effect. Prior to 2019, sanctions were not even acknowledged, but recently North Korea is for the first time talking of sanctions relief and seeking engagement.
There were some signs that the PRC in 2019 was not enforcing all the U.N. measures as rigorously as it did in 2018. Even so in 2019, North Korea exports and imports with China remained far short of, and the bilateral trade deficit much higher than, levels attained prior to the imposition of tougher measures, according to PRC customs statistics.
Hard work lies ahead in getting more countries to implement and rigorously enforce sanctions, as demonstrated by various judicial failings and complicit support of North Korea provided by some governments in Africa and elsewhere. Nonetheless, progress is being made, and patience plus persistence along with avoidance of sanctions fatigue may ultimately exhaust North Korea in this marathon contest.
Neil K. Watts and William J. Newcomb are former members of the United Nations Panel of Experts on North Korea sanctions established by UNSCR 1874 (2009).
2019 U.N. Panel of Experts on North Korea cites 56 countries
The report, covering the period from February 2018 to February 2019, detailed more than 100 new, continuing, or unresolved proven or alleged violations of the 10 U.N. resolutions on North Korea that have been passed since 2006. Thirty-one of the 56 countries, territories and entities listed plus North Korea were allegedly responsible for multiple sanctions violations.
The 56 countries include:
- British Virgin Islands
- Côte d’Ivoire
- Democratic Republic of the Congo
- El Salvador
- Equatorial Guinea
- Hong Kong
- New Zealand*
- Sierra Leone
- South Africa
- United Arab Emirates
- Yemen (Houthi faction)
*Indicates that a country took remediating, prosecutorial action during the reporting period to rectify or penalize one or several alleged sanctions violations.