Report

Confidential U.N. Report Details North Korea’s Front Companies in China

A maze of shadowy businesses allows Kim Jong-un to evade sanctions and experts say there's no way Beijing doesn't know.

This undated picture released from North Korea's official Korean Central News Agency (KCNA) on June 23, 2016 shows a test launch of the surface-to-surface medium long-range strategic ballistic missile Hwasong-10 at an undisclosed location in North Korea.
The Musudan -- also known as the Hwasong-10 -- has a theoretical range of anywhere between 2,500 and 4,000 kilometres (1,550 to 2,500 miles). / AFP / KCNA VIA KNS / KCNA / South Korea OUT / REPUBLIC OF KOREA OUT   ---EDITORS NOTE--- RESTRICTED TO EDITORIAL USE - MANDATORY CREDIT "AFP PHOTO/KCNA VIA KNS" - NO MARKETING NO ADVERTISING CAMPAIGNS - DISTRIBUTED AS A SERVICE TO CLIENTS
THIS PICTURE WAS MADE AVAILABLE BY A THIRD PARTY. AFP CAN NOT INDEPENDENTLY VERIFY THE AUTHENTICITY, LOCATION, DATE AND CONTENT OF THIS IMAGE. THIS PHOTO IS DISTRIBUTED EXACTLY AS RECEIVED BY AFP.  /         (Photo credit should read KCNA/AFP/Getty Images)
This undated picture released from North Korea's official Korean Central News Agency (KCNA) on June 23, 2016 shows a test launch of the surface-to-surface medium long-range strategic ballistic missile Hwasong-10 at an undisclosed location in North Korea. The Musudan -- also known as the Hwasong-10 -- has a theoretical range of anywhere between 2,500 and 4,000 kilometres (1,550 to 2,500 miles). / AFP / KCNA VIA KNS / KCNA / South Korea OUT / REPUBLIC OF KOREA OUT ---EDITORS NOTE--- RESTRICTED TO EDITORIAL USE - MANDATORY CREDIT "AFP PHOTO/KCNA VIA KNS" - NO MARKETING NO ADVERTISING CAMPAIGNS - DISTRIBUTED AS A SERVICE TO CLIENTS THIS PICTURE WAS MADE AVAILABLE BY A THIRD PARTY. AFP CAN NOT INDEPENDENTLY VERIFY THE AUTHENTICITY, LOCATION, DATE AND CONTENT OF THIS IMAGE. THIS PHOTO IS DISTRIBUTED EXACTLY AS RECEIVED BY AFP. / (Photo credit should read KCNA/AFP/Getty Images)

When China announced last week plans to cut off imports of coal from North Korea, a vital source of revenue for the cash-starved Hermit Kingdom, it fueled optimism that Beijing may be getting serious about reining in its erratic neighbor.

But an unpublished U.N. report obtained by Foreign Policy that documents sophisticated North Korean efforts to evade sanctions shows that China has proved a fickle partner at best in Washington’s effort to stymie Pyongyang’s nuclear ambitions.

That poses a fresh challenge for U.S. President Donald Trump, whose prospects of containing North Korea’s nuclear weapons program — which has made great strides lately — rest largely with Beijing. But instead of low-key diplomatic spadework, Trump has sought to browbeat China into helping, blaming the Asian powerhouse with failing to use its influence to clip Pyongyang’s atomic aspirations.

North Korea “is flouting sanctions through trade in prohibited goods, with evasion techniques that are increasing in scale, scope and sophistication,” according to the report compiled by an eight-member panel, which is chaired by a British national and includes experts from China, Russia, and the United States. The North Korean schemes are “combining to significantly negate the impact” of international sanctions.

China, despite its apparent cooperation of late with international efforts to sanction North Korea, has instead served as Pyongyang’s economic lifeline, purchasing the vast majority of its coal, gold, and iron ore and serving as the primary hub for illicit trade that undermines a raft of U.N. sanctions that China nominally supports, the report’s findings suggest.

As early as December 2016, China had blown past a U.N.-imposed ceiling of 1 million metric tons on coal imports, purchasing twice that amount. China then shrugged off a requirement to report its North Korean coal imports to the U.N. Security Council sanctions committee. When U.S. and Japanese diplomats pressed their Chinese counterpart for an explanation in a closed-door meeting this month, the Chinese diplomat said nothing, according to a U.N.-based official.

North Korean banks and firms, meanwhile, have maintained access to international financial markets through a vast network of Chinese-based front companies, enabling Pyongyang to evade sanctions. That includes trades in cash and gold bullion and concealing financial transactions behind a network of foreign countries and individuals, allowing North Korea to gain ready access to the international financial system, as well as to banks in China and New York. North Korea’s business “networks are adapting by using greater ingenuity in accessing formal banking channels as well as bulk cash and gold transfers,” the report found.

There is no direct evidence that the Chinese government is actively supporting North Korea’s sanctions busters.

But William Newcomb, a former member of the U.N. sanctions panel on North Korea, said it is hard to believe China is unaware of the illicit trade.

“You have designated entities that have continued to operate in China,” he told FP. “It’s not an accident. China’s security services are good enough to know who is doing what” inside their country.

China has a pattern of showing goodwill in the U.N. Security Council by supporting a succession of sanctions resolutions aimed at curtailing Pyongyang’s nuclear trade, according to Newcomb. But it has shown less commitment to enforcing those measures.

And it has used its power in an obscure Security Council sanctions subcommittee — which makes its decisions by consensus and in secret — to “slow-roll” efforts to ensure that sanctions are respected, Newcomb said.

The Chinese mission to the United Nations did not respond to a request for comment. An official at the North Korean mission who declined to identify himself said: “I don’t think there is anyone available for this issue.”

The evasions raise fresh questions about China’s commitment and pose a major challenge to Trump, who has vowed to prevent North Korea from achieving its goal of developing an intercontinental ballistic missile (ICBM) capable of delivering a nuclear explosive to American cities.

Pyongyang has already conducted five nuclear tests since 2006, and it has made huge strides in missile technology, conducting a record 26 ballistic missile tests in 2016, including the firing in April of a submarine-launched ballistic missile using solid fuel. North Korean leader Kim Jong Un appears poised to test an ICBM with much greater reach.

“The unprecedented frequency and intensity of the nuclear and ballistic missile tests conducted during the reporting period helped the country to achieve technological milestones in weapons of mass destruction capability, and all indications are that this pace will continue,” according to the report’s findings.

The report — which is expected to be made public next week — “shows once again that the North Korean regime continues its methodical effort to develop a nuclear military program and the means to deliver the corresponding weapons,” said François Delattre, France’s U.N. ambassador. “It is a real challenge to the [nuclear] nonproliferation regime.”

The extent of Chinese companies’ role in enabling North Korea’s evasion of sanctions is detailed deep in the fine print of the still unpublished 105-page report. For instance, North Korea’s Daedong Credit Bank (DCB) and Korea Daesong Bank, both subject to U.S. and U.N. sanctions, continue to operate in the Chinese cities of Dalian, Dandong, and Shenyang in violation of U.N. resolutions. The panel suspects that one of the banks, Daedong, may in fact be majority-owned by Chinese shareholders, citing July 2011 documents indicating the sale of a controlling stake, 60 percent, to a Chinese firm.

Daedong “effectively accesses the international financial system through a network of offshore accounts and representative offices in China,” the panel report states. Its operations, according to the report, provide evidence that North Korean banks “manage to operate abroad through the establishment of front companies that are not registered as financial institutions but function as such.”

The United States sanctioned Daedong; its finance wing, DCB Finance; and their Dalian-based North Korean representative, Kim Chol Sam, in June 2013 for providing financial services to the Korea Mining Development Trading Corp., or KOMID, North Korea’s chief arms dealer.

Kim has established a series of front companies in China, including a Hong Kong firm he opened with a fake ID indicating he was a citizen of South Korea, according to the report. He has facilitated millions of dollars in “payments and loans between companies linked to DCB and exchanged large quantities of bulk cash transferred to China from the Democratic Republic of Korea.” The report says member states — an obvious reference to China — are obliged to expel Kim and “freeze all property, assets and other economic resources owned or controlled by him.”

The Chinese connection is at the center of an international web that stretches from Angola to Malaysia and the Caribbean and involves a large network of North Korean diplomats, entrepreneurs, smugglers, and foreign facilitators. The off-the-books trade includes the export of gold, coal, and rare-earth metals and the sale of rockets, Scud missile parts, government monuments, and high-tech battlefield communications equipment, among other things.

Last year, the panel’s investigations exposed trade in “encrypted military communications, man-portable air-defense systems, and satellite-guided missiles that may involve large teams of the country’s technicians deployed to assemble or service the banned items,” according to the report.

One example of a new niche market: North Korea buys cheap electronics in Hong Kong for a pittance and then turns them into military-grade radios it sells to developing countries for $8,000 a pop.

In July 2016, authorities from an unidentified nation seized an air shipment containing 45 boxes of battlefield radios, and assorted high-tech communications gear, from China to a technology company in Eritrea.

By the standards of North Korea’s multibillion-dollar black-market trade, the Eritrea haul was a drop in the bucket; North Korea earned $1.2 billion in coal sales to China last year. But the case provided insights into Pyongyang’s elaborate, and ever evolving, financial scheme to evade U.N. sanctions and stay two steps ahead of the United States and other key powers seeking to thwart North Korea’s illicit trade.

The equipment bore the trademark of Global Communications Co., or Glocom, a Malaysia-based front company for North Korean firm Pan Systems Pyongyang, which operates a network of front companies and agents in Malaysia and China. The company also has a branch in Singapore. Efforts to reach the company were unsuccessful.

But the head of Pan Systems in Singapore, Louis Low, told Reuters — which first reported on the scheme — that his company set up an office in Pyongyang in 1996 but that it severed relations with North Korea in 2010 and has had no dealings with Glocom. He suggested that North Koreans might still be using the company’s name without his agreement.

The mastermind behind the operation is North Korea’s premier intelligence agency, the Reconnaissance General Bureau, which runs Pan Systems and other front companies.

“The global network consisted of individuals, companies and bank accounts in China, Indonesia, Malaysia, Singapore and the Middle East,” the report stated.

Photo credit: KCNA/AFP/Getty Images

Colum Lynch is Foreign Policy’s award-winning U.N.-based senior diplomatic reporter. @columlynch

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