[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                       RESTRICTING NORTH KOREA'S
                           ACCESS TO FINANCE

=======================================================================

                                 HEARING

                               BEFORE THE

                        SUBCOMMITTEE ON MONETARY

                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 19, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-33
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
               Subcommittee on Monetary Policy and Trade

                     ANDY BARR, Kentucky, Chairman

ROGER WILLIAMS, Texas, Vice          GWEN MOORE, Wisconsin, Ranking 
    Chairman                             Member
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              BILL FOSTER, Illinois
ROBERT PITTENGER, North Carolina     BRAD SHERMAN, California
MIA LOVE, Utah                       AL GREEN, Texas
FRENCH HILL, Arkansas                DENNY HECK, Washington
TOM EMMER, Minnesota                 DANIEL T. KILDEE, Michigan
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                CHARLIE CRIST, Florida
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
                           
                           
                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 19, 2017................................................     1
Appendix:
    July 19, 2017................................................    39

                               WITNESSES
                        Wednesday, July 19, 2017

Newcomb, William J., Visiting Scholar, U.S.-Korea Institute, Paul 
  H. Nitze School of Advanced International Studies, Johns 
  Hopkins University.............................................     7
Park, John, Director, Korea Working Group, Belfer Center for 
  Science and International Affairs, John F. Kennedy School of 
  Government, Harvard University.................................    10
Rosenberg, Elizabeth, Senior Fellow, Center for a New American 
  Security.......................................................     9
Ruggiero, Anthony, Senior Fellow, Foundation for Defense of 
  Democracies....................................................     5

                                APPENDIX

Prepared statements:
    Newcomb, William J...........................................    40
    Park, John...................................................    46
    Rosenberg, Elizabeth.........................................    52
    Ruggiero, Anthony............................................    60

 
                       RESTRICTING NORTH KOREA'S
                           ACCESS TO FINANCE

                              ----------                              


                        Wednesday, July 19, 2017

             U.S. House of Representatives,
                           Subcommittee on Monetary
                                  Policy and Trade,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:32 p.m., in 
room 2128, Rayburn House Office Building, Hon. Andy Barr 
[chairman of the subcommittee] presiding.
    Members present: Representatives Barr, Williams, Huizenga, 
Pittenger, Love, Hill, Mooney, Davidson, Hollingsworth; Moore, 
Foster, Sherman, Green, Heck, Kildee, Vargas, and Crist.
    Ex officio present: Representative Hensarling.
    Also present: Representative Royce.
    Chairman Barr. The Subcommittee on Monetary Policy and 
Trade will come to order. Without objection, the Chair is 
authorized to declare a recess of the subcommittee at any time.
    Also, without objection, the gentleman from California, 
Chairman Royce, is permitted to participate in today's 
subcommittee hearing. Chairman Royce is the Chair of the House 
Foreign Affairs Committee as well as a member of the full 
Financial Services Committee, and we appreciate his interest in 
this important topic.
    I appreciate everyone's indulgence as we are delayed in the 
start of this hearing, just coming from votes. But this hearing 
couldn't be more timely and more important, so we appreciate 
your participation. This hearing is entitled, ``Restricting 
North Korea's Access to Finance.''
    I now recognize myself for 4 minutes to give an opening 
statement.
    The focus of today's hearing, ``Restricting North Korea's 
Access to Finance,'' will appear timely to many observers. With 
the July 4th test launch of the country's first 
intercontinental ballistic missile, the Hwasong-14, it would 
now seem to be the time to cut off North Korea's resources and 
deprive it of the means to further develop its nuclear and 
missile technologies.
    But in fact the time to think about genuine limitations on 
North Korea's capabilities is long overdue, as more than 2 
decades of failed agreements punctuated by 5 nuclear tests 
since 2006 have made clear. As a result, hovering over this 
hearing is not only a sense of urgency, but disappointment in 
years of misguided assumptions about the North's behavior and 
vulnerability to pressure.
    If we are to change North Korea's calculations, we must 
confront why economic sanctions have failed and adapt our 
policies accordingly. More of the same is unacceptable.
    Of course, sanctions can respond to any number of North 
Korean outrages. One thinks immediately of Otto Warmbier, an 
American student who was imprisoned for more than a year in 
Pyongyang only to pass away last month, just days after being 
sent home in a coma.
    Other crimes come to mind as well, from cybersecurity 
attacks around the world, including the alleged heist of $81 
million from Bangladesh's Central Bank last year, or the 
continued abuse of political prisoners and their families in 
DPRK's labor camps.
    Today, however, we will be concentrating on the Kim 
regime's proliferation efforts, with the aim of making our 
sanctions policy both more realistic and more ambitious as 
well: more realistic by evaluating the actual trade and finance 
networks exploited by Pyongyang; and more ambitious by 
assessing new sanctions targets that can influence North Korean 
behavior, even if those entities are located outside the DPRK 
itself.
    We must also calibrate our sanctions according to how 
enforceable they are. The future of sanctions as a tool of 
foreign policy, whether in North Korea or elsewhere, hinges on 
getting their implementation right.
    Central to North Korea's behavior is China, the DPRK's 
largest trading partner. It is often said that Beijing is 
worried more about stability in its region than a nuclear-armed 
North Korea.
    However, a nuclear North Korea with a flourishing missile 
program is incompatible with regional stability, as it would 
allow Pyongyang to bully its neighbors and manufacture new 
crises on demand.
    While much ink has been spilled over China's role as an 
emerging global leader, we should be clear that North Korea is 
a test of that claim. Pyongyang's behavior underlines that 
Beijing still has a long way to go to pass this test 
convincingly.
    In the end, our goal should be nothing less than stopping 
North Korea from being able to threaten the U.S. with a nuclear 
device. This may mean stripping Pyongyang of the wherewithal to 
further develop its weapons.
    It may mean sowing dissent among North Korea's elite. It 
may mean convincing China that the long-term costs of sanctions 
require it to lean on the Kim regime.
    Different observers will attach different probabilities to 
each of these outcomes. But again, the overarching goal, the 
protection of the U.S. and U.S. lives on U.S. territory, must 
be ever present, with sanctions designed and ultimately judged 
with this goal foremost in mind.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentlelady from Wisconsin, Gwen Moore, for 5 
minutes for an opening statement.
    Ms. Moore. Thank you so much, Mr. Chairman. And I want to 
thank our witnesses for joining us this afternoon. I know that 
more and more Americans are concerned, especially when they 
hear that North Korea has just launched a missile that the 
Pentagon believes could potentially reach our Nation.
    North Korea is a belligerent nation with nuclear 
aspirations and an unstable leader. President Obama warned 
President Trump that North Korea would be the most urgent 
national security threat facing our country. I sure wish we had 
had this hearing before the House took up and passed major new 
North Korea sanctions legislation, H.R. 1644, the Korean 
Interdiction and Modernization Sanctions Act.
    All options may be on the table with North Korea, but that 
doesn't mean that all of them are wise, effective, or even 
practical. The absolute best tool the U.S. has against North 
Korea is our global leadership and credibility to lead 
diplomacy and sanctions efforts.
    And yet, U.S. ambassadorships to Japan and South Korea 
remain vacant. And the President has yet to nominate a 
permanent Assistant Secretary of State for East Asia and 
Pacific Affairs.
    Needless to say, in a tense and volatile region, 
unpredictable or absent policy or actions run the risk of 
unimaginable consequences for our country and our allies. 
Sanctions, as the Chair said, have a limit. They have a role to 
play, but so does robust diplomacy.
    North Korea is well-versed in sanctions evasion. So we need 
effective, globally enforced measures. These efforts take years 
of hard work and cannot be turned off or on in an instance. We 
need the continuity, serious diplomatic work, rather than 
unpredictability, or saber-rattling as the right way to press 
North Korea.
    It is just ridiculous to think that we could engage on 
North Korea absent enduring, persistent, and tireless effort 
and the proper resourcing of the State Department, another area 
where our President is lacking in responding to the situation.
    I want to yield the balance of my time to the gentleman 
from New York, Mr. Sherman--I mean, California. Oh God, I will 
never be forgiven.
    Mr. Sherman. I am so thrilled the gentlelady would yield, 
that I will be from whatever State she suggests.
    After 20 years on the House Foreign Affairs Committee, I am 
now the ranking member on the Asia Subcommittee. I am glad we 
are having these hearings about closing off North Korea's 
access to the financial system. But unless we pressure China, 
we will only be able to annoy or punish the North Koreans but 
not force them to change their behavior.
    The idea has been put forward for 20 years that if we just 
have someone brilliant and eloquent go to Beijing, they will 
realize that their policy toward North Korea is wrong and they 
will adopt our policy.
    That will not happen. As long as China can have a strong 
North Korea on the one hand and have easy access to American 
markets on the other hand, they will continue their present 
policy.
    So we are not in a position where more rhetoric or 
eloquence will solve the problem. We have to change the facts. 
We have to choose between two approaches. One is putting 
pressure on China by saying access to U.S. markets will not be 
available to them as long as they support the North Korean 
regime in its present configuration and policies.
    Or second, we need to build fallout shelters starting on 
the West Coast because the idea of just saying, ``We are going 
to close this or that banking relationship, therefore we have 
done something'' is a way to--ignore--to fail to build those 
fallout shelters, which are more necessary now than they were 
20 years ago.
    We also have to have reasonable goals. China will not allow 
the overthrow of this regime. The regime will cling to power 
and cling to at least some nuclear weapons.
    If we have a reasonable policy, a big stick toward China, 
and a willingness to accept a very limited, highly-monitored 
non-missile's cache of nuclear weapons, we may be successful.
    But if we think that just restricting North Korea without 
China changing its policy will work, it won't. It may cause 
North Korea to free this or that prisoner of conscience, but it 
won't cause them to give up their missile and nuclear program. 
And if we think China is going to put pressure on North Korea 
that endangers the regime when they can have access to our 
markets anyway, that is not going to happen.
    Chairman Barr. The gentlelady's time has expired.
    The Chair now recognizes the chairman of the House Foreign 
Affairs Committee, the gentleman from California, Mr. Royce, 
for 1 minute for an opening statement.
    Mr. Royce. Thank you, Mr. Chairman. Mr. Sherman and I did 
raise this issue with the premier in Beijing. He is right. We 
have to leverage this with China.
    We have only one example where this has been effective, and 
that was with North Korea with Banco Delta Asia when we froze 
the accounts in a dozen of those banks. And at that point in 
time, they could not get the hard currency to continue with 
their program.
    Recently, I had passed legislation with Mr. Engel that was 
signed into law. The U.N. Security Council has put that into 
force. That was H.R. 757.
    Mr. Sherman also raises the point that there are some 
loopholes that the North Koreans have developed. One of those 
loopholes is the use of forced labor overseas where the check 
actually goes to the regime, rather than the money going to the 
workers. And we have a long list of countries that are only too 
willing to feed these workers without paying them.
    And that loophole we closed by the bill that we passed 
419--1, another bill that I passed into the Senate. We are 
having trouble getting that bill out of the Senate. It also 
closes a loophole used by some of the Chinese financial 
institutions.
    And so I am hoping this hearing today--and I think the 
chairmen will put enough pressure on the Senate for them to 
move that legislation. And then yes, enforcement is key to 
this--leverage on Beijing is key to this. Thank you.
    Chairman Barr. The gentleman's time has expired.
    Today, we first welcome the testimony of Anthony Ruggiero, 
a senior fellow at the Foundation for Defense of Democracies, 
who has spent more than 17 years in the U.S. Government as an 
expert in the use of targeted financial measures.
    Most recently, he was a foreign policy fellow in the office 
of Senator Marco Rubio and was Senator Rubio's senior advisor 
on issues related to the Senate Foreign Relations Committee.
    Mr. Ruggiero has also served in the Treasury Department as 
Deputy Director and then Director of the Office of Global 
Affairs and the Office of Terrorist Financing and Financial 
Crimes. In this capacity, he developed and implemented policy 
options to combat illicit finance, including terrorist 
financing and proliferation finance, kidnapping for ransom, 
money laundering, narcotrafficking, and transnational organized 
crime.
    Prior to joining Treasury, Mr. Ruggiero spent over 13 years 
in various capacities at the State Department, including as 
chief of the Defensive Measures and WMD Finance Team.
    William Newcomb is a visiting scholar with the U.S.-Korea 
Institute at the Johns Hopkins School of Advanced International 
Studies. From 2011 to 2014, he served as a member of the United 
Nations Security Council Panel of Experts on North Korea. And 
from 2002 to 2005 he was Deputy Coordinator of the U.S. State 
Department's North Korea working group.
    Mr. Newcomb has served in senior economist positions, both 
at State and Treasury. While at Treasury, he conducted 
investigations into Banco Delta Asia, which in 2005 was 
designated an institution of primary money laundering concern 
for its role in illicit North Korean financial activities.
    Elizabeth Rosenberg is a senior fellow and director of the 
Energy Economics and Security Program at the Center for a New 
American Security. Under the Obama Administration, she served 
as a Senior Advisor at the U.S. Department of the Treasury to 
the Assistant Secretary for Terrorist Financing and Financial 
Crimes, and then to the Under Secretary for Terrorism and 
Financial Intelligence.
    Dr. John Park is director of the Korea Working Group and is 
an adjunct lecturer at Harvard University's John F. Kennedy 
School of Government. He is also a faculty affiliate with the 
project on Managing the Atom at the Kennedy School's Belfer 
Center for Science and International Affairs. From 2012 to 
2013, Dr. Park was a Stanton Nuclear Security junior faculty 
fellow at MIT's Security Studies program.
    He previously directed Northeast Asia projects at the U.S. 
Institute of Peace in Washington, and has served as the project 
leader of the North Korea Analysis Group at the Kennedy 
School's Belfer Center.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Mr. Ruggiero, you are now recognized for 5 minutes.

 STATEMENT OF ANTHONY RUGGIERO, SENIOR FELLOW, FOUNDATION FOR 
                     DEFENSE OF DEMOCRACIES

    Mr. Ruggiero. Thank you. Chairman Barr, Ranking Member 
Moore, and distinguished members of the subcommittee, thank you 
for the opportunity to address you today on this important 
issue. Kim Jong-un is a despot who murdered an American 
citizen, tortures, starves and kills his own people, and will 
spare no expense to achieve an intercontinental ballistic 
missile that can deliver a nuclear weapon to the United States.
    Furthermore, one should not assume Kim will hold back from 
using his nuclear weapons on America and our allies. Sanctions 
remain the best policy option to protect the United States and 
its allies from North Korea's expanding programs.
    Both critics and supporters of the 2015 Iran Nuclear deal 
agree that sanctions brought Iran to the negotiating table. The 
Trump Administration should use the Iran sanctions playbook for 
its North Korea policy.
    It is common for scholars and journalists to note that 
years of strong sanctions against North Korea have failed. It 
is true that thus far sanctions have not achieved the U.S. 
objective of disarming North Korea, but it is not true that 
sanctions have been either strong or well-enforced or that they 
cannot work.
    An effective North Korea sanctions regime would target 
Pyongyang's international business and non-North Koreans 
facilitating sanctions evasion
    On Slide 1, a quantitative review of U.S. sanctions 
programs reveals that North Korea currently sits fifth behind 
Ukraine, Russia, Syria, Iran, and Iraq.
    North Korea sanctions have more than doubled since the 
North Korea Sanctions and Policy Enhancement Act came into 
effect on February 18, 2016. Prior to that date, North Korea 
ranked eighth behind Ukraine, Russia, Iran, Iraq, the Balkans, 
Syria, Sudan, and Zimbabwe.
    Slide 2, please. A U.N. Panel of Experts reported in 
February of this year that North Korea uses, ``non-nationals of 
North Korea as facilitators and relies on numerous front 
companies.''
    Slide 3, please. At present, only 2 percent of U.N. 
sanctions and 12 percent of U.S. sanctions target non-North 
Koreans facilitating Pyongyang sanctions evasion, while only 27 
percent of U.N. sanctions and 47 percent of U.S. sanctions 
target North Korea's international business.
    Thus, while the number of U.S. and U.N. North Korea 
sanctions may be increasing, they focus on the wrong areas. The 
goal of sanctions on North Korea is different than it was with 
Iran since the regime will not negotiate away its nuclear 
program.
    Kim Jong-un views negotiations merely as one step toward 
his goal of recognition of North Korea as a state with nuclear 
weapons.
    The U.S. goal should be to protect the U.S. and its allies 
at all costs by strangling the sources of revenue and its 
materiel on which North Korea relies for its nuclear weapons 
program.
    The key aspect of the Iran sanctions model that worked? It 
forced companies, individuals, banks, and governments wherever 
located to make a choice: continue doing business with Iran; or 
join the U.S. efforts.
    The approach worked around the world as banks and companies 
and eventually governments curtailed or eliminated business 
with Iran. To be as tough on North Korea as it was on Iran, the 
U.S. should move aggressively against Chinese banks that are 
integral to North Korea's sanctions evasion efforts.
    Information on North Korea's use of Chinese banks to access 
the American banking system is incomplete. The available 
estimates generally encompass only transactions with designated 
North Korean entities and individuals or those who work on 
their behalf.
    One pattern that emerges is the disturbing extent to which 
Chinese banks helped North Korea leverage the U.S. financial 
system to evade sanctions. Recent disclosures show that from 
2009 to 2017, North Korea used Chinese banks to process at 
least $2.2 billion in transactions through the U.S. financial 
system.
    Pyongyang's provocations, including its test of an ICBM, 
deserve increasingly harsh responses from Washington. A new 
North Korea sanctions approach is needed to secure the United 
States and its allies against the dangerous and growing threat 
from this rogue regime.
    Iran-style sanctions are the only peaceful way to coerce 
the Kim regime, and for that reason are indispensable. Thank 
you again for inviting me to testify, and I look forward to 
your questions.
    [The prepared statement of Mr. Ruggiero can be found on 
page 60 of the appendix.]
    Chairman Barr. Mr. Newcomb, you are recognized for 5 
minutes.

 STATEMENT OF WILLIAM J. NEWCOMB, VISITING SCHOLAR, U.S.-KOREA 
   INSTITUTE, PAUL H. NITZE SCHOOL OF ADVANCED INTERNATIONAL 
               STUDIES, JOHNS HOPKINS UNIVERSITY

    Mr. Newcomb. Thank you, Chairman Barr, Ranking Member 
Moore, and members of the subcommittee. I appreciate the 
opportunity to speak before you today. And I want to discuss 
the effectiveness of international sanctions. Now as we meet, 
our representative to the U.N. is seeking agreement on yet 
another sanctions resolution as a response to the DPRK's test 
of an ICBM earlier this month.
    If one were adopted soon, it would be the second in as many 
months and the eighth overall beginning with UNSCR 1718 back in 
2006, upon which subsequent resolutions have been built. To 
date, all but one of the sanctions resolutions have been 
adopted under Chapter 7, Article 41, of the U.N. charter. That 
is crucially important so that they are legally binding upon 
all member states.
    All the resolutions were announced with rhetorical 
flourishes about how the latest measures adopted were even more 
comprehensive and tougher. The trajectory of successive 
sanctions measures does show resolutions adopting a broadened 
set of targets and becoming more comprehensive, especially in 
restrictions on trade, transport, and finance. I would expect 
proposed measures now being discussed to continue in that 
direction.
    Despite delays in adoption while being negotiated, which 
gives the DPRK time to take immediate defensive measures and 
move assets of entities likely to be designated, and built-in 
loopholes insisted upon by China and Russia, these measures are 
of immense value, potentially.
    Regrettably, the success the U.S. and like-minded countries 
have achieved in getting tougher sanctions adopted has been 
blunted by inadequate action by most member states, squandering 
the political capital Washington has spent to obtain agreement 
from Beijing and Moscow.
    Over the past decade, the record of implementation is poor. 
There were some years when even members of the security council 
had not implemented the measures.
    Typically, it took several years following adoption for the 
rate of implementation to reach the 50 percent mark. This 
appears true for all U.N. sanctions program. It also held true 
for Iran, for example.
    More recently, efforts by the 1718 Committee and the Panel 
of Experts to address this problem through outreach appeared to 
be having some success.
    As of July 10th, 92 of 192 member states have reported 
implementation of Resolution 2270, which was passed in 2016, 
and 70 had reported implementation of 2321, which passed later 
last year.
    These numbers include states reporting on the 
implementation for the first time, thus prospects are improved 
for attaining a higher rate of adoption.
    But unfortunately, reports on implementation don't tell the 
whole story. Many nations failed to disclose details about how 
sanctions were implemented. Even those that do upon an 
inspection have fallen short of what was required.
    Mexico, for example, didn't implement the assets freeze 
provision, which gave it a big headache when it tried to seize 
the Mu Du Bong, which was a ship owned by Office of Maritime 
Management.
    Singapore prosecuted Chinpo Shipping for violation of 
proliferation finance. It was overturned by the high court in 
Singapore because that part of the resolution hadn't been 
implemented correctly.
    If Mexico and Singapore, countries that have adequate 
resources and good regulatory capacity, have difficulty in 
implementing sanctions, think about the problem faced by many 
countries that don't have adequate capacity.
    Then, we get to the problem of enforcement. When it comes 
to the U.N., violations are not treated as a judicial matter, 
but as a political one. Following the 2013 nuclear test, 43 
candidates were proposed for designation. China accepted only 
three. One of the ones on that list of 43 that was not accepted 
was a company known as Pan Systems Pyongyang.
    It was revealed earlier this year to be a front for 
Reconnaissance, General Bureau, involved in the sale of 
battlefield technical radios via a Malaysian listed company 
named Glocom.
    Now, the U.S. and like-minded countries are uniquely able 
to leverage the effect of international sanctions by adopting 
positive and negative incentive to encourage states to 
implement and rigorously enforce them.
    You need to give assistance to capacity-challenged states. 
You need to encourage one way or another those that lack 
political will. And states that tolerate or help in evading 
sanctions need to face consequences. Thank you very much. I 
look forward to your questions.
    [The prepared statement of Mr. Newcomb can be found on page 
40 of the appendix.
    Chairman Barr. The gentleman yields back.
    Ms. Rosenberg, you are now recognized for 5 minutes.

 STATEMENT OF ELIZABETH ROSENBERG, SENIOR FELLOW, CENTER FOR A 
                     NEW AMERICAN SECURITY

    Ms. Rosenberg. Thank you, Chairman Barr, Ranking Member 
Moore, and distinguished members of this subcommittee for the 
opportunity to testify today on restricting North Korea's 
access to financial services. There are an array of 
international sanctions and other restrictive financial 
measures on North Korea to expose and constrain its 
increasingly dangerous missile and nuclear proliferation 
activities.
    However, these measures have had limited utility in 
compelling North Korea to curb its proliferation activities. 
This is unsurprising, given the until-recent narrow focus of 
sanctions only on proliferation materials and actors, 
significantly within North Korea, as well as the limited 
implementation of sanctions including by China, which provides 
over 90 percent of North Korea's trade volume.
    U.S. policy leaders can and should use restrictive 
financial measures more aggressively as part of the holistic 
U.S. strategy to pressure North Korea.
    The country is not sanctioned-out and many loopholes can be 
closed with new measures and stronger enforcement, as has 
already been mentioned. An invigorated U.S. effort should 
involve sanctioning more of the agents that procure and 
proliferate missile and nuclear components and that raise and 
launder money for North Korea.
    Sanctions officials should target transit hubs for North 
Korea and the entities that do business through these hubs. 
They should also target additional economic sectors in North 
Korea including mining, energy, light manufacturing, 
transportation, and construction. They can also consider 
sanctioning commercial tour operators in North Korea with 
appropriate exceptions.
    Additionally, though it will be politically sensitive and 
economically significant, U.S. officials should focus sanctions 
on companies in China and elsewhere to stymie the shippers, 
insurers, manufacturers, and traders that wittingly and 
unwittingly prop up Pyongyang.
    Moreover, U.S. officials should restrict banks from 
financing any manufacturer of or facilitator for the purchase 
of North Korean exports including coal, minerals, textiles, and 
other products. Also, U.S. policy leaders should require that 
all payments to North Korean entities be held in escrow 
accounts outside North Korea with limitations on how the money 
can be used.
    True success in altering Pyongyang's financial means and 
its proliferation aims will only be delivered if its key 
conduit to the international financial system, China, makes the 
strategic decision to impose constraints on North Korea.
    China will not easily be swayed to this end and will only 
do so to achieve its own interest. This means that the United 
States will have to find ways to cooperate with Beijing and 
this will necessitate intensive diplomacy and creative thinking 
about how to advance mutual interests.
    It should also involve imposition of U.S. sanctions on 
North Korean companies and facilitators in China to clarify 
strong U.S. resolve when it comes to North Korea and 
intolerance of sanctions evasions and nonenforcement in China.
    Tough new sanctions carefully implemented with multilateral 
partners are an important part of the financial strategy to 
address the North Korean threat. However, they must be grounded 
in a broad policy effort to protect the financial system and 
institutions generally against abuse by proliferators.
    This is notoriously difficult even for the most 
sophisticated banks as proliferation finance is often hidden 
behind money laundering schemes or what appears to resemble the 
financing of industrial goods trade or retail banking of all 
cash businesses.
    The United States is well-placed to lead a much needed 
global initiative to combat proliferation finance and 
Administration officials should explore the creation of a new 
proliferation finance tracking program with key international 
allies to more easily share and analyze financial data across 
national boundaries.
    This will make it easier to map proliferation networks, 
gathering leads to target with sanctions and with law 
enforcement tools, intelligence tools, and others.
    U.S. policymakers should also give further public guidance 
on typologies of proliferation finance to aid banks in stopping 
this activity and contemplate additional legal protections or 
risk management guidance to promote more financial information-
sharing between the government and banks and among banks.
    Sanctions and counter-proliferation finance policy must be 
used more intensively along with other national tools to 
achieve meaningful progress in deterring North Korea from its 
proliferation aims.
    I applaud this committee's attention to this important 
issue and thank you for the opportunity to discuss it with you 
today. I look forward to answering any questions that you may 
have.
    [The prepared statement of Ms. Rosenberg can be found on 
page 52 of the appendix.]
    Chairman Barr. Thank you.
    And Dr. Park, you are recognized for 5 minutes.

 STATEMENT OF JOHN PARK, DIRECTOR, KOREA WORKING GROUP, BELFER 
 CENTER FOR SCIENCE AND INTERNATIONAL AFFAIRS, JOHN F. KENNEDY 
            SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY

    Mr. Park. Thank you very much. Chairman Barr, Ranking 
Member Moore, and members of the subcommittee, it is an honor 
to appear before you today. I am particularly honored to be on 
the same panel with Mr. Bill Newcomb, who has mentored me and 
many others in researching the North Korean regime's illicit 
activities.
    As requested by the subcommittee, I will be summarizing my 
research into the North Korean regime's accumulative learning 
in evading sanctions.
    The key takeaway is not that the North Korean regime has 
been evading sanctions. They have been engaged in this activity 
for decades. Rather, it is the story of how North Korea 
sanction evasion techniques have improved significantly because 
of North Korean's incorporated migration to the Chinese 
marketplace.
    As a result, U.S. policymakers need to factor in these 
growing gaps and consider underutilized measures, like Chinese 
domestic policy tools, to disrupt Chinese-North Korean business 
partnerships and restrict North Korea's access to finance.
    My MIT colleague, Dr. Jim Walsh and I, recently conducted 
research on, ``North Korea Incorporated,'' a term we use to 
describe the web of state trading companies, or STCs, that the 
regime operates. We found that STC managers were able to 
significantly improve their procurement operations by engaging 
in the following four main activities.
    Number one, hiring more capable Chinese middlemen. Instead 
of impeding procurement activities, we found that additional 
sanctions in some key instances have actually attracted more 
capable Chinese middlemen incentivized by a bigger payday 
through elevated commission fees.
    The North Korean regime has financed these larger paydays 
by drawing on sizable slush funds on the mainland that had 
amassed during the lucrative North Korea-China coal trade in 
the late 2000s.
    Number two, embedding in commercial hubs in China. What was 
striking about interviewing former STC managers was the 
normalcy of their business practices. Like American or European 
expatriate businessmen, they explained the challenges and 
opportunities of operating in a particular local market in 
Asia.
    By embedding in commercial hubs in China, STC managers 
gained tacit business knowledge that was critical to increasing 
their procurement effectiveness.
    Number three, leveraging commercial and banking hubs in 
Hong Kong and Southeast Asia. As global trends in trading and 
banking shifted to this part of Asia, these managers have 
benefited from increased access to business partners with an 
international reach.
    In the case of Hong Kong, we documented how a former STC 
manager based there was able to procure high-tech medical 
equipment from Japan through a local business partner. This 
partner filled out all the required documentation using the 
details of its own registrations and licenses.
    In the case of Singapore, it has been particularly useful 
for STC managers to pay local firms to arrange wire transfers 
for payments to foreign counterparties. As Singapore has 
rapidly risen to be a global center of money management, 
opportunities abound for the North Korean regime to benefit 
from illicit financial service offerings.
    Number four, extensive use of embassies as vehicles for 
procurement. North Korean embassies serve two key functions 
with respect to North Korea Incorporated illicit activities. 
The first is serving as a vehicle for procuring controlled 
items in a foreign country.
    Former STC managers note that the regime co-locates shell 
companies with its embassies in countries that offer unique 
access to sought after items ordered by the regime.
    The second function is the ability to credential an STC 
manager as a North Korean diplomat. In addition to gaining 
valuable tacit business knowledge by embedding in a country for 
a longer duration, STC managers are able to use diplomatic 
pouches for illicit purposes relating to transporting a banned 
item or couriering unreported cash.
    The net effective sanctions was that they in practice ended 
up increasing the regime's procurement capabilities, what we 
call the sanctions conundrum.
    Because of the elevated risk of doing business, an STC had 
to pay higher commission fees to private Chinese companies that 
played a middleman role. The elevation of risks and rewards 
attracted more capable professional middlemen into illicit 
activities on behalf of North Korean clients.
    In sum, targeted sanctions unintentionally and 
counterintuitively helped to more efficiently enable these 
North Korea Incorporated actors to operate in the Chinese 
marketplace.
    With an improved understanding of how North Korea 
Incorporated evades sanctions, we can better disrupt its 
business partnerships in China. In this endeavor, we need to 
develop ways to bolster the impact of sanctions, but we also 
need to explore other policy tools.
    Diversifying the set of policy tools and coordinating with 
different policy actors will significantly constrain the 
remarkably open space within which North Korea Incorporated 
currently operates. A top priority is to disrupt these 
partnerships upstream before the procured item becomes a part 
of globalized trade flows.
    In addition to the recommendations offered by my 
distinguished colleagues on the panel, I would like to bring to 
the subcommittee's attention another policy option, what I call 
the the ``three antis.'' These are a set of China's domestic 
policy tools--namely anticorruption apparatus, antinarcotics 
campaign, and anticounterfeiting activities--that can be used 
to impede North Korea's illicit procurement. I would be glad to 
discuss them in greater detail during the Q&A.
    In conclusion, stopping North Korea Incorporated's illicit 
procurement and blocking its access to finance constitutes a 
top priority in slowing down the regime's rapid advances in its 
nuclear and ballistic missile programs.
    The work of the subcommittee, the panel members, as well as 
sanctions-focused officials is critical in finding new, 
adaptive, and effective ways to counter the North Korean 
regime's WMD threats to the United States, its Northeast Asian 
allies, and the international community. Thank you.
    [The prepared statement of Dr. Park can be found on page 46 
of the appendix.]
    Chairman Barr. The gentleman's time has expired.
    And the Chair now recognizes himself for 5 minutes for 
questions.
    Dr. Park, your writings have documented how illicit 
procurement by the North Koreans is embedded in these legal 
trade networks. The final report of the U.N. Panel of Experts 
has also found that the DPRK continues to access the 
international financial system.
    How can we better identify--and you have spoken about these 
brokers and middleman in China--these middlemen and these 
transactions that violate our sanctions against North Korea?
    Mr. Park. Thank you, Mr. Chairman. I think one aspect of 
this is to view these as business transactions. One of the 
incredible stores of knowledge about doing business in China 
resides in American Chamber of Commerce members and others who 
have experience in these marketplaces.
    I think using that lens gives us another angle to observe 
these type of partnerships and activities that, frankly, are 
bewildering in terms of their normalcy.
    So I think from that angle it has to adopt a business lens 
that goes away from the security aspects, but in understanding 
the causality within the business community, bring those 
insights to enhancing these type of policy tools.
    Chairman Barr. And is there anything else besides that 
recommendation that we can do to adapt kind of a holistic 
approach that would deter Chinese middlemen from working with 
the North Koreans so that we don't have this kind of ``whack-a-
mole'' scenario where the North Koreans simply change out 
middlemen?
    Mr. Park. Absolutely. And this is a bit counterintuitive on 
the face of it, but to look at these activities in the context 
of Chinese-North Korean business partnerships, and that being 
the target.
    If you focus it along those lines, there are a number of 
ways in which the Chinese authorities are concerned about North 
Korean illegal activities that I think would unleash the 
potential for cooperation on using Chinese domestic policy 
tools.
    But it is that angle of framing these as threats and 
concerns from the Chinese authorities' perspective and then 
looking at the common ground that we can work towards this type 
of cooperation.
    Chairman Barr. Mr. Newcomb, the Associated Press reported 
this month that Chinese trade with North Korea increased 15 
percent in the first 5 months of 2017 compared to last year. 
This includes an 18 percent rise in oil exports to the North, 
while iron ore purchases from the DPRK were up 34 percent. What 
pressure points can we place on China to target this trade?
    Mr. Newcomb. Clearly, when we have tried to put the 
pressure points on China, the renegotiation of the ban on coal 
exports was recently successful, although, photography and ship 
tracking information shows that North Korea ships containing 
coal continue occasionally to call at Chinese ports. China has 
not done anything to dent the trade in iron ore because they 
are classifying it all as for in effect humanitarian purposes.
    So the only way you can really go after the China-North 
Korea business link is by changing the risk profile. And you 
change the risk profile by making sure that the companies that 
are engaged in illicit trade have consequences.
    Chairman Barr. You talk about the lesser developed 
countries and the North Korean's ability to evade sanctions and 
you argued that certain countries that help North Korea evade 
sanctions should face consequences. Is it reasonable for the 
United States to impose multilateral assistance to developing 
countries that knowingly evade U.N. sanctions?
    Mr. Newcomb. I think the answer to that depends on whether 
or not we can deconflict our national security priorities. In 
the case of some countries it might be pretty easy to apply a 
fairly broad-based sanction. But what will you do in the case 
of Egypt, where the Ministry of Defense there imported North 
Korean missile parts?
    So it adds a complication. Perhaps it is a matter of going 
in and targeting certain aspects of that country's operation or 
making it face consequences in other ways. This is where robust 
action by the Department of State could perhaps stop these in 
advance. The U.S. capabilities of knowing some of these things 
before they take place is pretty good.
    Chairman Barr. Mr. Ruggiero, a final question, what counts 
as success when it comes to sanctions in countering North 
Korea? And kind of a follow-up question, some observers have 
criticized the Trump Administration's tough rhetoric and threat 
of military action in response to North Korea's and the Kim 
regime's belligerence. Does dovish American foreign policy in 
contrast embolden North Korea, or is this strong language a 
deterrent?
    Mr. Ruggiero. In terms of the strong language, the Trump 
Administration is the first one, really in the last 10 years, 
to go after a Chinese bank. I think that, to the question of, 
how do we convince China to go after the--China is not going to 
do this.
    They are not going to go after these companies. They are 
not going to go after these individuals. And the reason why 
these Chinese companies and individuals are engaged in these 
activities is because they know there is no punishment.
    In terms of success, when you have a regime that is not 
interested in negotiating its nuclear program, then success 
will look like protecting ourselves, trying to reduce the 
capabilities of the nuclear and missile programs as best as we 
can and really squeezing the revenue. That is unfortunately 
where we are at 10 years--or excuse me, 11 years after the 
first nuclear test.
    Chairman Barr. My time has expired.
    And the Chair recognizes the distinguished ranking member, 
Congresswoman Moore, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman, and I agree 
with you. We are both on the same page here. We really do want 
to figure this out. But just listening to the witnesses here, 
it sounds like this is really like getting the camel through 
the eye of a needle here.
    On one hand, Mr. Ruggiero, you have shared with us that you 
think that there is a lot more sanctions capacity out there. 
But then again, Ms. Rosenberg, and maybe Dr. Park, and maybe 
you, too, Mr. Ruggiero, all of you have said that China is just 
not going to do--we are not going to pressure them into greater 
sanctions.
    But we ought to sanction other people who do business 
with--maybe not with North Korea, but with China. I just want a 
little clarification about where these pressure points other 
than China could be and an example of what those could be?
    Ms. Rosenberg. If I may take a--
    Ms. Moore. Yes ma'am.
    Ms. Rosenberg. --stab at the question? China is a critical 
player in putting pressure, financial pressure, on North Korea. 
And while I believe it is true that China of its own accord and 
in the current set of political circumstances is not motivated 
to put financial pressure on North Korea, it will not do it 
until it sees it in its interest to do so. I think it is 
possible for the United States to create the conditions such 
that China sees it in its interest to do so.
    As I suggested in my testimony, I think there is a 
combination of both coordination and pressure on Chinese 
facilitators and front companies that can and should be applied 
when it comes to the U.S. bilateral relationship with China to 
motivate Chinese pressure on North Korea and create those 
conditions.
    So certainly that could and should be a first, primary, 
most significant press in U.S. sanctions, law enforcement 
activities and broader proliferation finance policy frameworks, 
but there are other targets and other vulnerabilities in the 
global financial system.
    I have heard mentioned here Malaysia and Singapore. These 
are clear examples. There are a number of others, vulnerable 
nodes in the global financial system where the United States 
can focus its attention on North Korean evasion.
    Mr. Park. Thank you, Ranking Member Moore. If I could take 
another angle to this. In terms of pressure points, there are 
opportunities to cooperate with the Chinese authorities. I know 
that this may sound unconventional in the sense that there is a 
primary focus right now to pressure the Chinese government and 
the Chinese authorities, but just to give a little bit of 
background, in 2013, the Chinese authorities, a group of 
Chinese ministries came together and issued something called 
Technical Bulletin 59. This was a 236-page report that listed 
the items and the descriptions.
    The title of it, essentially being Chinese nationals, are 
banned from selling these activities, these items, to North 
Korean clients, and that this was deemed to be a criminal 
activity. This is broadly a Chinese effort to sanitize its 
trade with North Korea. But we know that hasn't worked.
    After 2013, North Korea has done more effective tests in 
both ballistic and nuclear fields. What we are finding in the 
market activity is that these type of efforts are creating more 
efficient markets unintentionally in the sense that it becomes 
easier for Chinese middlemen to approach a North Korean client, 
get the 236-page report and say what do you need, and basically 
list the terms and the higher commission fees and so forth.
    So the area of cooperation with this node and this segment 
of the Chinese authority apparatus and law enforcement, I 
think, is another area that we can further explore.
    That could be a combination of pressure points in other 
areas, like secondary sanctions, but under the heading of 
capabilities enhancement and going after these business 
partnerships, this could prove to be effective.
    Ms. Moore. I just wonder, Mr. Ruggiero, or any of you, do 
you have any thoughts on whether or not shoring up the State 
Department and getting those assets in there would be a helpful 
strategy for us?
    Mr. Ruggiero. I wonder if I could answer the China 
question, if that is okay?
    Ms. Moore. Oh, yes, go on. Go on.
    Mr. Ruggiero. Yes. I hate to be the pessimist here, but we 
have been trying to work with China for 10 years now, and it 
hasn't worked. I think we have to be very clear. For those of 
us who--we are in government delivering a lot of these messages 
to the Chinese, they were very specific messages for them to 
act and so I think we have to be clear about that.
    I think the example in the Iran sanctions is also important 
here, where the U.S. fined European banks over $12 billion from 
2012 to 2015. So we were willing to fine our own allies, but we 
are not willing to go after China. I think that is the problem 
with our sanctions here.
    Ms. Moore. Got it. Thank you. My time has expired.
    Thank you Mr. Chairman.
    Chairman Barr. The Chair recognizes the vice chairman of 
the subcommittee, Mr. Williams from Texas.
    Mr. Williams. Thank you, Chairman Barr, and I thank all of 
you for being witnesses today. We appreciate it. Obviously, 
given the recent actions by the North Korean government, this 
topic is of course very timely. And although the most recent 
missile test did not have the capability to carry a nuclear 
device the potential is there, and we must not take these 
actions lightly.
    So Mr. Ruggiero, if I might address you, in an analysis 
from earlier this year the nonprofit group c4ads reported that 
from 2013 to 2016 there were only 5,233 companies in China that 
imported goods from a net from or exported goods to North 
Korea. By comparison, over 67,000 Chinese companies exported to 
South Korea.
    So I have two questions. First, should we target all banks 
that deal with this limited set of companies given that the 
line between North Korea's legal and illegal procurement is so 
unclear?
    Mr. Ruggiero. Yes, I think there is a way to target Chinese 
banks. I think the examples that I provided in my written 
testimony about some areas where banks are either complicit or 
they are not asking the right questions of whether North 
Koreans are involved.
    Mr. Williams. Okay. And second, how confident could we be 
that a designated firm wouldn't simply pop up under a new name 
or be replaced by a Chinese competitor?
    Mr. Ruggiero. This is not easy. It was not easy with regard 
to Iran. I remember working the aspect of IRISL, which was 
Iran's shipping line. We had one person working full-time on 
that because of the number of times that those vessels change 
flags, change owners, change everything about them. So this is 
not an easy process.
    But in terms of the question that the ranking member asked 
about resources, the question I would ask is, how many people 
are actually dedicated to North Korea in OFAC, in Treasury, and 
at the State Department?
    And I know, at least in my time there, that there were 
never enough people dedicated to this. And that is the real 
question of how many people are working these designation 
packages to get us to that point? And it is not going to be 
easy and it is going to take some time, but it is still worth 
it.
    Mr. Williams. Okay.
    Mr. Park, in a July 13th Washington Post article, a high-
level North Korean defector who routinely evaded sanctions 
noted how, even when North Korean firms are blacklisted, 
``North Korea is 100 percent state enterprise so these 
companies just change their names the day after they have been 
sanctioned. That way the company continues but with a different 
name than the one on the sanctions list.''
    So without objection, I would ask that this article be 
entered into the record.
    Chairman Barr. Without objection, it is so ordered.
    Mr. Williams. Okay. In addition, North Korea reportedly 
confiscates from 30 to 90 percent of what its nationals made 
abroad, which may not derive from illicit activity at all.
    My question is this: No one wants to harm ordinary North 
Koreans, but how meaningful is the distinction between legal 
and illegal activity when all of it helps secure foreign 
exchange from the Kim regime? And when it is so difficult to 
determine if a company is simply a sanctioned entity that has 
been rebranded?
    Mr. Park. Thank you very much, Congressman. One thing I 
would like to start off with is moving away from the 
characterization of North Korea as a country when we look at 
these business activities. It is really the story of the 99 
percent and the one percent.
    When we are talking about North Korea, Incorporated, that 
is the one percent. So to your question about looking at some 
of these activities that Mr. Reid, the former senior manager in 
Office 39, a very elite state trading company for the North 
Korean regime, as he is talking about his evasion techniques, 
you are looking at the operation of this one percent of North 
Korea, Incorporated.
    When it comes to looking at how to disrupt their 
activities, I think it is the focus on their partners. The 
local middlemen are crucial as enablers. So while we do 
continue to go after the North Korean entities and as they have 
masked themselves and take on other forms, another parallel 
effort, I think,is to target these Chinese entities in using a 
different number of measures.
    But the domestic policy measures that I mentioned on the 
Chinese side could be effective if they are labeled in terms of 
threats to Chinese interests.
    So the three that I briefly mentioned, the corruption 
drive, these local businessmen are tied to local corrupt party 
officials, so targeting them could be one area of further 
disruption.
    The second is looking at their narcotics. There is a 
narcotics problem in the China-North Korea border region. That 
could be another means to unleashing more law enforcement on 
that effort.
    And then the third is related to the counterfeiting 
activities. Something not well-known in the West but certainly 
a strong concern among the Chinese is increasing evidence of 
North Korea counterfeiting Chinese currency. So these are areas 
where I think you can create common ground in targeting these 
Chinese middlemen.
    Ms. Rosenberg. Congressman, may I answer your question as 
well?
    Mr. Williams. Yes, ma'am. Sure.
    Ms. Rosenberg. With regard to the difference between what 
is illicit trade for the North Korean regime and its 
proliferation aims, and what is legal trade, which may then 
subsequently be used for illicit proliferation aims, it is 
difficult to distinguish these often commingled revenue 
streams. Recent U.N. Security Council resolutions, as well as 
U.S. sanctions, have gone after entire sections, sectoral 
sanctions of the North Korean economy under the assumption that 
this threat is so grave. Because it is so difficult to 
distinguish between these two different kinds of revenue 
streams, we must put financial pressure on the regime by going 
after both.
    Mr. Williams. Thank you. I yield back.
    Chairman Barr. The gentleman's time has expired.
    The Chair recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Okay. First, I support virtually every piece 
of legislation to tighten the screws on North Korea. And I 
commend the Chair of the Foreign Affairs Committee for 
shepherding so many of those last year and this year, and I 
hope the U.S. Senate passes them.
    That being said, we have to determine whether we are 
willing to just put enough pressure on North Korea to win a 
small victory, perhaps one or two people released from prison, 
perhaps they would stop counterfeiting U.S. currency and devote 
their efforts to counterfeiting Chinese currency instead, 
versus the big thing, which is ICBMs that could hit my 
Congressional district.
    I will ask the panelists not for a prescription but for a 
prediction. Do any of you predict that North Korea would not 
have at least one ICBM able to hit Los Angeles with a nuclear 
weapon 10 years from now?
    Is there anyone, please raise your hand if you believe that 
you would predict that North Korea would not have that 
capacity? I see no hands going up. That sounds like civil 
defense for Los Angeles.
    The issue before us is company sanctions versus country 
sanctions. As Mr. Park points out, if we just have the 
objective, as he says, to sanitize China's trade with North 
Korea, not cut if off, then we would aim at particular 
companies. But some companies aren't doing business with the 
United States.
    Other companies can be created that would focus just on 
making profits, perhaps a few extra percentage points at the 
expense of the North Korean government, in doing business with 
North Korea.
    Some will rebrand, hide behind other entities, some will 
shift to other companies, and sometimes the Chinese government 
will just wink and let it happen because the Chinese government 
is determined that they don't want to pressure this regime too 
much.
    The other approach is country sanctions, 10, 15 percent 
tariff on everything coming into the United States from China. 
That would get Beijing's attention.
    Is there anybody on the panel who, and I realize that 
describing the effectiveness of sanctions this way you have to 
come up with some metric, but I will take the metric 10 percent 
decline of GDP.
    Let's say we had sanctions, just company sanctions, this 
and that, and continue of passing all of the bills that are 
before Congress, they cut North Korea's GDP by 10 percent. Do 
any of you think that Kim Jong-un would give up his nuclear 
program in order to get that 10 percent of his GDP back? Any 
hands? Let the record show, no hands were raised.
    Do any of you believe that sanctions against individual 
companies caught doing business with North Korea could cut the 
North Korean GDP by 10 percent? I am looking for hands. I see 
none. This is depressing, unless you are in the business of 
building fallout shelters in Los Angeles.
    Is there--so we can talk about country sanctions. I will 
ask our first witness. Would North Korea, if they faced an all-
out effort from China, and the risk of losing all trade with 
China, be willing to accept a highly monitored, small cache of 
nuclear weapons and a halt to its missile program?
    Mr. Ruggiero. Well, I don't think that is our goal, right? 
Our goal is to--
    Mr. Sherman. Well, it is--
    Mr. Ruggiero. --get rid of their nuclear weapons program.
    Mr. Sherman. Did I mention I represent Los Angeles? Yes. I 
know what our goal is. We are the country that refused to sign 
a non-aggression pact with North Korea in the late 1990s. Or 
was it at the early part of this century?
    Because our goal, the political--if you want to be a good 
politician, you just slam the table and say we want a 
democratic North Korea and we will settle for nothing less.
    And then 20 years from now when we have a nuclear North 
Korea you, well, I will point out that has been the President's 
proposal, where he announces that everything goes wonderfully 
and he is meeting with the Chinese president. And then we see 
the massive increases in trade between North Korea and China 
just during his presidency.
    So assume that the goal was more modest than our stated 
goal. Could we achieve it if we got China to threaten an end to 
trade?
    Mr. Ruggiero. There is no evidence based on the 4 times we 
have achieved this that a freeze or, which I think is what you 
are describing, a similar freeze will be effective.
    I think it is important to remember that during the freeze 
the North Koreans developed their covert enrichment program and 
they built a nuclear reactor in Syria. So North Korea does not 
abide by their freeze.
    Mr. Sherman. We know they are going to cheat.
    I yield back.
    Chairman Barr. The gentleman's time has expired.
    The Chair recognizes the chairman of the House Foreign 
Affairs Committee, the gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman, and thank you again for 
holding this hearing. One of the most interesting conversations 
I think we have had is with the former director of propaganda, 
or minister of propaganda in North Korea, who laid out for us 
that, frankly, this was the number one priority of the regime 
and that the regime did not spend its hard currency on food.
    That is the responsibility of the people. And so many live 
in the no-go areas that aren't exactly in support of the regime 
that they don't put their resources there.
    They put their resources into: first, the ICBM program, 
their nuclear program; second, paying the military to keep them 
loyal; and third, their party-building activities around their 
core leadership.
    So given that reality, what he indicated is that the one 
effective thing is figuring out how to shut down their access 
to hard currency since it takes them several billion dollars to 
run this nuclear ICBM program. It is very expensive.
    And second, it costs them an enormous amount of money to 
pay the generals and the military.
    What we know about Banco Delta Asia was that when given a 
choice between economic collapse or bankruptcy I guess, versus 
giving up and freezing the accounts with North Korea, the 
financial institutions decided to do that, just that. They 
froze the accounts.
    And the consequence of that, as we know in hindsight, was 
that is shut down the production of the line, because we did 
talk to the defectors, including those who worked on the 
missile production program.
    So there is that methodology, which would freeze the banks 
which are used, and I would say that the line of argument that 
my colleague from California, Mr. Sherman, walked us through 
speaks directly to the challenge we have here.
    Because if their number one goal is to develop, let us say, 
100 ICBMs that can hit the United States, then we have to 
figure out how to shut down their capability given the 
temperament of their leadership, their capability to do that. 
We know what worked in the past.
    The other aspect of this that I think is important is we 
have done a lot of work on human trafficking. Well, here we 
have a situation where North Koreans are sent to countries such 
as, and I will just go down the list: Angola, Burma, Cambodia, 
China, Democratic Republic of Congo, Ethiopia, Kuwait, 
Malaysia, Qatar, Russia, and Senegal.
    When we are talking about sanctions, this is why I think it 
is important we follow up with our second sanctions bill over 
in the Senate, because we can make it unthinkable to these 
governments to continue a process of exploitation where people 
are fed.
    As one of the managers said overseas, ``And they will work 
for nothing. We feed them. They work long hours, they get very 
little sleep, and they don't have any labor problems.'' I guess 
not.
    I would say it is time for all of us with one voice to 
speak on both of these issues and to look at every means 
available to pressure Beijing, because 90 percent of that 
subsidy comes from Beijing. And we know one other thing from 
the South Koreans. We know that the motors and the wiring was 
made in China.
    We also know 10 years ago, when we shut down the production 
line, that the defectors said the advanced gyroscopes were 
bought on the black market from Japan. So they do not have the 
indigenous capability for all aspects of this.
    They put their money into obviously the centrifuge 
programs, enriched uranium, plutonium, and ICBM. But the parts, 
if we cut off the hard currency we could shut that down and, 
more importantly, we shut down his ability to pay his generals.
    I think at that point you get the kind of negotiation that 
Mr. Sherman's talking about where a regime begins to think 
differently about just how committed it is to this particular 
aspects of the program.
    Is there any concurrence on what I have argued here? I 
would just ask the members of the panel what your thoughts are 
on that?
    Mr. Newcomb. I think, Chairman Royce, you have highlighted 
two very important things to do. I worked on BDA and it was 
very powerful because it sent a message to the international 
banking community that North Korea was not a profit center for 
them so they began to shun North Korean business.
    I think the Section 311 action against the Bank of Dandong 
should serve a similar purpose for Chinese banks. I am not 
saying we have to go and do a Section 311 on a number of other 
banks. Mr. Ruggiero mentioned fines. Fines can play a big role.
    Bank of China Singapore was complicit in the financing of 
the Chong Chon Gang, which was caught by Panama. Those payments 
went through correspondent accounts in New York City banks. Yet 
Bank of China Singapore didn't suffer any consequences for this 
complicity in arranging the finance. So there are things that 
we can do there.
    Second, network disruption is key. Network disruption--
    Chairman Barr. The gentleman's--
    Mr. Newcomb. --loss of financing and--
    Chairman Barr. The gentleman's time has expired.
    Mr. Newcomb. --self--
    Chairman Barr. And we will let you--
    Mr. Newcomb. Sorry, sir.
    Chairman Barr. --elaborate later on. I just have to be fair 
to everybody here.
    The gentleman from Texas, Mr. Green, is recognized.
    Mr. Green. Thank you, Mr. Chairman, and I thank the ranking 
member as well.
    Mr. Royce, would you desire additional--
    Mr. Royce. It is all right, Al.
    Mr. Green. You are good?
    Mr. Royce. Thank you, Congressman.
    Mr. Green. Okay. I want to thank you and Mr. Sherman for 
your commentary today. It has been quite enlightening, to be 
very candid with you. And you and I had a conversation coming 
over to the hearing about the slave labor, and I am just going 
to follow up on that.
    It really concerns me that we have this slave labor 
situation that is fueling the nuclear arsenal. And while I 
can't end every problem in the world, I am always concerned 
about freedom, liberty. And my concern has a lot to do with the 
countries that allow these workers to enter such that they will 
be exploited.
    Tell me how we can work to end the exploitation of the 
workers who benefit very little from their work and find 
themselves in situations from which they can't extricate 
themselves and they need us to help them. What can we do?
    Yes, sir?
    Mr. Ruggiero. I think that the conservative estimate is 
that North Korea gets about $500 million a year from this 
practice. And the U.N. Security Council noted that money is 
being used for its weapons programs. But there was no 
prohibition on that.
    I think that what has been used by Administrations so far 
is targeting the North Korean individuals and companies that 
are exporting these laborers. The issue here is what Chairman 
Royce's bill does, which goes after the companies, the foreign 
companies and individuals that employ this labor. And that is 
the next level.
    But I would also caution here in the sense that this gets 
us back to the China problem and Russia problem where certain 
estimates suggest that 10,000 in China, at least 10,000 in 
China and 20,000 in Russia.
    So while we should be able to roll up the rest of the 
50,000 or more, 20,000 total outside China and Russia, we are 
going to be back to, are you going to sanction Chinese and 
Russian companies and individuals for slave labor? That is what 
we are going to head toward.
    Mr. Green. Does it always come back to China and Russia 
regardless as to where we start? Do we end up with China and 
Russia as obstacles?
    Mr. Ruggiero. I would say yes. I think that there is the 
China issue where you have the volume of trade and so there is 
value. There is always value in going after Southeast Asia, and 
countries and countries in Africa, and there are countries in 
Europe where there is a North Korean problem, and in the Middle 
East where we are talking about millions there, whereas with 
China we are talking about billions.
    And then the issue with Russia is that there is some 
indication that they might be backfilling some of the aspects 
that China is increasing its own sanctions. And I am thinking 
here of oil and aviation fuel and jet fuel. The Treasury 
Department in early June sanctioned a Russian oil and gas 
company for its relationship with North Korea.
    Mr. Green. Assuming that we had the will to act on Russia 
and China, what level of retaliation should we expect?
    Mr. Ruggiero. I would say it depends on how we do it. One 
of the things that I have advocated--
    Mr. Green. Assume that we take what you consider the most 
efficacious action.
    Mr. Ruggiero. The examples I can give you, they are not 
numerous because we haven't gone after Chinese companies and 
banks. In 2013, we went after North Korea's foreign trade bank. 
Bank of China, closed that account inside China.
    Last year the c4ads there was a report that forced the hand 
of acting against Dan Tong Hong Jiao and the Chinese government 
finally froze the assets and arrested people.
    Bank of Dandong, frankly, they haven't really--they have 
talked a lot about it. They are not going to stand up and 
defend the fact that one of their banks was a money launderer 
for North Korea. So again, if it is done the right way we are 
not talking about impacting U.S.-China broad trade 
relationship.
    Mr. Green. Anyone else?
    Yes, ma'am?
    Ms. Rosenberg. Just to add further to this, there is an 
effect that will come when the U.S. takes specific action to 
engage in sanctions or use the USA PATRIOT Act 311 authorities. 
And there will be an amplification of this effect when global 
banks, specifically those based in the United States or in 
Europe which are in highly regulated jurisdictions, highly 
concerned about proliferation finance and with the capacity to 
do broad, Big Data analysis for this.
    When they see that certain entities in China, for example, 
are sanctioned in this way it gives them more information and 
better tools to go after this and improve the way they search 
for proliferation finance transactions.
    And in turn what they require of their correspondent banks 
in China and elsewhere in vulnerable jurisdictions, who then 
also increase the searching for and freezing of North Korean 
illicit finance when it moves through their jurisdictions.
    Mr. Green. Mr. Chairman, may I say that I would like to 
thank Mr. Royce for that piece of legislation and the ranking 
member as well and you, thank you.
    Chairman Barr. Thank you. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. Pittenger, is 
recognized.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And thanks to each of you for your expert testimony today. 
I think we have established once again the reality that we 
cannot work with North Korea in good faith. We certainly 
learned that through the Clinton years and through the Bush 
years.
    We at one point had sanctions there on the Bank of Macao 
which were very effective and operated in good faith. And I am 
glad to see that FinCEN will be greater employed as a sense to 
impose further sanctions.
    As well, it seems to me that these companies that supply 
material support to North Korea, I would like to get your 
understanding of how many companies that there are right now?
    China has been very aggressive in acquisitions in the U.S. 
today and buying technology. They spent $50 billion last year 
alone, much of that targeted toward acquiring technology firms.
    We passed a bill last week that I had introduced that would 
punish those technology firms that provided material assistance 
to North Korea and not allowing them to do contract work with 
DOD. But I would like to get some sense from you of what is the 
scope of the companies there?
    We fined ZTE a few months ago $1 billion, something that I 
had spent a lot of time on, for selling technology not only to 
Iran but also for selling embargoed technologies to North 
Korea. These are the kind of I think meaningful efforts we can 
make.
    But give me your response and what else we can be doing in 
terms of impacting these telecom companies? And how many there 
are, too? What is the scope of our mission there?
    Mr. Newcomb. Do you want me to start? Thank you, 
Congressman. I don't think anyone has a good fix on the 
universe of total population of companies that are involved. 
Research by c4ads, as was mentioned earlier this afternoon, 
shows that there are over 5,000 companies involved in trade 
with China.
    And that actually is a bit of an overestimate of the 
concentration because the time devoted to this work wasn't 
sufficient to enumerate some of the subsidiaries of these 
companies. So it is probably inflated a little bit.
    What was even more impressive about this work, though, is 
the concentration of managers, directors, that are guiding this 
network. North Korea's illicit activities operate in licit 
space. They leave tracks, financial tracks, purchasing tracks.
    You can get at them through business-to-business databases. 
It is researchable. Some breakthrough reports have been done 
over the last couple of years demonstrating this.
    Investigative reporters have broken stories on Glocom and 
most recently on a company in Singapore named OCN that operates 
a complex trading relationship with North Korea. So you can go 
after them.
    And I agree if you just designate entities, then you are 
playing whack-a-mole. You have to also designate the people who 
are operating them and get them on the compliance lists.
    Mr. Pittenger. One thing that we are seeking right now is 
to address CFIUS and it hasn't been reformed much since the 
Gerald Ford years when it was established.
    And we are working on legislation right now because we 
believe that we need much greater review and with the enormous 
amount of recurring investments that are taking place by the 
Chinese and in acquiring these technology firms, including 
those in the supply chain of DOD.
    But the chains appear to be very much focused on their 
technology advancement. And the best way to get it is to steal 
it or buy it. But it seems to me that should be a clear 
direction that we need to be about to make sure we have the 
best tools available to prevent those types of acquisitions. 
Would you concur with that?
    Mr. Newcomb. Yes, sir, I do.
    Mr. Pittenger. Any other comments by any of the rest of 
you?
    Thank you. I yield back.
    Chairman Barr. The Chair recognizes the gentleman from 
Arkansas, Mr. Hill.
    Mr. Hill. Thanks, Mr. Chairman.
    Thanks to the panel for being here. Thank you for taking a 
keen interest in this topic on this subcommittee. And I think 
we all saw today why we appreciate so much Chairman Ed Royce 
and Congressman Engels' engagement in our Foreign Affairs 
Committee and what a fine job they do together on behalf of the 
American people.
    There has been a lot of conversation. My friend from North 
Carolina mentioned it. We are on our fourth President now in 
dealing with North Korea since we have all acknowledged the 
clear and present danger of North Korea's nuclear program to 
the West, to the region.
    And so 24 years have gone by. We have had a lot of sort of 
Neville Chamberlain moments along the way, and we haven't 
seemingly accomplished our goals, the goals of the United 
Nations and the United States and our partners in Asia.
    So I really want to explore that a minute and say maybe if 
each of you could respond, in your personal view, in your 
professional capacity, is China today in working with the Trump 
Administration, the most active and helpful they have been over 
that 24 years? And you are making a relative statement.
    In other words, are they engaging and realizing that this 
has gone on too long and has been too inconclusive and is not 
in their national interest to let it proceed? So are they more 
engaged than they have been over 24 years?
    I will just go down the row if you would start, Mr. 
Ruggiero?
    Mr. Ruggiero. No. I don't think they have done enough to 
rein in North Korea.
    Mr. Hill. Okay.
    Mr. Ruggiero. I think they are interested in the freeze, 
which is not an option really there.
    Mr. Hill. Mr. Newcomb?
    Mr. Newcomb. There has been an increase in cooperation from 
China over the life of the sanctions. But it is not enough.
    Mr. Hill. Yes, okay.
    Ms. Rosenberg?
    Ms. Rosenberg. I would agree with that and maybe I would 
put the peak last year and unfortunately going the wrong 
direction.
    Mr. Hill. All right.
    Dr. Park?
    Mr. Park. I think it is a very complicated picture. There 
are different interest groups in China, particularly at the 
provincial level, that have very close economic benefits with 
these North Korean border provinces. So with that I think there 
is this conflict within the Chinese hierarchy.
    One quick thing I would mention, out of the seven members 
of the standing committee of the politburo, two come from the 
provinces near the border with North Korea. Their elevation and 
their path to the politburo was from cranking out economic 
growth in their jurisdictions.
    Mr. Hill. Yes.
    Mr. Park. So it gives you a sense of how the enmeshment and 
the entanglement, it makes it a very complicated picture within 
China. There are some agencies and some ministries who are keen 
on trying to sanitize this trade, and others that are working 
against it in order to work with corrupt party officials and 
make a lot of money.
    Mr. Hill. Thank you.
    And that is helpful. And so then when I look at ourselves, 
the United States and the leader of sanctions, both at the 
United Nations and then bilaterally with our allies, over that 
24-year period, are we now just getting it on how we should 
really design and impose sanctions and enforce them?
    Because you guys are really talking in the present tense 
and talking about the nuance about how to really do the 
administrative work, how to really do the enforcement. And as a 
Representative of the taxpayer, I would say what have we been 
doing the last 24 years, just sort of experimenting 
unsuccessfully? And now you think we have it right?
    So give me a little feedback about design. Are we now 
prepared at the United Nations and here in the United States 
with our allies in the region to do a more aggressive and 
better job at designing and implementing sanctions? And I am 
trying to be constructive.
    Have we learned from our mistakes? I will phrase it that 
way. And suddenly we can do a more effective job or we just 
have the willingness to do a more effective job now because we 
have allowed 24 years of progression?
    Again, let us go down the row and hear that.
    Mr. Ruggiero?
    Mr. Ruggiero. I think the fact that sanctions have doubled 
in a little over a year indicates--
    Mr. Hill. Still modest on your chart though, compared to--
    Mr. Ruggiero. Sure. It is compared to other sanctions 
programs. But the fact that it has doubled suggests that we 
were not even really focused on North Korea. And now we are 
focused on whether we should act against China, and that is the 
outstanding question.
    And other Administrations have determined that it is not a 
priority for the U.S.-China relationship. That is the 
outstanding question.
    Mr. Hill. Thank you.
    Mr. Newcomb?
    Mr. Newcomb. I think the United States did too little for 
too long, and they are just now thinking about getting serious 
about it. But again, it depends on establishing this as a 
national security vital interest.
    Mr. Hill. Thank you, sir.
    Ms. Rosenberg?
    Ms. Rosenberg. I think that there has been technical 
capacity in the Administration to do very good, creative 
targeting work for decades. And there has been select dedicated 
leadership in Congress also on this issue.
    However, there are two things that have changed more 
recently that I think have really brought this to the fore. One 
is the experience of what many believe as a success in the Iran 
sanctions case, where the United States led a global coalition 
of countries that engaged in financial pressure applied to 
Iran, and it worked in affecting Iran's economy and their 
political calculus.
    And the second issue that has changed this picture and I 
think the political will around it is the perception of a much 
more imminent threat, as was discussed by Congressman Sherman 
and many others, who feel this way to the United States and 
U.S. vital interests.
    Mr. Hill. Thank you. My time has expired.
    I'm sorry, Mr. Chairman.
    Chairman Barr. The Chair recognizes the gentleman from West 
Virginia, Mr. Mooney.
    Mr. Mooney. So Dr. Park mentioned in his testimony the coal 
trade between North Korea and China. And when the word ``coal'' 
comes up, it piques my attention, because I represent the great 
State of West Virginia.
    Coal has been a major driver of our economy for years, our 
number one product. Despite the previous Administration's war 
on coal, we still believe in coal and we believe it is going to 
come back. So anyway, when coal is mentioned I pay special 
attention.
    But my question will be for anybody on the panel who wants 
to address it, because in 2016 China negotiated the loophole 
which you referenced, Dr. Park, in its coal trade with North 
Korea, which permitted the purchases of the coal for 
``livelihood purposes.''
    What would be anyone on the panel's assessment of the 
humanitarian exemptions in North Korea sanctions? And a follow-
up to that, are the sanctions too difficult to enforce, and how 
meaningful are they given Pyongyang's control of resource 
distribution to its people?
    Go ahead?
    Mr. Park. If I could take a first crack at your questions 
there, Congressman, one of the things about the loophole that 
you meant and the livelihood purposes, there is actually a 
larger loophole.
    In 2009 in October, then-Premier Wen Jiabao led a Chinese 
equivalent of a cabinet delegation to Pyongyang and they signed 
a number of trade deals. And they created essentially the 
openings that became the coal trade between China and North 
Korea. That was the enabler.
    And the message from that trip to Chinese companies was 
that under Chinese law it is legal to do business with North 
Koreans. And that created something of the opening of the 
floodgates.
    But the loophole that they had there was under the headings 
of economic development, tourism, and education. Those became 
the gateways that the Chinese justified a lot of their trade 
with the North Korean entities.
    But to your point about the humanitarian exemptions, there 
are, I think, important elements that we have to be very 
careful of. But if we go back to these loopholes and how the 
Chinese have been using those as the legal justification to do 
the coal trade, right now with the sectoral bans I think there 
is an incentivization of smuggling along the border as well. 
And that is what we have to factor in as we try to look at 
other measures, to implement sectoral bans and other things.
    We should not be surprised by these activities. But when 
you restrict quantity prices go up and you incentivize 
smugglers, in many instances the very officials who are tasked 
with implementing the sectoral bans.
    Mr. Newcomb. If I may add to John's answer? The livelihood 
provision on coal was changed in the following Resolution 2321 
and because China was not employing it correctly. They were 
misapplying the measure and granting anyone the opportunity to 
import coal and just going through the motions of saying it was 
for livelihood purposes.
    So 2321 imposed a quota system. And it was a hard-won 
concession on the part of the Chinese. and it appears to have 
worked episodically but not totally. Now, the livelihood 
provision remained in force on iron ore, which continues to 
soar as a part of trade.
    Mr. Mooney. Thank you. If there are no other comments, I 
will yield back the balance of my time.
    Chairman Barr. The gentleman yields back.
    The Chair recognizes the gentleman from Ohio, Mr. Davidson.
    Mr. Davidson. Thank you, Mr. Chairman.
    Thank you to our panel. I really appreciate your input. It 
has been very helpful. Prior to coming to Congress, I spent 
about 15, 16 years in manufacturing. And obviously, China 
exports a fair bit of manufactured goods to the United States.
    I also serve on the Terrorism and Illicit Finance 
Subcommittee, and we spend a lot of time there talking about 
know your customer. Is there a burden to know your supplier? So 
when you go to China and you do business, most American 
companies wouldn't say, hey, I am doing business with a North 
Korean, because to them, they are not.
    But the Chinese company may very well have a beneficial 
ownership interest that is North Korean or may be one of the 
companies in China that has chosen to do lots of business with 
North Korea. Is there any burden to know your supplier in that 
extent?
    Ms. Rosenberg. I think the answer is it depends, and it 
depends a lot on your banking regulator. So taking a step back, 
for most global banks who handle the financing side of the 
manufacturing trade, there is, obviously, an importance placed 
on or a requirement to know your customer.
    And many of the major global banks, those in the United 
States and Europe, also feel the need to know your customer's 
customer, which is another way of getting at knowing your 
supplier.
    And there are some leading global banks, for example 
Standard Charter, which takes this very seriously. They also 
have a business footprint, if you will, that is in a lot of 
very high-risk jurisdictions for terrorism and proliferation 
financing.
    They send teams of their bankers out to educate their 
correspondent banks so that they do not find themselves in the 
position of having a correspondent banking relationship with, 
for example, a bank in China where the trade that they are 
financing, the supplier may actually be supplying North Korean 
goods, that kind of thing.
    So there, one of the ways that they are trying to know the 
supplier or possibly the beneficial owner is by taking that 
training out to their correspondent banks. There are other 
versions of this but I think some of the biggest global banks 
take it very seriously and too many banks, regional banks 
elsewhere in the world, are completely unaware, which is a 
major vulnerability.
    Mr. Davidson. Thank you. To follow up on that, if you are 
an American corporation, it could be manufacturing, it could be 
agriculture, it could be shipping, whatever you are going to--
energy, you are going to wire some money to a Chinese 
corporation.
    And as Chairman Royce pointed out, they really need hard 
currency to pull this off or they need core components. They 
get this through means like this.
    Now, a wire transfer goes to a Chinese company but may very 
well benefit North Korea. Follow that back to the know your 
supplier, what are the burdens by the U.S. entity, not just the 
financial institution, in making that transfer?
    Ms. Rosenberg. I will--go ahead.
    Mr. Davidson. Mr. Newcomb or--
    Mr. Newcomb. In terms of suppliers, too few, I think, 
actually try to manage their supply chain. There is an 
Australian sportswear company that accidentally found that a 
North Korean textile manufacturer was sewing ``Made in China'' 
labels on its clothes and then shipping it through China. This 
was discovered through investigative reporting, not through 
their own due diligence.
    So it is a very difficult process, but the problem is North 
Korea operates banks within banks using foreign subsidiaries, 
fronts, and shell corporations that act as a bank that absorb 
the money from various North Korean-linked sources and then 
pass it on.
    That is where banks are failing to know their customers, 
and that is where banks are failing in due diligence. And that 
is what is exactly exposing our financial system to money 
laundering and terrorism and proliferation risk.
    Mr. Davidson. Thank you.
    Dr. Park, Let's say that there was a law similar to the 
Foreign Corrupt Practices Act or Know Your Customer Act that 
said you are fine to do business with the companies in China, 
including state-owned companies in China, however, you can't do 
business with any company that does business with North Korea. 
You must know your supplier.
    Would that have a deterrent effect or a decrease in hard 
currency going into North Korea?
    Mr. Park. It could possibly, but in many cases the way that 
it is masked, even the middleman is surprised that they are 
getting semi-sourced products whether--the middleman directly. 
But the supply chain is such that I think it is so complicated 
to get these things aligned unless you get these rules and 
regulations in place.
    One thing to explore though I think is the use of 
incentives. If there could be ways to monetize this information 
that can lead to the interdiction or some notion of tracking 
down to the source, that is something we haven't explored. I 
think that is a very robust area, the area of incentives.
    Mr. Davidson. Thanks. I would love to talk longer, but my 
time has expired.
    Mr. Chairman, I yield back.
    Chairman Barr. The gentleman yields back. And without 
objection, we will move to a brief second round of questions. 
And I will recognize myself for an additional 5 minutes.
    Mr. Newcomb, I want to ask you about sanctions enforcement 
a little bit more. You have highlighted implementation 
challenges with existing sanctions. And according to the U.N. 
Panel of Experts' final report, following the adoption of U.N. 
Security Council sanctions last year 43 of 54 countries in 
Africa failed to submit their national implementation reports.
    The U.N. report also highlights difficulties in countries' 
ability to coordinate their sanctions enforcement and in basic 
failures to freeze the assets of entities acting on behalf of 
designated persons.
    So aside from using secondary sanctions to encourage 
foreign countries' compliance, what is the role of technical 
assistance, be it through the Treasury Department, IMF, or 
other international financial institutions in improving those 
countries' ability to enforce the U.N. Security Council 
resolutions?
    Mr. Newcomb. That is ongoing. The Panel of Experts actually 
works with the Financial Action Task Force and with the FSRBs, 
in particular the East Africa, any money laundering 
organization. So the education on what is required by the 
resolutions is taking place.
    The bottleneck appears to be in the political process of 
adopting the rules and regulations necessary to implement and 
enforce and of course overcoming the political will. North 
Korea gave material assistance to a number of African 
liberation movements, and it supplied arms, and so it built a 
lot of goodwill.
    The problem is convincing a number of African countries 
that their future in the international area relies on 
cooperating to suppress the North Korean program and not 
facilitating its support.
    Chairman Barr. Mr. Ruggiero, I think earlier you defined 
the objective well. If the objective is not just deterrence 
through mutually assured destruction, if the goal here of 
sanctions is to force North Korea to abandon its nuclear and 
ballistic missile programs, if our goal is to stop North Korea 
from being able to threaten the United States with a nuclear 
device, if that is the objective please define success, each of 
you down the row in my remaining time, what does success look 
like with an updated sanctions regime?
    Mr. Ruggiero. I think success in terms of protecting 
ourselves is less successful missile tests. I think less the 
ability for North Korea to deploy these missiles, the inability 
for North Korea to make advances in its weapons programs. Those 
are high goals and those should be the high goals if our goal 
currently is not de-nuclearization because this regime is not 
interested in that.
    We should have a high goal in trying to protect ourselves 
against North Korea's nuclear and missile programs.
    Chairman Barr. And specifically in terms of success of what 
the sanctions should--
    Mr. Ruggiero. Oh, in terms of the success on what the 
sanctions, I think that there has been a lot of questions about 
the scale. And I think Bill did a great job of sort of 
describing these are really networks. If we start to take down 
complete networks, the Dandong-Hangzhou action last year was 
incomplete.
    It didn't sanction any of the front companies. And through 
the Bank of Dandong action we learned that Dandong-Hangzhou was 
doing $56 million in transactions through that bank, minimum. 
So we need to be completely going after networks. We need to be 
using fines or other criteria to go after Chinese banks if we 
are really going to be serious about this.
    Chairman Barr. Mr. Newcomb, Ms. Rosenberg, and Dr. Park on 
the same question?
    Mr. Newcomb. I agree with everything that Mr. Ruggiero 
said. And I would add that success also means we have to be 
working much more closely with other like-minded countries. 
They have to be doing the same thing.
    The E.U. has imposed sanctions on entities that do not 
appear on the SDN list. I mentioned that the Pyongyang company 
that did the radios, that is still not on the SDN list. We have 
to step up the pace.
    Chairman Barr. Ms. Rosenberg and Dr. Park?
    Ms. Rosenberg. I would agree that success in sanctions 
implementation looks like taking down these networks that prop 
up the North Korean proliferation aims and motivate massive 
enforcement by other countries at the national level around the 
world, specifically in China.
    Furthermore, that this success for sanctions will only act 
to empower and strengthen and coalesce U.S. alliance 
relationships in North East Asia and never come at the expense 
of them.
    Chairman Barr. Dr. Park?
    Mr. Park. So very quickly, I think it is disrupting North 
Korea, Incoprporated's business partnerships. This in terms of 
the nuclear weapons and the ballistic missiles development, 
those are happening because of their procurement abilities and 
business practices.
    So we have to break up these business partnerships and 
targeting using these different policy tools that I mentioned 
earlier, I think, prime candidates for slowing it down so that 
North Korea doesn't build out this arsenal of ICBMs with 
nuclear weapons.
    Chairman Barr. Thank you for your conclusions.
    And now I will recognize the ranking member for an 
additional 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman, and thank you 
all for this very important discussion.
    I am wondering, Ms. Rosenberg, you indicated in your 
written testimony that it was sort of a lost opportunity to 
build the sort of international coalition and the consensus on 
sanctioning North Korea at the recent G-20 meeting.
    What kind of message does that send? How can we recover 
from that diplomatically? And what should we do in the absence 
of having not done that?
    Ms. Rosenberg. Thank you for the question. I think it is an 
incredibly important question. I see that as a massive 
opportunity missed, and it sends the wrong signal only days 
after.
    This is still in the news cycle for anxiety and concern 
about that ICBM test, that the United States didn't provide 
leadership in that forum, particularly when, as has been stated 
by other representatives at that meeting, everyone shared that 
concern, at least in some fashion.
    The way to come back from that or to address that, not just 
that, as I see it failing, but this issue more broadly, is for 
the United States to take the opportunity in meetings, at 
highest level meetings between the United States and China, 
bilateral meetings, as well as in every appropriate 
multilateral forum to raise this issue again and again and 
again. And I think the severity of it demands nothing less.
    Ms. Moore. Just a thought on the diplomatic efforts, I 
think. Mr. Ruggiero, you mentioned that we do need to deploy 
our diplomatic assets. And I am just wondering about the recent 
nomination of Mr. Huntsman to be our main diplomatic asset to 
Russia.
    Do you think that his history and his background will be a 
lot more useful to have him switch back to being an asset and a 
diplomat to China?
    Mr. Ruggiero. Putting aside whether leaving it to the 
Senate to confirm him, his prior postings in Singapore and 
China, I think, provide ample background on the North Korea 
issue because, as Mr. Newcomb said about Singapore, that is a 
significant North Korea hub.
    We have already talked about China. And as I mentioned in 
the answer to a prior question, there is this sort of 
suggestion that some of this activity is moving from China, 
some of this China-North Korea trade, to Russia. And I think 
that the Administration is concerned about that.
    So I expect if he is confirmed that a large portion of his 
interactions with the Russian government will be about North 
Korea.
    Ms. Moore. Okay. So it might be beneficial for him to be in 
that spot.
    Ms. Rosenberg, you talked about expanding the USA PATRIOT 
Act. And could you just share with us just a little bit about 
how you want to expand the use of the PATRIOT Act?
    Ms. Rosenberg. Thank you. I think I will highlight two 
things. So the PATRIOT Act 311 authorities have been used with 
noted success by a number of members of this committee before 
to target North Korean proliferation concerns.
    There is an opportunity to both increase the use of the 
specific tool. It is a really useful one, including by 
comparison to sanctions, but not that one should exclude the 
other because when a 311 is made there is an awful lot of 
information that becomes available to companies, manufacturers, 
banks that are in the position of trying to look for and 
prevent North Korean trade and illicit finance from occurring. 
So it is a very useful kind of action for the information it 
gives. That is one way.
    Another way is that in that same piece there--well, I would 
just say the opportunity for greater information sharing 
between the government and banks and among banks that can be 
facilitated by statute, not the Patriot Act in particular, but 
in order to facilitate more such 311 actions, so that is our 
Banking Secrecy Act opportunity to expand and create some 
safeguards around great information sharing.
    That is another thing that can further the--
    Ms. Moore. Do we need a statutory expansion to do--
    Ms. Rosenberg. I think that is a great thing to consider by 
this committee.
    Ms. Moore. All right. Thank you.
    And I will yield back.
    Chairman Barr. Thank you.
    The gentlelady yields back.
    And the Chair recognizes Mr. Williams for an additional 5 
minutes.
    Mr. Williams. Thank you, Mr. Chairman.
    Mr. Newcomb, in a 2015 report the U.N. estimated that North 
Korea had sent 50,000 laborers to dozens of countries, which 
provided them with $1.2 billion to $2.3 billion annually. And 
in an article from July 11th, the New York Times noted how 
North Korean laborers in Russia saw their wages confiscated by 
the North Koreans in amounts that hinged on the ruble's 
exchange rate with the dollar.
    How do we prevent North Korea from exchanging laborers' 
foreign earnings into desirable currencies, be it be dollar to 
euros or whatever? And how do we prevent the DPRK from 
subsequently accessing those currencies, whether it is in the 
form of bank accounts or in the form of bulk cash?
    Mr. Newcomb. Sir, the relationship supplying workers to 
Russia, mostly for the logging industry, has existed for a 
number of years. And more recently, of course, this did supply 
of a lot of North Korean workers to China.
    I really don't think that there is a lot that can be done 
directly to curtail these numbers or impinge upon their ability 
to earn money through that. But you can go after all the other 
countries on the list that Chairman Royce read.
    There were other countries on that list earlier. Poland has 
now stopped its use of North Korean workers. Malta has stopped 
its use of North Korean workers. Malaysia has said it is going 
to reduce the number and send them back.
    Some of the North Korean workers are building facilities 
for the World Cup. Why in the world, as a member of that, is 
the U.S. going along with it and not raising serious objections 
to that?
    I think every place the North Koreans are, particularly in 
countries in the Middle East where we have a lot of influence, 
such as Qatar, why are the workers still there? Why are they 
still in Kuwait? Right?
    I don't think we are exercising the diplomatic and other 
kinds of pressure that we can bring quietly in these 
jurisdictions to get them to abandon this practice.
    Otherwise, North Korean workers need to be treated, if they 
are going to be hired, under international labor organization 
standards, and they are not.
    Now, the companies that provide them are receiving the 
money. The workers are not. They are getting a pittance. And in 
many cases the money is being carried back to North Korea via 
cash couriers. Now, that can be intercepted as North Korean 
cash couriers go through international checkpoints. So we have 
opportunities to put a dent in this.
    Mr. Williams. Okay. Thank you for that answer.
    Dr. Park, what behavioral change could trigger the 
relaxation of financial sanctions against the DPRK? Is it a 
complete freeze, would you say, on missile development?
    Mr. Park. The North Korean regime is the subject of a 
number of sanctions. So even if there were the ones that linked 
to North Korea's stopping the activities on ballistic missile 
development, there are other sanctions in place that I think 
you would see the North Koreans coming back expecting sanctions 
relief.
    But frankly, yes, at this particular point in time, the 
North Korean regime has not expressed any interest in terms of 
the notion of trying to coordinate some sort of deal for the 
relief on these type of sanctions.
    Mr. Williams. Okay. Dr. Park, Justin Hastings, of the 
University of Sydney, has written that Taiwan was only second 
to China as a focus for North Korean trading partnerships after 
2006. What is your assessment of Taiwanese efforts to prosecute 
brokers of illicit North Korean activity? And can we do more to 
remove Taiwan from the DPRK's trading network?
    Mr. Park. I think there are a number of measures in terms 
of looking at these type of business partners. But in addition 
to Taiwan there are also Japanese-based entities who are 
largely tied to the North Korean resident community there as 
well.
    So I think Taiwan and the Taiwanese companies in terms of 
their activities, documenting them, sharing that kind of 
information with Taiwanese authorities as well. But a number of 
these type of activities, especially under the private sector 
growth of compliance within different financial institutions as 
well is another means to do this.
    But we have more tools, and I think with that there is an 
opportunity to ply the accumulative learning on our side in 
terms of these North Korean practices.
    Mr. Williams. Okay.
    Mr. Chairman, I yield my time back. Thank you.
    Chairman Barr. Finally, the Chair recognizes the gentleman 
from Ohio for an additional 5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman.
    And thank you all. Thanks for sticking around for a few 
more questions, and I thank my colleague for the question about 
Taiwan or other countries.
    Some of these countries we have great relationships with 
and we consider allies, but they are not exactly supportive of 
our efforts with respect to North Korea, and perhaps others, 
but the topic here is North Korea.
    We have talked a little bit about sanctions. We have talked 
about how going back to the 1990s we haven't really been as 
serious. We have had forays into economic policy messaging 
maybe. When does the line cross and it is really economic 
warfare where we are going to use every economic means possible 
to stop this?
    If we are declaring North Korea as a potential existential 
threat, that is obviously something that could be a trip line 
for kinetic force, not just economic.
    So what escalations could be possible? Dr. Park, you 
mentioned one that we haven't, incentives, but I guess down the 
line, if you could, what are we not doing with respect to 
diplomacy with our allies like Taiwan and Japan but with 
respect to anything that is in the kit bag or potentially in 
it?
    Mr. Park. I think you are right. We are not serious when it 
comes to either diplomatic or economic input with our allies in 
particular. And that is why in my testimony I have referenced 
the Iran-style sanctions, which is, and I know it sounds 
bravado, but that is essentially what we did with Iran.
    It was either North Korea or us, and I think that is the 
like-minded coalition that the Administration could build.
    Mr. Davidson. Warfare.
    Mr. Park. But it will still circle us back to China and 
Russia, so we are sort of avoiding the larger question 
unfortunately.
    Mr. Davidson. Mr. Newcomb?
    Mr. Newcomb. I think much can be done with Taiwan. There 
are Taiwanese companies that do cooperate with North Korea. 
Royal Tea comes to mind. There are others, including one that 
was prosecuted in Chicago about a year-and-a-half ago.
    Taiwan is a trading nation, right? And so they look for 
opportunities to sell. Taiwanese machine tools get copied by 
the North Koreans one way or another. When Japan started to 
prohibit trade with North Korea a lot of the activity was 
redirected toward Taiwan. So Taiwan needs to do a lot of its 
own due diligence about what its own companies are up to.
    And in terms of moving to economic warfare, you could 
probably draw the line at a blockade. Crossing over into a 
blockade would definitely move us into economic warfare.
    Mr. Davidson. Thank you.
    Ms. Rosenberg?
    Ms. Rosenberg. I will just add to this, what is the trip 
line for waging economic warfare? I think what we ought to be 
careful to encourage sanctions policymakers to remember is that 
when we get there, whatever that looks like, and it may be a 
bit of moving target that a blockade is certainly one I would 
endorse.
    But there will be others, other kinds of threats to our 
allies and ourselves. That economic warfare should always come 
as, in my view, a counterpoint, in addition to and alongside 
the credible threat of military force.
    And so there should be no situation where economic warfare 
is ever waged by itself. It has to come, at that point, at that 
severe point of threat to the U.S. interests. It must come 
along with the use of military force, posture, and potentially 
projection.
    Mr. Davidson. Thank you.
    Dr. Park, if you have another one?
    Mr. Park. I would just echo what my colleagues here are 
saying. But also, one of my colleagues at the Kennedy School, 
Aaron Arnold, has also been looking at the notion of what are 
the implications if you double down and concentrate more along 
the lines that would potentially trigger something like 
economic warfare?
    There is also the negative unintended consequence that 
different trading countries migrate away things that are U.S. 
dollar-based. So we have to anticipate that. It is not to say 
we shouldn't pursue some of these coercive measures, and 
certainly as my colleagues here have been saying it, in the 
context of a broader strategy.
    But I think we have to look at these very complex 
unintended consequences because we are going to trigger both 
positive as well as these negative unintended consequences.
    Mr. Davidson. Thanks.
    Everyone, last question. Lots of folks in this whole deal 
would like to see the United States off the Korean Peninsula. 
We have been there since 1950. I think that wouldn't be a bad 
outcome. What would it take for us to see that as a win in our 
departure from Korea?
    Mr. Ruggiero. I think the problem in this current 
circumstance is that if the United States withdrew from the 
peninsula, that could increase the option of North Korea 
becoming more aggressive. And I think that could also lead to 
South Korea and perhaps even Japan considering developing their 
own nuclear weapons.
    Mr. Davidson. Yes, I think short of that, it would take 
some sort of reconciliation path between North and South Korea 
similar to what happened in East Germany and West Germany, 
personally.
    Mr. Chairman, I yield back.
    Chairman Barr. The gentleman yields back. And I spoke too 
soon.
    The chairman of our Capital Markets Subcommittee has 
arrived and would like to be recognized for questions. Mr. 
Huizenga is recognized.
    Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that. 
And I had the privilege of chairing this subcommittee last 
Congress and my interest is definitely there.
    I would like to put for the record, not sure where my 
colleague was going, not everybody agrees that we ought to be 
withdrawing from the Korean Peninsula. Someday if we--yes.
    There are a lot of aspirational things happening here in 
Washington right now, but I do believe we have a strategic 
interest there both with South Korea and Japan.
    Dr. Park, in your testimony you had suggested using China's 
anticorruption campaign to target corrupt officials who will 
facilitate North Korean trade and also noted that the Chinese 
have an interest in, or at least should have an interest in 
stopping North Korea's trafficking of narcotics and counterfeit 
bills in China. And I would think that would be of strategic 
interest for them and practical interest.
    What kind of room is there for truly meaningful cooperation 
in these areas? Is that really in the cards for us, and how can 
the U.S. impress on Beijing that a harder line with Pyongyang 
will service its own self-interest?
    Mr. Park. This is a very nuanced approach. On the face of 
it, the idea of cooperating with the Chinese authorities seemed 
to be something that would not work.
    But there are two outstanding recent trends. One is the 
growing urgency among the Chinese leadership about how quickly 
North Korea is developing its nuclear weapons and ballistic 
missile capabilities. And the second I think is the possibility 
of coercive economic measures directed on a larger scale.
    We have had the precedent of secondary sanctions against 
the Bank of Dandong, and potentially others as well. But in 
this atmosphere, the notion of using these means, the question 
then becomes, where can you get political buy-in? And where are 
you going to get the sustained coordination?
    I would offer the Commerce Department's newly launched 
comprehensive economic dialogue, and as well as the State 
Department and Pentagon's approach with their Chinese 
counterparts within the diplomatic and security dialogue has 
been used where they can explore further cooperation in these 
areas.
    Because if you do look at it from the Chinese perspective, 
they are not concentric circles. They may not look like much in 
the beginning, but certainly those can be expanded and done in 
a way that we are looking at it from Chinese interests and then 
expanding upon those towards creating this notion of slowing 
down the procurement on the North Korean side.
    And I would conclude that the overall image that one can 
imagine as a basis of this type of discussion is a sanitization 
of China's trade with North Korea. It is actually a small 
sliver of the overall ``legal trade'' that is illicit.
    And if you look at these commercial channels, they become 
almost like dual-use technologies. If you are moving innocent 
goods through you have all the intimate areas and processes in 
place to move illicit goods through.
    Breaking that apart and using these different types of 
domestic policies on the Chinese side, I think, is a serious 
area of investigation given the urgency.
    Mr. Huizenga. And it is my understanding that the--and I am 
not going to get the phrase correct, but the industrial park 
that was in North Korea, that was fenced going in from South 
Korea and had North Korean workers there and trucks coming out? 
My understanding is that has been shut down? Correct?
    Mr. Park. The Kaesong industrial complex, yes, that is 
correct.
    Mr. Huizenga. Yes, and has that had any kind of effect in 
North Korea? Has that been a pressure point?
    Mr. Park. I think a lot of researchers have documented how 
the revenue earned from essentially rent from those facilities 
went to the North Korean military. But since that has been shut 
down, that source of funds to the North Korean military has 
also ceased.
    There is some discussion among this new government in South 
Korea, the Moon Jae-in administration to explore potentially 
looking at ways to reopen the Kaesong industrial complex as a 
broader part of their North Korea policy.
    Mr. Huizenga. And do you think that would be a positive 
move?
    Mr. Park. I think if you look it from their rationale that 
they would try to use it as an incentive, enticement to the 
North Korean regime, they have to factor in the fact that the 
North Korea-China trade far over shadows what is happening in 
the potential restarting of the Kaesong industrial complex.
    Mr. Huizenga. Okay.
    Mr. Park. It really is, I think, critical that we look at 
how the Chinese authorities, in particular the Communist Party 
of China, has been rebuilding the Worker's Party of North Korea 
for a stabilizing game plan for a number of years now. And that 
is something that has a certain type of momentum.
    Mr. Huizenga. Yes. In my last 30 seconds, which I need 3 
minutes really to do this, but Mr. Ruggiero and Mr. Newcomb and 
Dr. Park as well, the Banco Delta Asia had been tagged as a 
primary money laundering concern.
    You have brought up some of the bank sanctions. Are there 
any lessons that case carries forward, and are there any 
specific high-profile designations or prosecutions that should 
be pursued in order to make Chinese banks a little more 
reticent in helping out?
    Mr. Ruggiero. I guess I would say the lesson learned, I 
know people see that as a silver bullet, that doesn't exist 
right now. I think that going after something similar to that 
where North Korea values it, whether it from a financial or 
commercial perspective.
    I think some of the information coming out now clearly 
indicates that the Justice Department and the Treasury 
Department are going after Chinese banks allowing U.S. dollar 
transactions, which are illegal, on behalf of North Korea.
    And I think that is the right approach. But again, it is 
going to take a lot of work on the part of the Trump 
Administration to reverse the tide over the last 10 years.
    Mr. Huizenga. Thank you, Mr. Chairman.
    Chairman Barr. The gentleman's time has expired.
    And I would like to thank all of our witnesses today for 
their insightful testimony, and you all have certainly informed 
our oversight of U.S. sanctions policy as it pertains to North 
Korea and our oversight of Treasury's implementation of those 
sanctions.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is adjourned.
    [Whereupon, at 4:26 p.m., the hearing was adjourned.]

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                             July 19, 2017

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