Dandong Delenda Est: A little-noticed law may soon raise the pressure on China over N. Korea’s smuggling
Next week, a little-noticed law designed to give the President new economic alternatives to war comes into effect. The new law requires U.S Customs and Border Protection to blacklist ports that fail to comply with U.N. sanctions requiring them to inspect all cargo coming from, destined for, or brokered by North Korea or its nationals (see UNSCR 2270, paragraph 18). It also authorizes CBP to increase inspection of cargo coming from those non-compliant foreign ports. The recent default of the debt-burdened Port of Dandong on $150 million in bonds now suggests that a key node in China’s policy of undermining of U.N. sanctions has never been more vulnerable to U.S. economic pressure.
Americans tend to celebrate when Beijing votes to sanction Pyongyang and sleep while Beijing undermines them. But as Pyongyang advanced its capability to blackmail Seoul and Washington with nuclear weapons, Beijing systematically violated U.N. sanctions against North Korea — much too widely and fragrantly for this pattern to constitute anything less than a deliberate state policy. Indeed, Beijing probably has stronger sanctions against Seoul to punish it for deploying missile defense radars than it has against Pyongyang. The U.S. ought to have stood by its South Korean ally and responded to China in kind with the new economic tools Congress recently gave it.
One of these is section 205 of the North Korea Sanctions and Policy Enhancement Act, as amended by section 314 of the KIMS Act. Think of section 205 as the shipping equivalent of section 311 of the Patriot Act ” a law that uses customs inspection instead of financial regulation to force hubs of commerce to exclude bad actors (in this case, Pyongyang). In the same sense that 311 blacklists (and raises legal risks for) banks that fail to perform due diligence to prevent North Korean money launderers from using their institutions, section 205 blacklists ports that fail to inspect North Korean cargo as required by U.N. Security Council Resolution 2270, and prevent North Korean smugglers from accessing their ports.
In effect, if you’re the director of a foreign port that fails to inspect North Korean cargo, cargo coming from your port to an American port can be targeted by U.S. Customs and Border Protection for enhanced screening to ensure that North Korea isn’t using your port to introduce North Korean contraband (or worse) into U.S. commerce. A section 205 designation creates a risk that shippers who use the Dandong port to export to the U.S. will see their merchandise held up or spoil in warehouses awaiting inspection. That risk may cause shippers and manufacturers to take their business to areas served by more compliant ports, potentially throwing China’s most economically fragile region into recession. It could also discourage lenders and insurers from dealing with the port, or raise its risk premiums and debt servicing costs.
Section 205 includes a short list of foreign ports whose compliance with UNSCR 2270 the Secretary of Homeland Security is required to assess. The report is due 180 days from the enactment of the legislation, a deadline that expires next week. That list, which is non-exclusive, includes ports in Iran, Syria, Russia, and China ” including Dalian and Dandong. The latter two cities are the Grand Central Station and the Penn Station of North Korean smuggling. A glance at a shipping tracker will readily confirm that Dandong continues to be the most important port for North Korea’s foreign trade. A large share of the ship-to-ship transfers in violation of UNSCR 2375, paragraph 11 likely pass through Dandong, a reported hub for banned North Korean exports of both coal and seafood.
With exquisite timing, Leo Byrne now reports that Liaoning Yuan Zhou Industrial Group, a Dandong-based company involved in smuggling North Korean coal, textiles, and metals, also exported textiles made with North Korean labor into the United States — a violation of Executive Order 13570 (and probably others) unless licensed by the Treasury Department, and punishable by hefty fines, forfeitures, and prison time. Byrne’s detailed and credible report vastly complicates any attempt by Homeland Security to acquit Dandong of (at best) a failure of due diligence. Even before Byrne’s report, Dandong’s violations were legion.
Dandong also continued to be a haven for North Korean money laundering last year, and probably still does. Chinese companies that have been targeted by recent Treasury and Justice Department actions, or implicated by C4ADS, have names like “Dandong Hongxiang,” and “Dandong Zhicheng,” a/k/a “Dandong Chengtai.” The Justice Department hit the latter target with another civil forfeiture action last week, for $500,000, in part for very recent violations of the North Korea Sanctions and Policy Enhancement Act. (The original complaint the recent action amended is here.) Last week’s round of Treasury Department designations included a North Korean proliferator based in Dandong, a Dandong trading company, and a North Korean bank branch based in Dandong.
North Korea’s smuggling through Chinese ports poses a direct threat to U.S. national security; after all, if North Korea can smuggle textiles into the United States through Dandong, what other noxious things can it smuggle into the United States through China? There’s no need to use one’s imagination. In 2005, Chinese smugglers were convicted of conspiring to smuggle counterfeit currency, counterfeit cigarettes, fake viagra, cocaine, meth, and Chinese-made QW-2 man-portable surface-to-air missiles into the United States. Some of those products, including the counterfeit money, were of North Korean origin. The connection between Pyongyang and the missiles is less clear, although North Korea has been caught smuggling MANPADs to Iran. Other MANPADs of North Korean origin have shown up in hands of Islamic extremists in Syria, probably after they were captured from the Syrian government.
Whatever his other flaws, Donald Trump is the first American President to make China pay a price for this threat to our security. In the summer and fall of 2017, Chinese banks facing the threat of secondary U.S. sanctions began to close North Korean accounts. Chinese factories began to lay off North Korean workers, Chinese and North Korean businesses that deal in cross-border trade have been idled, Chinese investors in North Korea have lost money, and cross-border trade between China and North Korea declined after rising for the last several years. I distrust all statistics published by the central government in Beijing, but there is ample extrinsic evidence for a significant (if not dramatic) decline. This shift probably owes more to the banks, factories, and trading companies responding to the potential loss of U.S. market access than to a change of attitudes in Beijing. The same pressures could be applied to Dandong’s port, which just defaulted on $150 million in bonds:
Dandong Port Group Co., controlled by a Chinese construction magnate with political ties in the U.S., told bondholders this week that it is unable to repay part of 1 billion yuan in bonds due Monday. A company statement cited “heavy interest-bearing debt burdens and high short-term payment pressure” and said it is working with underwriters to repay the investors. [….]
The port, located at the mouth of the Yalu River on the border with North Korea, has expanded energetically in recent years to handle soybean imports from the U.S. and coal from Mongolia, even as much of northeast China’s resource-heavy economy struggled. International sanctions on North Korea have pinched some trade, though a company representative said the port halted business with the country in 2010 and so hasn’t been affected by the restrictions. [WSJ]
But as we’ve already seen, the latter statement is a lie, and a 205 designation could weaken Xi Jinping’s own hold on power. Northeast China’s fragile economy, and “[t]he risk of social unrest due to job losses,” are politically sensitive matters for Xi Jinping. Dandong’s default on its bonds followed a party congress that expanded Xi’s political power, so closely in time as to suggest that Bejing kept its debt problems under wraps until the conclusion of this party congress. The default nonetheless shook prices on the Shanghai Stock Exchange. Said one analyst quoted by the Wall Street Journal: “Dandong Group’s problems reflect the lackluster state of the whole Chinese economy and the northeast region.” The default also exposed the shady financial and political practices of the port’s management.
The company’s controlling shareholder, Wang Wenliang, was replaced as Dandong Port’s legal representative this August, although he remains in control of Dandong Port through two corporate entities, one of which is based in Hong Kong, according to company filings.
A fixture on lists of China’s wealthiest people, Mr. Wang has surfaced in separate scandals in China and the U.S. in recent years. He was one of several dozen deputies from Liaoning province expelled from China’s legislative body last year in a vote-buying scandal.
In the U.S., his political funding and other donations have also been scrutinized. His construction business Rilin Enterprises, for instance, gave $1 million to $5 million to the Clinton Foundation since its founding, according to records published by the organization co-founded by the former candidate Hillary Clinton. A spokeswoman for Mr. Wang put his total donations to the foundation around $2 million.
Also last year, The Wall Street Journal reported the Federal Bureau of Investigation had also examined a $120,000 donation by a U.S. business owned by Mr. Wang to then-Virginia Gov. Terry McAuliffe. Mr. Wang has also donated to U.S. universities including Harvard and at least one think tank, the Center for Strategic and International Studies. [WSJ]
In other words, as with Dandong Chengtai, North Korea’s enablers in China turn out to have more U.S. market exposure than we’d realized. But there is more to be done ” only 6,000 of 30,000 North Korean slave laborers have gone home, and there are no fresh reports of banks closing North Korean accounts.
Dandong is only one of many local governments in China that have taken on heavy debt loads for state-owned enterprises and big public-works projects in order to sustain local employment. That, in turn, has required China’s central government to inject capital into local governments to prop them up. In Dandong’s case, sanctions on North Korea had already affected the local economy, contributing to a steep decline in government revenue since 2013, higher unemployment, and a high debt burden. The economy slowed in 2016, when the U.N. and the U.S. adopted stronger new sanctions authorities, and the U.S. indicted Dandong Hongxiang (perhaps chilling other cross-border trading companies). Further defaults by Dandong and its port could also impact banks that Bejing has forced to lend them money. To Xi Jinping, these are all reasons to go slower on enforcing North Korea sanctions. The threat of a section 205 designation can convince him that Dandong’s financial insecurity is a reason to go faster.
There are other ways we could target Dandong’s economy. One would be a focused advisory by the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, that U.S. correspondents should exercise particular diligence for certain classes of those transactions, or transactions emanating from certain regions. For more on how due diligence requirements, anti-money laundering laws, and Know-Your-Customer rules, I’ll refer you to this by Neil Bhatiya, and especially this by Peter Harrell and Juan Zarate in Foreign Affairs. After years of reading third-rate punditry about sanctions by people who’d have to Google “IEEPA” to know what it stands for, it’s refreshing to read original ideas by people who know what they’re talking about.
The theory behind the financial constriction of North Korea is that when offered the choice of trading with the U.S. or with North Korea, most banks in China would find that their economic interests lie with maintaining access to U.S. markets. What makes this threat credible is that it is scalable. Customs can pick what cargo gets targeted for enhanced inspection, unlike Patriot Act section 311 designations, which can destroy a bank’s reputation even if only the slightest special measures are imposed. Thus, when the U.S. government calls on the Hong Kong government to cease being a “safe harbor” for illicit trade with North Korea, section 205 presents a credible threat of consequences. Another obvious target for this chilling effect is Dalian. For now, however, it is the smaller and more financially troubled port at Dandong that is more vulnerable.