H.R. 6281, banning N. Korea from SWIFT, would be a powerful sanctions upgrade

Via Yonhap, we learned last week that Rep. Matt Salmon (R, Ariz.), the Chairman of the House Asia-Pacific Subcommittee, has introduced a bill to cut North Korea off from the “specialized financial messaging services” that banks use to send wire transfer orders around the world. The industry leader for financial messaging is SWIFT, whose headquarters is in Brussels, but which also has operations in Geneva and Manassas, Virginia. If you don’t know what SWIFT does and why it matters, I’ll refer you to this post.

“What we can do is deny them access to services designed to quickly and easily transfer money worldwide. Without access to these services, we can force the North Koreans to purchase supplies and receive support in the way typically favored by state sponsors of terrorism: shipments of anonymous, small denomination bills.” [Yonhap]

You may be able to run a mid-size drug cartel that way, but not a country with a population of 23 million and a large, mechanized army. Although a SWIFT cutoff would be based on a different legal authority from the authority Treasury used against Banco Delta Asia in 2005, Yonhap compares the proposed legislation to BDA.

Should the legislation be enacted, it would have powerful impacts on the North, possibly similar or even greater than the 2005 U.S. blacklisting of a Macau bank for doing business with Pyongyang.

By designating the bank in the Chinese territory, Banco Delta Asia (BDA), the U.S. not only froze $24 million in North Korean money held in the bank, but also scared away other financial institutions from dealing with Pyongyang for fear they would also be blacklisted.

The measure hit Pyongyang hard, and reports at the time said North Korean officials had to carry around bags of cash for financial transactions because they were not able to use banks. The sanctions were later lifted in exchange for a denuclearization agreement that later fell apart. [Yonhap]

A better analogy would be the effect SWIFT sanctions had on Iran’s economy more recently. 

Without SWIFT, global trade and investment would be slower, costlier and less reliable. [”¦.]

The earlier SWIFT ban is widely seen as having helped persuade Iran’s government to negotiate over its nuclear programme. The ban was one of the first sanctions Tehran asked to be lifted, points out Mark Dubowitz of the Foundation for Defence of Democracies, a Washington-based think-tank. Though some of the banks blocked from SWIFT managed to keep moving money by leasing telephone and fax lines from peers in Dubai, Turkey and China, or (according to a Turkish prosecutor’s report) by using non-expelled Iranian banks as conduits, such workarounds are a slow and expensive pain. And the sanctions prompted Western banks to stop conducting other business with the targeted banks. [The Economist]

Keep reading that article to understand some of the good reasons to exercise great restraint in using SWIFT as a sanctions tool. I agree with those reasons; I just happen to believe that there are two cases compelling enough to be deserving exceptions — Iran and North Korea. (In the case of Russia, I’m not yet convinced that this is the right tool; I’d rather see us arm and train the Ukrainians.)

As of posting time, the text of H.R. 6281 was not yet available at Congress.gov, but I’d expect it will bear some resemblance to section 202 of the original introduced version of H.R. 1771, the North Korea Sanctions Enforcement Act, a later version of which the President signed into law in February as H.R. 757, the North Korea Sanctions and Policy Enhancement Act (Public Law 114-122, codified at 22 U.S.C. Chapter 99). The bill already has nine original co-sponsors, including three Democrats.

If you own a calendar and had a television in your home in the 1970s, you already know that the obstacles to getting this bill to the President’s desk this year are signficant. The administration has hinted, however, that it may be asking the European Union, which regulates SWIFT, to effect its own cutoff.

“The SWIFT system which is what I think you are referring to is not a U.S. system, and therefore not under our direct control. I believe it’s an EU system up housed [sic] in Brussels,” Daniel Russel, the Assistant Secretary of State for East Asian and Pacific Affairs at the U.S Department of State said, when asked by how the U.S. administration planned to further penalize North Korea. [NK News, Dagyum Ji]

I’m all for doing things diplomatically if that achieves our objective. No doubt, our diplomats’ work has been made easier by the conduct of the North Koreans themselves, who are suspected of hacking SWIFT to rob its client banks of $80 million and laundering the loot through casinos in the Philippines (Rodrigo Duterte, call your office). Russel’s written testimony is here.

The necessity of far-reaching financial sanctions rose to the surface after the North was suspected to be connected to Bangladesh Bank heist back in May.

“We are in discussions with our partners, including the EU, about tightening the application of sanctions and pressure, including and particularly to deny North Korea access to the international banking infrastructure that it has abused and manipulated in furtherance of its illicit programs,” Russel said.

“I think that our hope is that we will in fact ultimately be able to reach an agreement that would further restrict North Korea’s access.” [NK News, Dagyum Ji]

If this bill doesn’t pass in this Congress and diplomacy can’t achieve the same result, I’m sure it’ll be back in the next Congress. In fact, for reasons I’ll explain below, it might be back even if the EU enacts a SWIFT ban. With the arrival of a new U.S. administration and an election year in South Korea, there will be no shortage of provocations to help pass it. North Korea loves to act up during election years. It makes certain kinds of people write op-eds calling for talks and concessions. 

More recently, however, Kim Jong-un’s election-year antics have made him one of Washington’s most effective lobbyists — for new sanctions laws.

This post by Stephan Haggard has sparked some debate as to whether SWIFT is still servicing North Korean banks. According to Haggard’s post, SWIFT’s processing for North Korean banks fell from 50,000 a year in 2011 to a mere 5,000 a year by 2012. Haggard is always very careful with his sourcing and relied on published SWIFT data, but for reasons I shouldn’t share here, I don’t believe the statistics are accurate. I can’t rule out the possibility that SWIFT cut the North Koreans off in mid-2013 or later, however. By then, UNSCR 2094, paragraph 11, prohibited SWIFT from servicing (at the very least) U.N.-designated North Korean banks.

But in the end, whether North Korea is still using SWIFT or not, H.R. 6281 is still useful. If SWIFT is still providing services to North Korean banks, H.R. 6281 can give the Treasury Department and our diplomats more leverage to persuade the EU and SWIFT to cut the North Koreans off now. If SWIFT isn’t providing services to North Korean banks, someone else is. It would make sense that North Korea’s hacking of SWIFT software to steal from foreign banks was both a way to make money and retribution for a SWIFT cutoff.

Either way, North Korean banks need financial messaging services. One of the strongest arguments against the overuse of SWIFT sanctions is that they might give a less responsible service a competitive advantage. If some less responsible competitor has emerged to take on North Korea’s financial messaging business, then H.R. 6281 would enable the Treasury Department to either “reason with” that upstart service or sanction it to extinction. In which case, the potential rise of a SWIFT alternative turns one of the strongest arguments against H.R. 6281 on its head.