Another Look: C4ADS — Risky Business

July 6, 2017 9:15 AM

As hysteria rises around the peninsula, it is predictable that the administration will be looking to expand secondary sanctions on Chinese entities. In its second report on North Korea, following the highly influential Asan-C4ADS report from last year, C4ADS has produced another extraordinary piece of financial forensics that will directly affect the implementation of secondary sanctions. (Marc Noland first reviewed this second report last month here, and given its gravity, it's certainly worth revisiting). It does so by naming names: identifying particular firms and even individuals that manage North Korea’s sanctions-busting networks.

The author, David Thompson, and his team drew on a variety of sources including “registration forms; lists of owners, directors and employees; purchases and sale of assets; leasing and mortgage documents; and quantities, amounts, and types of goods bought and sold.” They also worked back from enforcement actions, sometimes quite minor ones such as the sting operation that caught Kim Song Il seeking to purchase night vision goggles from a federal agent. In that case, a relatively minor transgression revealed that Kim had businesses in Hong Kong, China and Russia, at least two different Cambodian passports and ties to a network considered critical in shipping military equipment from North Korea, through China, to the Angolan Navy.

The finding generalizes. According to the report, a handful of influential players such as Fan Mintian 范民田 and the Dandong Hongxiang Industrial Development Co. Ltd (DHID) 丹东鸿实业发有限公司 have been critically important for the broader network. In the latter case, DHID is estimated to have accounted for no less than 20% of all North Korea’s trade, with firms splayed across trading and logistics, information technology, restaurants, hotels, Chinese-North Korean joint ventures and above all financial institutions. One of the more important functions of the group was providing a means for Korea Kwangson Banking Corp.—an entity designated in 2009—to access the international financial system.

One of the more amazing findings of the report is the identification of the total number of firms doing business with North Korea (albeit with false precision): 5,233 companies for the 2013-2016 period, albeit with likely overlap among firms falling within the same group. In line with our surveys reported in Hard Target, they find that Chinese exporters far outweigh importers, and the number of importers fell pretty sharply over the period, no doubt reflecting the greater political and economic risk of being on that side of transactions. But also as we found, concentration is high. The report claims that the top ten importers of North Korean goods in 2016 controlled just under 30% of total imports, with firms like Dandong Zhicheng Metallic Material Co Ltd 金属材料有限公司 accounting for no less than 10% on its own. Moreover, the network analysis done by C4ADS shows that these top players are themselves interconnected in important ways; great graphics play out some of these connections for the larger entities.

A big question in the sanctions literature is whether to stick with a narrower conception of proscribed trade—for example, dual use items—or to see virtually all of it as indirectly supporting the regime and its activities. Clearly, Marc Noland and I side with the latter way of thinking about this. But the report also does the service of identifying a number of HS codes in the trade data that are vulnerable to abuse, and outlining trade networks around those items as well, for example in the Dandong Dongyuan Industrial Co. Ltd. The amounts are small, but the significance is not as such information provides likely violations of existing multilateral sanctions.

The takeaway of the report is summarized in three words: that North Korea’s sanctions evasion networks are centralized, limited and therefore vulnerable. The bad news is that they are also constantly morphing and that China has taken a “principled position” on maintaining “purely commercial” trade, an idea that makes little sense in such a political economy. The only way forward is to take this sort of outstanding financial forensics and present it to the Chinese on a regular basis, and if they fail to act, try to go after the larger players who are more exposed to the international financial system. I wish I had written this report; it is first class.

Comments

jacob shapiro

http://www.dcd.uscourts.gov/sites/dcd/files/BAHMemoandOrder.pdf

Stephan Haggard

Jacob:

If you can expand on this order, it would be great; the document is a reversal of a lower-court denial of a seizure warrant with respect to funds related to Dandong Zhicheng Metallic Co.

SH

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