U.N. Panel: North Korea Used Chinese Bank to Evade Nuclear Sanctions

Samantha Power, the U.S. ambassador to the United Nations, lauded China last week for joining Washington in slapping North Korea with what she described as the toughest round of measures against the Hermit Kingdom in more than 20 years in response to its latest nuclear and ballistic missile tests.

Washington may want to hold off celebrating: An unpublished report by a U.N. panel responsible for enforcing existing North Korean sanctions suggests that China has been lax in ensuring the current measures were carried out. The report, obtained by Foreign Policy, also cites evidence that Pyongyang moved tens of millions of dollars through a Singaporean branch of China’s biggest bank to evade sanctions. Beijing has held up publication of the review for two weeks, though copies have been leaked to a handful of reporters.

The report underscores the tightrope China is trying to walk between its role as a global power responsible for curtailing North Korea’s nuclear program and its role as a diplomatic big brother seeking to prevent its unpredictable smaller neighbor — as well as its own businesses — from reacting provocatively to the latest round of sanctions.

Last week, North Korean leader Kim Jong Un announced plans to place his government’s nuclear weapons on the ready in response to the sanctions. Angered by the start of a large U.S.-South Korea military exercise Monday, North Korea threatened to strike South Korean and American targets in the region and warned that “all bases of provocations will be reduced to seas in flames and ashes in a moment.”

For now, U.N. Security Council diplomats are hopeful that China has simply held up the report in order to avoid piling it on North Korea and to deter their troublesome client from overreacting. But China’s long-standing ideological aversion to sanctions and its lax enforcement of previous penalties have dampened some observers’ confidence that it can be relied on to vigorously enforce the harshest of the new measures, which are tailored to prevent North Korea from raising the revenue needed to finance its nuclear ambitions.

The unpublished report obtained by FP claims that a Singapore-based shipping firm, Chinpo Shipping, used its account at a Bank of China branch to conceal North Korean payments to operate ships carrying arms and other goods on behalf of Pyongyang.

The report reaches a grim but blunt verdict on the efficacy of sanctions to deter North Korea from its nuclear ambitions over the past decade: They haven’t worked. There are few signs, the panel concluded, that sanctions will change its mind.

“The panel’s investigations have shown that the Democratic People’s Republic of [North] Korea has been effective in evading sanctions and continues to use the international financial system, airlines and container shipping routes to trade in prohibited items,” the report states. “The panel has found no indications that the country intends to abandon its nuclear and ballistic missile programmes.”

Some observers are more optimistic, noting that Beijing has gradually — though often grudgingly and as a result of persistent U.S. pressure — come around to supporting ever tougher U.N. measures. “This is another manifestation of China coming out of the closet as a global player,” said one diplomat. “If you told me seven months ago that China would go along with the language in this resolution, I would have said you’re crazy. You have to take your hat off to the Americans.”

The panel’s account of Chinpo’s activities is drawn from court proceedings in Singapore, where state prosecutors have accused the company of helping the North Korean government evade U.N. sanctions. According to court documents, Chinpo made some 605 payments valued at more than $40 million on behalf of North Korean entities between April 2009 and July 2013, when Chinpo wired more than $72,000 to a Panama shipping firm to cover the costs of passage for the MV Chong Chon Gang — a North Korean-flagged vessel that had previously shipped weapons for the country — through the Panama Canal.

Singaporean authorities claim that Chinpo’s de facto chief executive, Tan Cheng Hoe, tried to disguise the transaction by using a trick he had been employing since 2010: withholding the name of the North Korean ship in the bank’s wire transfer to avoid suspicion. In January, District Judge Jasvender Kaur fined Chinpo $128,000 for violating a Singaporean law upholding U.N. sanctions and acting as a financial paymaster without a license from the government.

“According to Mr. Tan’s statement, ‘more questions were asked by the bank in the United States when the vessel name was included, and some processing banks will reject the transaction after asking for more information,’” the panel wrote. “He then states that the Singapore branch of [the] Bank of China … had advised [Chinpo] to leave out the vessel name in transactions, [and] that [the] bank was aware that the remittances were being conducted on the behest of Democratic People’s Republic of Korea entities.”

Tan also provided a contradictory account to Singaporean police, saying that he had made the decision to withhold the names of vessels. The prosecution’s case is directed solely at Chinpo, and Tan has not been formally accused of wrongdoing. Repeated efforts to reach Chinpo’s lawyers, as well as the Bank of China’s Singapore branch, by phone and email were unsuccessful. But Bloomberg News, which covered the Singaporean case, reported that Chinpo’s attorney, Edmond Pereira, plans to appeal the judge’s ruling.

The smuggling operation was exposed after Panamanian authorities inspected the ship. Buried beneath 10,500 metric tons of Cuban sugar was a stockpile of conventional weapons. These include two disassembled MiG-21 fighter jets, 15 aircraft engines, antitank rockets, and SA-2 and SA-3 Russian surface-to-air missile systems. It was the largest weapons haul since 2006, when the Security Council first imposed sanctions on North Korea.

“It would surprise me if what happened in Singapore is a unique case,” said Sandy Baggett, an American lawyer who served as Singapore’s lead prosecutor in the Chinpo case.

Baggett said she was struck by the degree to which North Korea — usually seen as a deeply isolated rogue nation — has an extensive network of diplomats carrying out business deals throughout the rest of the world. One North Korean diplomat, she said, traveled to Singapore each year to collect large sums of cash from Chinpo’s account at the Bank of China branch there.

“These people had diplomatic status, and yet they were engaging in commercial activities,” she said.

The U.N. Security Council first imposed sanctions on North Korea in 2006, following Pyongyang’s initial nuclear test. The council’s subsequent measures have criminalized the financing of entities involved in securing equipment for Pyongyang’s nuclear and ballistic missiles. In June 2009, the council established a panel of experts to monitor the enforcement of sanctions. The panel includes representatives from the key powers, including the United States and China.

China has often been reluctant to follow up on previous sanctions votes to ensure they are enforced. It has been defensive in the face of revelations that Chinese firms or agencies have been implicated in wrongdoing.

In the Bank of China’s case, Beijing’s diplomats have privately raised concerns about the panel’s decision to name the Chinese bank. They have argued that the only evidence comes from a Singaporean court and that the experts should have relied more on the word of Chinese authorities.

China has also been slow to back proposals for strengthening the existing sanctions. When the U.N. panel of experts called for freezing the assets of North Korea’s chief shipping agent, Ocean Maritime Management (OMM), China dragged its feet.

The United States, which has overseen efforts to ratchet up pressure on North Korea, finally overcame China’s reservation, and in July 2014 the 15-nation council agreed to impose sanctions on OMM. But the North Korean shipping agency quickly established a network of new companies to manage the business.

In February 2015, the U.N. panel of experts recommended that the council sanction 34 entities that were conducting North Korea’s shipping business on behalf of OMM. But Chinese diplomats in New York pushed back, killing off consideration of such measures by claiming they lacked clear authority from Beijing to penalize the companies.

It would take more than a year — and the detonation of a nuclear weapon and a banned rocket test — before China yielded to U.S. pressure to sanction those groups. Last week, the Security Council added those companies to a U.N. list of entities subject to an asset freeze.

Nick Gillard, a Project Alpha researcher at King’s College London who tracks North Korea’s nuclear proliferation efforts, said China’s decision to support such tough U.N. measures demonstrates its growing seriousness about the need to rein in the North Koreans.

“I think there is certainly political will at the central level” of the Chinese government, Gillard said. The open question, he added, is whether Beijing can compel its banks and rural ports to vigorously enforce the sanctions. Gillard said he was optimistic, in part because of press reports indicating that Beijing has issued a central directive prohibiting OMM vessels from entering Chinese ports.

But Andrea Berger, an expert on nuclear proliferation at the Royal United Services Institute, said China has made similar pledges in the past but has not always faithfully honored them. “China has agreed to sanctions packages in the past, each harsher than the last,” she said. “Yet on each occasion, it has also failed to follow up by systematically enforcing the measures, encouraging the private sector to do the requisite due diligence to flag prohibited trade, and acting when they do not.”

If, for instance, the Bank of China had asked Chinpo’s director the necessary questions, “it would have become apparent that this business involved regular dealing with North Korea. For most other banks in the world, this would be a red flag suggesting high-risk clients.”

Photo credit: Ed Jones/AFP/Getty Images