Center for Arms Control and Non-Proliferation

Another Squeeze

by Duyeon Kim [contact information]

By Duyeon Kim
August 11, 2010

A fresh list of U.S. sanctions is expected to be disclosed within this month at the earliest to curb North Korea's nuclear proliferation activities and to eventually coax Pyongyang back to nuclear talks. It also comes on the heels of North Korea's sinking of the South Korean ship Cheonan. All eyes are on what new faces and entities will be added to existing international blacklists.

The new sanctions are aimed at drying up the regime’s illegal cash sources and Kim Jong-il’s personal slush funds that help feed the North’s nuclear weapons programs. The method is to blacklist North Korean individuals and entities participating in such “illicit and deceptive” activities while freezing company assets and bank accounts with ties to the North. The targets include those involved in transactions and manufacturing of:

     - Banned trade of conventional arms and weapons
     - Luxury goods
     - Currency counterfeiting and laundering
     - Drug trafficking
     - Fake cigarettes

Effective Tool?

Sanctions are a familiar policy tool short of war to not only punish but to change an actor’s behavior. However, the effectiveness of sanctions tends to ignite hot international debate. One concern is that sanctions can hurt the civilian populace rather than their intended target. The State Department's special adviser for nonproliferation and arms control Robert Einhorn said in Seoul on August 2 that "These measures are not directed at the North Korean people. Instead, our objective is to put an end to the DPRK's destabilizing proliferation activities, to halt illicit activities that help fund its nuclear and missile programs and to discourage further provocative actions.”

Einhorn also stressed that financial institutions in other countries will be urged to sever links with North Korea. The purpose is to cut the North out of the international financial and commercial system, and the incentive for global institutions to follow suit would be to maintain reputable ties with the U.S. These measures resemble those of the so-called “BDA case” when the U.S. Treasury Department in 2005 blacklisted Macau-based bank Banco Delta Asia for allegedly laundering hundreds of millions of dollars for Pyongyang’s illicit activities. The U.S. also froze $25 million worth of North Korean assets in the bank.

This leads to the second concern regarding sanctions: Will they, in fact, change an actor’s behavior? History usually says “no.” But it can be argued that the BDA case played a crucial role in bringing Pyongyang back to the six-party negotiating table and kept them there until the signing of two more denuclearization deals in February and October 2007 that disabled its key nuclear facilities. The BDA case was effective because those sanctions targeted Kim Jong-il’s personal pocket money and even forced senior North Korean officials at international conferences to privately request that their leader’s assets be returned. The officials were also said to have hand-delivered bags of cash since the sanctions paralyzed their global financial transactions. In other words, the BDA sanctions hit the place where it hurt the North Korean leadership most, which appears to be the rationale behind the Obama administration’s new sanctions. It also proved that the US possessed a powerful and effective tool short of military force.

New Sanctions or Recycled?

Will the new round of sanctions bring fresh targets or the same names that have already appeared in different sanctions lists? The UN, the U.S. and the EU combined have already sanctioned nearly 30 North Korean entities and 18 individuals. American officials say they intend to widen the scope of existing sanctions by targeting key individuals and entities rather than increasing the number of names listed. This means that even though names are recycled, the new sanctions list is still seen as significant because it targets the North on multiple fronts. For example, if an entity already sanctioned under a WMD blacklist is also sanctioned for counterfeiting currency and drug trafficking, it would further limit the activities of the players involved.

The spotlight is shining especially bright on two North Korean entities. The first is “Room 39,” which observers anticipate to top the new U.S. blacklist. Room 39 (a.k.a Bureau 39, Division 39, or Office 39) is said to be the lynchpin of Kim Jong-il’s $4 billion slush fund and family enterprises. The covert money-making bureau formally falls under the Worker’s Party Central Committee but, in practice, is said to be directly controlled by the Dear Leader himself. Room 39 is believed to manage nearly 120 overseas branches and trading companies that help finance family and business ventures. In December 2009, the EU had placed a travel ban on Room 39’s head, Kim Dong-un, who was reportedly fired four months later to possibly evade the squeeze of sanctions. South Korean intelligence reportedly believes Pyongyang replaced him with Kim Jong-il’s high school friend Jon Il-chun, and it remains to be seen whether Jon’s name will appear on the new U.S. sanctions list.

Curiosity also surrounds the second generation of the North’s elite, an unofficial group known as the “Pong hwa jo” or “Torch Group.” Western intelligence authorities believe the off-springs of senior military and communist leaders operated a global network trafficking drugs and counterfeiting supernotes at least until 2005. It is unclear whether “Pong hwa jo” will be designated under the new U.S. sanctions.

Washington is also said to be preparing to target at least three financiers who manage Kim Jong-il’s secret overseas funds, which is in turn expected to deal a great blow to the leadership. Yonhap News reports Kim Tong-myong (Tanchon Commercial Bank director),who is already included in U.S. Executive Order 13382, may be one of the candidates. The U.S. may decide to re-enlist him not only for WMD involvement, but for his dealings in luxury goods, conventional arms, drug trafficking and counterfeiting currency as well. However, some say Kim Jong-il’s political confidantes are expected to be exempt from the new sanctions list, many of whom were designated travel bans by the EU.

Implications and Recommendations

The true effects and impact of the new sanctions will be unknown until after they are implemented as was the case in 2005 with the BDA sanctions. The effects of the sanctions will also help better assess North Korea’s network of illicit activities. Still, some initial forecasts and recommendations can be made:

- The squeeze of new sanctions will likely force North Korea to hunt for other business partners, such as failed states and rogue actors, to deal with under-the-table. The continued effectiveness of the new sanctions also depends on how Pyongyang adapts to and attempts to skirt them.

- A third North Korean nuclear test can be expected. Pyongyang tested a nuclear device after the BDA measures, and it would not be a surprise for a third test to follow the next wave of sanctions. Preparations must be made to deal with this along with more North Korean provocations after the wheels start turning on new sanctions.

- History may repeat itself with Pyongyang demanding sanctions be lifted before it agrees to any nuclear negotiations or in conjunction with its return. This was the case during “BDA” when the Bush administration unfroze Pyongyang’s assets in exchange for the resumption of talks. While this may have been viewed as the best bargaining chip at the time, history has taught us that Pyongyang will eventually turn its nuclear switch back on. If the North ever decides to return to nuclear talks, it is important to separate politics from the denuclearization timetable. In other words, new and existing sanctions should be enforced until the regime takes substantive and verifiable steps toward denuclearization to make it harder for Pyongyang to renege later. It appears the Obama administration plans to do just that, but history has also shown that initial stances can change at the bargaining table.

- China is expected to maintain its role as North Korea’s benefactor and unlikely to cooperate in any type of sanctions. Despite its vote for two UN Security Council resolutions on the North, Beijing continues to leave the aid door wide open to avoid instability across its borders. Close coordination and cooperation with Beijing is important in dealing with Pyongyang.

- History has shown that foreign policy is heavily swayed by domestic politics especially before an administration exits office. The hard-lined Bush administration showed greater flexibility towards the end of its second term by engaging in talks with North Korea when its Middle East policy was in peril. It is unclear whether the Obama administration will shift its current hard-line stance since the U.S. is approaching mid-term Congressional elections and the White House will soon begin preparations for presidential re-election. It may be enough for President Obama to declare that his new sanctions helped further prevent North Korea’s nuclear proliferation particularly since he has a chance to run for office again. On the other hand, South Korea’s constitution only allows each president to serve one five-year term, and since North Korea is a top security policy, President Lee may feel pressured to demonstrate creativity before leaving office especially amid concerns over Kim Jong-il's ailing health. Still, the current state of tensions is expected for the time being, perhaps until after a leadership transition takes place in the North. But the allies should begin drawing up measures to be used at some future opportune point to show strategic flexibility so that crisis can eventually be turned into an opportunity.

- Finally, the word “reunification” has been lost in translation lately when talking about “denuclearization.” The two terms were once spoken of almost hand-in-hand. The time clearly is not ripe to discuss reunification since tensions are running high on the peninsula amid growing North Korean belligerence. However, we must not forget that the nuclear issue cannot be solved exclusively, and will eventually need to be brought back to the broader context of reunification. Preparations must also be made for a sudden collapse or instability in the North as its leader's health continues to be questionable. It is imperative that South Korea, the U.S. and China actively engage in close trilateral consultations and coordination sooner than later.

* Much of the information in this article is from the author’s personal research.