Maximum pressure watch: The Dandong Zhicheng warrants foreshadow N. Korea-related indictments

Last fall, as America was consumed by (depending on your state of residence) post-election trauma or celebratory gunplay, China blew past the North Korean coal import caps it had just agreed to at the U.N., and the Obama administration issued what would be some of its final North Korea sanctions designations — of Daewon Industries (a coal exporter subordinate to the North Korean military) and Kangbong Trading Corporation (a coal exporter subordinate to the Munitions Industry Department and involved in the development of North Korea’s ballistic missiles).

At the time, I suggested that the administration might have shown a belated willingness to enforce the coal cap that China would not. A few months later, the Trump administration designated Paeksol Trading Company, a third coal exporter that answers to the Reconnaissance General Bureau, the agency that carries out Pyongyang’s foreign intelligence operations, terrorism, and cyberattacks, and some of its arms smuggling.

The real significance of these three coal designations was not the amount of money that Kangbong, Daewon, and Paeksol might have been laundering through the United States, although Americans tend to underestimate such things. Their real significance is that by designating these three entities, the Justice and Treasury departments were laying down a marker for anyone who was knowingly dealing with them, for violations of the International Emergency Economic Powers Act, money laundering, or conspiracy. What’s that, you say? It doesn’t matter if there’s no one here to arrest? Not to worry. The smarter strategy need not burden the taxpayers with feeding and housing crooked Chinese traders and bankers; it can be even more effective to seize their ill-gotten gains, bankrupt them, terrify other bankers into meeting their due diligence obligations, and depositing said gains into either of two U.S. government forfeiture funds that pay for the cost of other law enforcement operations.

That is to say, I don’t know how Donald Trump will make Mexico pay for the wall, but I do know how he can make the Chinese banks pay for bankrupting Kim Jong-Un.

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By now, it is now clear that Treasury’s designations of the North Korean coal exporters were only the first steps, and that there is substance, strategy, and policy behind the Trump administration’s talk of “maximum pressure.” The first clear sign came last month, when the Justice Department sued to forfeit almost $2 million Mingzheng International Trading Limited laundered for the Foreign Trade Bank of North Korea (FTB). A few weeks later, it cut the Bank of Dandong off from the financial system for laundering money for North Korean arms dealer KOMID and Korea Kwangson Banking Corporation, an FTB subsidiary. (Treasury blocked KKBC and FTB in 2009 and 2013, respectively, making it illegal to do business with them inside the United States, though corrupt trading companies stepped up to help them access the dollar system indirectly, for commissions of up to 25 percent per transaction). We can now see the feds’ emerging strategy taking shape — to bankrupt the Chinese trading companies that fill His Porcine Majesty’s coffers and make them toxic to the entire financial industry.

North Korea’s latest missile test changes the administration’s calculus, said Nicholas Eberstadt, a North Korea security expert at the American Enterprise Institute. He expects the White House to accelerate its sanctions against Chinese firms.

A central aim of the strategy of freezing out a Chinese bank from the U.S. financial system is to chill transactions by other Chinese institutions. Access to U.S. financial markets and the dollar are critical for trade and finance around the globe. But for that effort to be perceived as a credible, said Mr. Eberstadt, the administration will have to list other Chinese banks to instill broader fear.

“If I wanted to send a message, I’d probably send several postcards,” Mr. Eberstadt said.

Analysts and senior officials from two previous administrations say the existing sanctions regime against North Korea have so far been elementary compared with the thicket of actions applied against Iran at the height of the Obama administration’s punitive actions against Tehran. That effort pushed the country into recession and persuaded the country to negotiate, although many foreign-policy experts question the effectiveness of the subsequent deal the U.S. reached with Iran. [WSJ, Ian Talley]

Then, last week, the U.S. District Court for the District of Columbia unsealed this seizure warrant for funds of Dandong Zhicheng Metallic Materials Company that entered eight U.S.-based correspondent banks. According to the warrant, Dandong Zhicheng processed $700 million in prohibited North Korea-linked transactions through those eight correspondents since 2009, including $52 million in the last seven months alone. Yes, that’s right — Pyongyang was laundering its money through our banks and right under our noses all along, just like I’ve been saying.

Tantalizingly, the warrant cites a cites a grand jury subpoena that isn’t published on PACER, most likely because it’s still sealed under Rule 6(e) of the Federal Rules of Criminal Procedure, which protects the secrecy of grand jury material. This particular warrant is a “damming warrant,” a tool prosecutors use when they have probable cause to seize evidence or contraband that regularly transits through a specified place, even if it isn’t there at the moment (such as drugs through a dealer’s P.O. box, or funds through a money launderer’s account). It means that money goes into, but not out, of the account subject to the warrant. In this case, the damming warrant lasted 14 days, which may be as long as a depositor would continue to dump money into a bank account before wondering why his checks weren’t clearing.

I found the names of the correspondent banks on PACER so that wouldn’t have to: Bank of America, Deutsche Bank Trust Company Americas, Citibank, Bank of New York Mellon, HSBC, JP Morgan Chase, Standard Chartered Bank, and Wells Fargo. So far, the feds aren’t directly targeting those banks for legal action, and neither the banks nor the feds are saying anything else about that, but read on. You’ll also see in footnote 5 of the court’s order that the feds have now begun to make good use of the NKSPEA; evidently, the prosecutors cited section 104(a)(8) it in their warrant application.

By now, the more astute readers among you have picked up on the familiarity of Dandong Zhicheng’s name. No, this isn’t the Chinese network exposed in C4ADS’s report (and mostly undone by the Justice Department’s indictment and forfeiture complaint) last year. That was Dandong Hongxiang (or DHID). Dandong Zhicheng (or DZMM) is the Chinese network exposed by C4ADS’s most recent report, just last month.

In 2016, a single company, Dandong Zhicheng Metallic Material Co. Ltd. 丹东至诚金属材料有限公司, reportedly accounted for 9.19% of total North Korean exports to China. Established in July 2005, just as North Korean coal exports began to increase as a percentage of total exports, Dandong Zhicheng Metallic Material Co. Ltd. is a commodity company based in Dandong, China. The company’s archived website states that, as of April 6, 2016, it was recording annual sales of US$250 million, mainly of North Korean coal. This fact is recorded in trade data: 97% of the company’s imports were of North Korean coal. The company’s rapid growth and subsequent market position today is best described by a 2013 statement by one of the company’s traders, “The golden time for high profit has ended. It is now difficult to expand the market share further, and small players are out of the game.” Since 2014, Dandong Zhicheng Metallic Material Co. Ltd. has reportedly been the top overall importer from North Korea in China. [C4ADS]

If C4ADS is right that North Korea’s financial networks are centralized, limited, and vulnerable, the Justice and Treasury departments can damage or destroy the Chinese conglomerates that link Pyongyang to the financial system. To hear C4ADS tell it, DZMM is the single biggest Chinese importer of coal and other products from North Korea. Reuters backs that up by citing a 2013 online profile for DZMM, which claims that it imported $250 million worth of North Korean coal that year. By contrast, UNSCR 2321 capped North Korea’s total annual coal exports at $400 million. Thus, DZMM is almost certainly Pyongyang’s single largest coal customer and one of its key links to the global economy (no matter how many “experts” say that Pyongyang is already too isolated to sanction or that those links are too well hidden to find).

Nothing in the damming warrant mentions Kangbong, Daewon, or Paeksol, but it’s almost a sure bet that at least one of them is having some cash flow problems today, if not all three. The fact that the warrant reveals that a grand jury has been empaneled is also telling. Reuters got someone at DZMM to answer the phone, but they wisely refused to comment. If the cliché is correct that you can indict a ham sandwich, we should expect to see an indictment unsealed in the coming weeks or months, and we’ll learn the names of DZMM’s banks.

Asked about the issue, Chinese Foreign Ministry spokesman Geng Shuang reiterated that any infringements of U.N. resolutions on North Korea would be dealt with according to Chinese law, and that China opposed “long-armed jurisdiction”. [Reuters]

That is to say, China is opposed to unilateral sanctions, except when it isn’t. I can’t recall when I’ve ever heard China sound so upset and concerned about the prospect of paying a penalty for Pyongyang’s behavior.

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When the feds indicted Dandong Hongxiang last September, they hastened to add that the banks were not suspected of any wrongdoing. How much legal jeopardy are the banks in this time? Potentially, plenty. The court issued the DZMM warrant in May, so presumably, the affected transactions would have come after Treasury’s Financial Crimes Enforcement Network (FINCEN) issued this new regulation, based on its finding that North Korea is a jurisdiction of primary money laundering concern. The FINCEN regulation requires banks to cut North Korean financial institutions off from both direct and indirect access to the financial system, and requires due diligence of banks processing transactions to that end. Clearly, the banks should not have processed transactions for designated North Korean entities — including the FTB, KKBC, Daewon, Paeksol, or Kangbong. This time, DZMM’s Chinese banks and their U.S.-based correspondents both face higher legal burdens due to the new FINCEN regulation. The amount of jeopardy depends on how apparent DZMM’s links to North Korea were, or alternatively, how many hard questions they asked DZMM and each other about their customers.

What’s clear, regardless of the outcome, is that the banking industry has to step up its compliance game. And judging by the clarity of the message the feds are finally sending, I expect it already is.

Have all the shoes dropped? By no means. A grand jury is (or was) in session, indictments are thus more likely than not, the feds have plenty of other options short of that, and according to the Wall Street Journal, their strategy has backing at the highest levels of the administration. Our government is now promising — and taking steps to implement — a secondary boycott of North Korea’s enablers around the world, Nikki Haley is telling countries that they cannot trade with both the U.S. and North Korea, and the U.S. is moving to combine its economic power with that of South Korea and Japan (collectively, China’s three largest trading partners). Yes, China and Russia are stalling approval of a new U.N. sanctions resolution, but I’ve long felt that we’ve reached the point of diminishing returns from new U.N. sanctions anyway. What’s needed now is strict enforcement of the existing sanctions and anti-money laundering authorities, and that’s what I’ve just been talking about here.

Last year was a bad year for North Korean banks. Although the effects of that still aren’t clear, this year promises to be much worse for them. And we haven’t even gotten to the tools the Senate is about to give the feds.