[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
A LEGISLATIVE PROPOSAL TO
IMPEDE 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
__________
SEPTEMBER 13, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-41
U.S. GOVERNMENT PUBLISHING OFFICE
29-542 PDF WASHINGTON : 2018
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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
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Page
Hearing held on:
September 13, 2017........................................... 1
Appendix:
September 13, 2017........................................... 37
WITNESSES
Wednesday, September 13, 2017
Albright, David, President, Institute for Science and
International Security......................................... 5
Klingner, Bruce, Senior Research Fellow, Northeast Asia, the
Heritage Foundation............................................ 11
Rosenberg, Elizabeth, Senior Fellow and Director, Energy,
Economics, and Security Program, Center for a New American
Security....................................................... 9
Ruggiero, Anthony, Senior Fellow, Foundation for Defense of
Democracies.................................................... 7
APPENDIX
Prepared statements:
Waters, Hon. Maxine.......................................... 38
Albright, David.............................................. 40
Klingner, Bruce.............................................. 53
Rosenberg, Elizabeth......................................... 71
Ruggiero, Anthony............................................ 78
A LEGISLATIVE PROPOSAL TO
IMPEDE NORTH KOREA'S
ACCESS TO FINANCE
----------
Wednesday, September 13, 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 10:06 a.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, Emmer, Mooney, Davidson, Tenney,
Hollingsworth; Moore, Foster, Sherman, Green, Heck, Kildee, and
Vargas.
Ex officio present: Representative Hensarling.
Also present: Representative Wagner.
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.
Today's hearing is entitled, ``A Legislative Proposal to
Impede North Korea's Access to Finance.''
I now recognize myself for 5 minutes to give an opening
statement.
Today's hearing will examine draft legislation that would
impose secondary sanctions on foreign banks whose business
supports the North Korean regime, whether directly or
indirectly. By encompassing virtually all of North Korea's
economic activity, these measures would represent the toughest
financial sanctions yet directed at Pyongyang. This means going
after coal, petroleum, textiles, and minerals, as well as North
Korean laborers abroad.
In addition, the bill would incentivize greater compliance
with U.N. sanctions by leveraging our vote at the international
financial institutions where certain countries with lax
enforcement go to seek assistance. This bill puts those
countries on notice.
This proposed legislation has been informed by the
committee's ongoing work on North Korea, as well as the U.N.
panel of experts' evaluation of existing sanctions
effectiveness.
Needless to say, North Korea's sixth nuclear test on
September 3rd, coupled with its repeated launching of
intermediate and long-range ballistic missiles, underlines that
more must be done. As a result, the legislative draft we will
be looking at lays out a choice: Foreign banks can either do
business that benefits North Korea or they can do business with
the United States. They cannot do both.
As many of us here today are aware, this is a similar
approach to the one taken in 2010 against Iran, which helped
compel the ayatollahs to negotiate over their nuclear program.
While there are differences of opinion over how successful
those negotiations were, there is consensus, I believe, that in
the absence of secondary sanctions affecting banks, Tehran
would have been far less incentivized to even engage in talks.
A focus on banks is especially important given how North
Korea has evaded sanctions in the past. As Dr. John Park of
Harvard's Kennedy School testified before this subcommittee in
July, the North Koreans have moved much of their trading
activity offshore using third-country brokers and front
companies.
The specter of financial sanctions may concentrate the
minds of foreign banks so that the entities identified by Dr.
Park and others have fewer options to carry out transactions
and mask North Korean involvement.
Having said that, this bill would expand the scope of our
sanctions to encompass even actors engaged in conventional
trade with the North. Given North Korea's unchecked hostility,
broadening our efforts in this way appears essential.
Nevertheless, China's response to stronger sanctions has
been cited as a concern as the country accounts for an
estimated 90 percent of North Korea's trade. Some have
therefore argued that harsher sanctions now may damage
cooperative efforts with Chinese leaders to curb North Korea's
weapons program. But I would submit that those critics should
be far more sensitive to a quarter century of failed
multilateral efforts to reign in Pyongyang. There comes a time
when caution or, ``strategic patience,'' as one Administration
phrased it, becomes a euphemism for self-delusion.
As this subcommittee learned from its hearing in July, if
China is not part of the solution to North Korea, it is part of
the problem. Chinese officials have fallen short on enforcing
U.N. sanctions that Beijing itself has signed on to. And as the
U.N. Security Council talks following the North's sixth nuclear
test have demonstrated, it is still unclear if China is
committed to meaningfully tackling the North Korean threat.
Finally, we should acknowledge that Kim Jong-un's eagerness
in forcing the withdrawal of U.S. troops from the region may
not be entirely inconsistent with Chinese interests. For all
the breathless talk of China exerting influence around the
globe as a rival to U.S. power, we are curiously asked to
believe that its hands are tied when it comes to a small,
economically dependent state next door.
Well, if Chinese officials' hands are tied, then we should
proceed with secondary sanctions so that their banks can assist
international efforts to cut off North Korea's access to
finance. If, on the other hand, China could do more than it
has, then secondary sanctions may finally inspire it to do so.
I want to thank our witnesses for appearing today, and I
look forward to their testimony.
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 in the absence of our ranking member of the full
Financial Services Committee, Ms. Waters, I would like to share
some thoughts that she has committed to paper regarding today's
hearing:
``I want to thank our witnesses for joining us to discuss
the legislative proposal aimed at expanding United States
sanctions against North Korea and pressuring the international
community to enforce those restrictions as well.
``The situation in North Korea is the most urgent and
dangerous threat to peace and security that we face. And it is
one that grows more dangerous as North Korea aggressively
pursues the capacity to extend its nuclear reach to United
States cities.
``In fact, there are no good options for dealing with North
Korea. Most experts agree that a preemptive strike at this
point on North Korea would be reckless beyond belief.
``Of the least-bad options, I like the idea of pressing
China to lean more heavily on North Korea and I like the idea
of tougher sanctions. But we should not confuse either of those
things with a coherent strategy, and we should be clear up
front about our goals and objectives and what we expect
sanctions can accomplish.
``Any ratcheting up of sanctions must be coupled with
aggressive diplomatic engagement by the United States and
within a framework that would entail nuanced negotiations with
North Korea, U.S. allies, and China. This would require
unprecedented policymaking capacity and coordination across the
United States Government as well as skilled policy coordination
with our allies.
``It concerns me, therefore, that just as this crisis is
accelerating, our diplomatic capabilities, which open channels
for crisis communication and reduce the risk of miscalculation,
are diminished. Not only are U.S. ambassadorships to Japan and
South Korea still vacant, the President has yet to nominate a
permanent Assistant Secretary of State for East Asia and
Pacific affairs.
``The legislative proposal before us today rightly
recognizes the need to exert massive and immediate pressure on
the North Korean regime and, importantly, enlists China and
others in this effort. However, such a powerful approach
towards sanctions that have the capacity to reverberate
throughout the global economy and present potentially
disastrous, unintended consequences must also allow for careful
calibration in its implementation.
``We look forward to the witnesses' views on the proposal
before us as well as your views on how the U.S. can most
effectively use this leverage to contain the alarming danger
North Korea presents.
``And I reserve my time.''
Chairman Barr. The Chair now recognizes the gentleman from
Washington, Mr. Heck, for an opening statement.
Mr. Heck. Thank you, Mr. Chairman, and Ranking Member
Moore, for the time. And thank you all for convening this
important hearing.
Responding effectively to North Korea's provocations will
require a variety of tools: credible deterrence; adept alliance
management; skillful diplomacy; and a careful design of
nonmilitary sanctions.
Here in the Financial Services Committee, we have
jurisdiction over only one of those tools: sanctions. But I
believe it is important that we always keep the broader picture
in mind as we work to perfect the discussion draft which has
been put forward today.
Even with perfect compliance, I believe it is very
difficult to stop any country from pursuing a course of action
which it views as vital to its survival through sanctions
alone. These challenges are even greater when dealing with a
regime like North Korea, a regime which relies on force to stay
in power, a regime which has demonstrated indifference to the
incredible suffering of its own people, a regime which can
easily make sure that its elite and its nuclear program are the
last to feel any pinch.
Done right, however, sanctions can make further North
Korean advances slower and more costly, giving more time for
other policy tools to work.
And I look forward to hearing from our distinguished
witnesses about how this proposed draft fits into a larger
strategy.
My constituents in the South Puget Sound, who include the
servicemembers at Joint Base Lewis-McChord, are counting on us
to respond to this crisis in a responsible manner. So, too, are
our allies, like South Korea and Japan and an Asia Pacific
region which has enjoyed decades of peace and prosperity in
large part because of the credibility of U.S. security
guarantees and a broader commitment to the region.
We cannot afford to fail them. We have to get this right.
And I am hopeful that with steady American leadership working
in a bipartisan manner, we will get this right.
I yield back, Mr. Chairman.
Chairman Barr. The gentleman yields back.
And because of the significance of the issues under
consideration in this hearing and the importance of the North
Korean threat to our homeland and to the interests of our
country, a number of members from the full Financial Services
Committee have expressed an interest in participating in
today's subcommittee hearing.
And so I ask for unanimous consent that members who are on
the full committee, but not on this subcommittee, may join in
this hearing. Without objection, it is so ordered.
Today, we welcome the testimony of a distinguished panel of
witnesses. First, David Albright, who is the founder and
president of the Institute for Science and International
Security. He has written numerous assessments on the secret
nuclear weapons programs throughout the world. Mr. Albright has
published assessments in numerous technical and policy
journals, including The Bulletin of the Atomic Scientists,
Science, Scientific American, Science and Global Security,
Washington Quarterly, and Arms Control Today. Mr. Albright has
also coauthored four books, including, ``The World Inventory of
Plutonium and Highly Enriched Uranium,'' as well as, ``Peddling
Peril: How the Secret Nuclear Trade Arms America's Enemies.''
Prior to founding the Institute, Mr. Albright worked as a
senior staff scientist at the Federation of American
Scientists, and as a member of the research staff of Princeton
University's Center for Energy and Environmental Studies.
Anthony Ruggiero is a senior fellow at the Foundation for
Defense of Democracies. He 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
adviser on issues relating 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 in the Office of Terrorist Financing and
Financial Crimes.
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. He was
also nonproliferation adviser to the U.S. delegation to the
2005 rounds of the six-party talks in Beijing, and participated
in U.S.-North Korea meetings following the identification of
the Macao-based Banco Delta Asia as a primary money-laundering
concern. He has also served as an intelligence analyst covering
North Korean nuclear and missile programs and proliferation
activities.
Bruce Klingner specializes in Korean and Japanese affairs
as the senior research fellow for Northeast Asia at the
Heritage Foundation's Asian Studies Center. He is a frequent
commentator on the region in U.S. and foreign media. Mr.
Klingner's analysis and writing about North Korea, South Korea,
and Japan are informed by his 20 years of service at the
Central Intelligence Agency and the Defense Intelligence
Agency.
From 1996 to 2001, Mr. Klingner was the CIA's Deputy
Division Chief for Korea, responsible for the analysis of
political, military, economic, and leadership issues for the
President of the United States and other senior U.S.
policymakers. In 1993 and 1994, he was the Chief of the CIA's
Korea branch which analyzed military developments during a
nuclear crisis with North Korea.
Elizabeth Rosenberg is a senior fellow and director of the
Energy, Economics and Security Program at the Center for a New
American Security. In this capacity, she publishes and speaks
on the national security and foreign policy implications of
energy market shifts and the use of sanctions in economic
statecraft.
From May 2009 through September 2013, Ms. Rosenberg served
as a Senior Adviser to the Assistant Secretary for Terrorist
Financing and Financial Crimes and then to the Under Secretary
for Terrorism and Financial Intelligence. In these roles, she
helped to develop and implement financial and energy sanctions.
She also helped to formulate anti-money-laundering and counter-
terrorist financing policy and oversee financial regulatory
enforcement activities.
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. Albright, you are now recognized for 5 minutes.
STATEMENT OF DAVID ALBRIGHT, PRESIDENT, INSTITUTE FOR SCIENCE
AND INTERNATIONAL SECURITY
Mr. Albright. Chairman Barr, Ranking Member Moore, and
other members of the subcommittee, thank you for the
opportunity to testify today.
North Korea's September 3rd nuclear test, its sixth overall
and by far the largest in terms of explosive yield,
demonstrates its resolve and commitment to developing a nuclear
arsenal able to strike its enemies.
During the last few years, North Korea has embarked on an
intensive nuclear weapons testing and production campaign that
has included the construction and operation of many nuclear
facilities, three underground nuclear tests, and tens of
ballistic missile launches.
Its apparent goal is to have a variety of nuclear warheads
of many varieties mated to ballistic missiles with ranges
stretching to intercontinental distances. Few doubt that North
Korea can now launch nuclear-tipped ballistic missiles that can
strike our allies, Japan and South Korea. There is rightly more
skepticism that North Korea is yet able to deliver a nuclear
warhead to an American city, but it is making rapid progress
toward that goal.
I continue to believe that North Korea can be peacefully
denuclearized; however, substantive negotiations appear
unlikely unless North Korea changes its path. Given North
Korea's unwillingness to enter denuclearization talks, and its
provocative behaviors, there is little choice but to assert
more pressure, including harsher sanctions and additional trade
cutoffs. The U.N. Security Council resolution passed on Monday
is an important step in that direction.
A near-term priority is to far more effectively isolate
North Korea from the regional and international financial
system. A central problem is that many countries are not
enforcing sanctions effectively or are, in some cases,
willfully disregarding them. Punitive measures are needed to
encourage compliance and deter violations. Additional U.S.
legislation that supports that goal is useful.
North Korea appears to target entities and persons engaging
in activities in violation of U.N. Security Council sanctions
in tens of countries with weak or nonexistent trading control
system, poor proliferation financing controls, or higher-than-
average corruption.
Although a range of remedies are needed to fix the poor
performance, in general, of many of these countries, the
creation of punitive measures may be an effective means to
accelerate more compliant behavior in the short term among a
wide range of countries where entities and individuals see
North Korea as a quick way to make money or obtain military or
other goods either more cheaply or unavailable elsewhere.
Dealing with China's trade with North Korea is in a
different category. North Korea has depended on illegal or
questionable procurements for decades for its nuclear and other
military programs. And as the chairman pointed out, they have
gone offshore quite successfully to be able to acquire those
goods.
And they don't just acquire them, let's say, in a country
such as China. They are able to get those goods from the United
States, Europe, and Japan by operating in China and exploiting
China's weak export control and sanctions legislation.
Although China is improving its export control laws,
Beijing has certainly not done an adequate job of enforcing its
laws and sanctions against illegal exports and re-transfers to
North Korea. And I have provided several examples in my
testimony.
China remains North Korea's central, perhaps unwitting
supply conduit for its nuclear weapons program. And one of the
priorities is to change that. The Trump Administration's
efforts to sanction Chinese, and for that matter Russian-owned
companies and individuals that significantly support North
Korea's weapons programs, are a positive step.
But unless China and Russia show dramatic improvements in
ending their nefarious trade with North Korea, the United
States should go further and sanction major Chinese and Russian
banks and companies for any illicit North Korea dealings.
Both countries have gotten away with for far too long, and
have faced too-few consequences, for turning a blind eye to the
sanction-busting business activities of their citizens and
those of North Korea in using their economies for nefarious
purposes.
North Korea has a diplomatic path out of its isolation and
sanctions if it negotiates a full, verified denuclearization of
its nuclear and long-range missile programs. Any such
negotiations would need to repair past mistakes where North
Korea was able to evade inspections and continue expanding its
nuclear programs.
An agreement would also need to allow unprecedented
inspections and access allowing for a full accounting of the
program as part of a denuclearization process. Although this
prospect seems unlikely in the short term, given North Korea's
current trajectory, it is important to keep this goal available
as a matter of U.S. policy in case increased sanctions can
convince North Korea to negotiate in earnest.
Likewise, the Trump Administration should continue to make
clear that regime change is not its goal. And particularly if
the goal is to seek cooperation from China, that becomes even
more important.
Chairman Barr. The gentleman's time has expired.
Mr. Albright. Okay.
[The prepared statement of Mr. Albright can be found on
page 40 of the appendix.]
Chairman Barr. Thank you. We will look forward to the
remainder of your testimony during the question-and-answer
session.
And, 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.
Often, U.S. policy toward North Korea gets stuck in a cycle
whereby a North Korean provocation is met with a strong
American rhetoric and/or a token increase in sanctions, a
pattern repeated over and over. If we don't break this cycle,
the Kim regime can keep distracting the United States with its
repeated provocations. We must ensure that the U.S. response to
every North Korean provocation advances our goal of
denuclearizing North Korea.
Some experts will call for the White House to negotiate a
freeze of North Korea's nuclear program with claims that it
will reduce the threat and eventually lead to denuclearization.
But we have seen this movie before and its ending is not
encouraging.
North Korea has made it clear that it has no interest in
denuclearization. To the extent that Pyongyang is interested in
negotiations, it is only for the purpose of extracting
concessions in exchange for promises it will quickly violate as
it did with the 1994 agreed framework.
In testimony before this subcommittee in July, I noted that
U.S. sanctions did not have a serious impact because they have
neither sufficiently targeted enough of Pyongyang's
international business, nor have they targeted non-North
Koreans facilitating sanctions evasion. Fortunately, this
appears to be changing. The Trump Administration has started to
sanction North Korea's international business partners.
Since March 31st, the U.S. has sanctioned 43 persons, of
whom 86 percent operate outside North Korea and 54 percent are
non-North Koreans. But this work is not done. As I note in my
written testimony, recent U.S. actions against North Korea
reveal three methods Pyongyang uses for financing prohibited
activities.
In slide one, the first method starts with North Korean
revenue in China following the sale of commodities brokered by
Chinese firms and individuals. The payment then moves through a
North Korean bank. Moving left to right, from there, the funds
move to a Chinese company and then a front company that
accesses U.S. banks. This only happens because the U.S. banks
are tricked into processing the North Korean transactions. This
is how payment is made for the original item in U.S. dollars.
This method is important to highlight with recent reports
that Chinese banks have cut off North Korean accounts. The
method relies on a ledger system between North Korea and China
where the Chinese firms and individuals hold these bank
accounts.
Slide two, please.
The second method was identified by the Justice Department
based on information from an unnamed North Korean defector. On
the left side of the slide, Chinese entity one owes money to
North Korean entity one while North Korean entity two owes a
similar amount to Chinese entity two. The entities pay each
other, given the difficulties of moving money over the China-
North Korea border.
Slide three, please.
The third method was used by a Russian company to receive
U.S. dollars for a shipment of gas and oil to North Korea.
Again, this is very important, given the new resolution that
restricts energy sales.
A U.S. bank would not process this transaction between
sanctioned parties. To avoid this scrutiny, the front companies
were created in Singapore to obscure the nature of the
transaction, allowing almost $7 million in payments for this
transfer.
All three methods show that North Korean suppliers prefer
U.S. dollar payments, providing a key vulnerability that
Washington can exploit. This is why it is crucial for the Trump
Administration to issue fines against Chinese banks that are
facilitating North Korea sanctions evasion, matching the
successful U.S. policy, as the chairman said, used to pressure
European financial institutions that were facilitating Iran
sanctions violations. The fines likely will prompt Chinese
banks to increase scrutiny of North Korea-related transactions.
To be clear, if nongovernmental organizations here in
Washington can find these transactions, I am confident the
largest banks in China, with its significant manpower, can find
them, too. Chinese banks need to do more or face severe
consequences.
In the meantime, it is important to remember that there are
other political considerations at play. Pyongyang is trying to
decouple the United States from our closest allies in South
Korea and Japan. The Kim regime's ultimate goal is not a
suicidal nuclear attack on the U.S. homeland, but rather using
that threat to bolster Pyongyang's effort to reunify the Korean
peninsula and intimidate our Japanese allies.
A sanctions approach that focuses on North Korea's
financial activities has the best chance of success.
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 78 of the appendix.]
Chairman Barr. Thank you, Mr. Ruggiero.
Ms. Rosenberg, you are recognized for 5 minutes.
STATEMENT OF ELIZABETH ROSENBERG, SENIOR FELLOW AND DIRECTOR,
ENERGY, ECONOMICS, AND SECURITY PROGRAM, CENTER FOR A NEW
AMERICAN SECURITY
Ms. Rosenberg. Thank you, Chairman Barr, Ranking Member
Moore, and distinguished members of the subcommittee. I
appreciate the opportunity to testify before you today.
North Korea's alarming and dangerous recent ballistic
missile launches and its sixth nuclear test highlight the need
for much stronger pressure on the regime to limit its
proliferation activities and cease its provocations. Financial
sanctions should be a core part of a pressure strategy along
with force posture and projection and complemented by a
diplomatic engagement to move North Korea toward stability and
denuclearization.
I applaud the work of Congress to impose new sanctions
authorities this past summer to tighten financial pressure on
North Korea along with complementary new sanctions from the
United Nations. However, non-enforcement and evasion is gravely
concerning, particularly when it comes to China, through which
flows the overwhelming majority of North Korean international
finance and trade.
For some observers, the lack of sanctions enforcement is an
immediate indication that the current sanctions framework is
inadequate and that the United States should make secondary
sanctions' shock treatment mandatory to force other countries
to comply with sanctions.
While current sanctions authorities are already very
aggressive to apply pressure on North Korea and its
international enablers, I support the efforts of this committee
to consider how mandatory secondary sanctions should be
deployed to enhance pressure.
We must not forget, however, that secondary sanctions
require delicacy in their application. They may be
counterproductive if they are so aggressive or politically
incendiary that U.S. partners become utterly defiant,
uncooperative, and create officially backed evasion schemes and
impose retaliatory sanctions or economic punishments on U.S.
firms abroad or a trade war.
Ultimately, avoiding pitfalls in the use of secondary
sanctions is primarily the responsibility of the U.S.
Administration. The body that implements and enforces
sanctions, Congress, must oversee aggressive sanctions
implementation, but also give the Administration adequate
flexibility, even within the framework of mandatory secondary
sanctions, to impose these measures and also manage their
consequences for the United States and its partners.
In addition to sanctions, U.S. policy leaders must deploy
another form of economic statecraft to target North Korea,
pushing for rigorous, risk-based approaches for global banks to
identify and curtail proliferation finance. Currently, only
large U.S. banks and some major European and Asian banks
holistically pursue proliferation finance, leaving all other
global banks significantly vulnerable to abuse by North Korean
or other proliferators.
For these other global banks, weak supervisory frameworks
and expectations, lack of knowledge and resources, and
insufficient prioritization of the threat means that they often
take a mechanical approach to proliferation finance in the form
of checking customers or transactions against entities
sanctioned by the U.N. or national governments, sometimes, but
not always, including the United States. This presents obvious
opportunities for proliferators to use front companies or
proxies to get around limited compliance controls outside of
major financial institutions. And we have just heard that
described in some of the examples offered by my colleague, Mr.
Ruggiero.
The global standard-setting body for countering illicit
finance, the Financial Action Task Force, endorses an approach
toward proliferation finance along the lines of checking
customers against sanctions lists instead of a risk-based
evaluation of suspected proliferation conduct or proliferation
typologies.
This limited approach is inadequate and we need much
stronger leadership from the United States to clarify that
global banks must take a more holistic, risk-based approach to
screening and investigation for proliferation finance and that
there must be stronger public/private information exchange
around known proliferation entities and typologies.
In my written testimony, I outline several specific points
in response to your legislative discussion draft and some ideas
for additional legislative measures. To briefly summarize a few
items, I support your tough approach on secondary sanctions and
encourage the inclusion of meaningful waiver provisions to
manage unintended consequences.
Also, I urge you to consider ways to provide additional
financial support for the Treasury and State Departments and
the U.S. intelligence community to expand the group of experts
crafting and enforcing U.S. sanctions and offering technical
assistance to foreign countries related to sanctions
enforcement.
Finally, Congress should mandate new bank supervision
requirements for U.S. banks extending to their foreign
branches, subsidiaries and correspondence related to
proliferation finance and facilitate greater public/private
information sharing on this topic to enhance global compliance
and to impede the proliferation threat.
Thank you for the opportunity to testify, and I look
forward to answering any questions you may have.
[The prepared statement of Ms. Rosenberg can be found on
page 71 of the appendix.]
Chairman Barr. Thank you.
And, Mr. Klingner, you are now recognized for 5 minutes.
STATEMENT OF BRUCE KLINGNER, SENIOR RESEARCH FELLOW, NORTHEAST
ASIA, HERITAGE FOUNDATION
Mr. Klingner. Chairman Barr, Ranking Member Moore, and
distinguished members of the subcommittee, it is truly an honor
to be asked to speak before you.
Although North Korean nuclear and missile programs are
indigenous, the regime requires access to foreign technology,
components, and hard currency. Pyongyang maintains covert
access to the international banking system through a global
array of overseas networks and shell companies. Most of North
Korea's financial transactions, and those of the foreign
entities that assist the regime, continue to be denominated in
U.S. dollars and thus are still going through U.S. banks.
While the challenges in imposing targeted financial
measures on North Korea may appear overwhelming, a closer
examination reveals several encouraging characteristics. North
Korea uses a limited number of trusted individuals to run its
covert networks. Although the shell companies can be swiftly
changed, the individuals responsible for establishing and
managing them have remained unchanged, often for years. By
embedding their illicit activities into the global financial
network, North Korean agents leave behind a digital trail
making them vulnerable to targeted sanctions.
As C4ADS, a non-government organization using only publicly
available information discovered, while China accounts for
almost 90 percent of total North Korean trade, the entire
trading system consists of 5,000 companies. Those firms are
centralized among a smaller number of large-scale trading firms
so that the top 10 importers of North Korean goods in China
controlled 30 percent of the market. And those trading firms
themselves are controlled by a smaller number of individuals.
As such, the North Korean network in China is centralized,
limited, and therefore vulnerable. Therefore, targeting a
relatively small number of strategic choke points can have
disproportionate, disruptive ripple effects impacting multiple
networks across multiple countries.
Every law enforcement action could induce remaining
components in the network to change routes, bank accounts, and
procedures to less-effective means. Even legitimate businesses
will become more fearful of being entangled in illicit activity
and more fully implement required due-diligence measures.
Cumulatively, these efforts reduce North Korea's foreign
revenue sources, increase strains on the regime and generate
internal pressure on the regime.
Sanctions enforcement must be flexible, innovative, and
adaptive to the changing tactics of the target. But as North
Korea altered its modus operandi, international law enforcement
agents didn't keep pace. When North Korea shifted to Chinese
brokers, the U.S. and U.N. agencies should have begun including
them on sanctions lists that lagged.
To raise the cost of North Korean defiance, the U.S. must
go beyond sanctions and diplomacy to include a full-court press
to diplomatically and economically isolate North Korea from the
international community and introduce tremors into regime
stability.
For too long, successive U.S. Administrations have used
sanctions as a calibrated and incremental diplomatic response
to North Korean provocations rather than a law enforcement
measure defending the U.S. financial system.
The U.S. should target any entity suspected of aiding or
abetting North Korean nuclear missile and conventional arms
development, criminal activities, money-laundering, or the
import of luxury goods. The U.S. should also end de facto
Chinese immunity from U.S. law. Beijing has not paid a price
for turning a blind eye to North Korean proliferation and
illicit activity occurring on Chinese soil. Washington has long
cowered from targeting Chinese violators of U.S. laws out of
fear of undermining perceived assistance and pressuring North
Korea or economic retribution against U.S. economic interests.
The North Korea Sanctions and Policy Enhancement Act
mandates secondary sanctions on third-country banks and
companies that violate U.S. sanctions and U.S. law. The U.S.
should penalize all entities, including Chinese financial
institutions and businesses that trade with those on the
sanctions list, export-prohibited items, or maintain
correspondent accounts for North Korean entities.
Washington should impose significant fines on China's 4
largest banks at a commensurate level to the $12 billion in
fines the U.S. levied on European banks for money-laundering
for Iran. And the U.S. should designate as a money-laundering
concern any medium or small Chinese banks or businesses
complicit in prohibited North Korean activities.
In conclusion, the most pragmatic U.S. policy is a
comprehensive, integrated strategy using all of the instruments
of national power to increase pressure in response to
Pyongyang's repeated defiance of the international community,
to expand information operations against the regime, to
highlight and condemn Pyongyang's crimes against humanity, and
to ensure the U.S. has sufficient defenses for itself and its
allies, while leaving the door open for diplomatic efforts.
Sanctions require time and the political will to maintain
them in order to work. It is a policy of a slow python
constriction rather than a rapid cobra strike.
Thank you again for the privilege of appearing before you.
[The prepared statement of Mr. Klingner can be found on
page 53 of the appendix.]
Chairman Barr. Thank you for your testimony.
And the Chair now recognizes himself for 5 minutes for
questions.
Earlier this month, Russian President Vladimir Putin argued
that the potential for North Korea sanctions to be effective
remains limited. He claimed that the North Koreans would,
``prefer to eat grass,'' rather than give up their nuclear
weapons.
How would you respond to those who claim that North Korea
can always weather sanctions, that sanctions are not an
effective means of providing substance and meaning to our
diplomacy, and that the Kim regime will never care if its
economy will suffer in order for him to advance his weapons?
And I will ask all of you to briefly respond to that
question.
Mr. Albright. I think sanctions can have a very big impact
in North Korea, partly for what you have been focusing on, they
are not implemented, so there is a lot of room to really press
North Korea to change its behavior. So I think it is an
extremely valuable tool.
I think part of the purpose of sanctions--I would like to
see North Korea eat its nuclear weapons. If that is what they
choose, that the sanctions should start to have a cost, and I
think that can actually be done. And particularly in North
Korea, I think it is more vulnerable because it is surrounded
by very big powers. This isn't like India and Pakistan or even
Iran. North Korea is a relatively weak state that is surrounded
by very powerful neighbors who increasingly, even in the case
of Russia, do not like its behavior.
Chairman Barr. Mr. Ruggiero, when you answer this question,
could you also address the issue that, of course, North Koreans
have been very creative in using third-country brokers, as you
testified, and front companies to mask their illicit
transactions? And as you answer the question, could you address
our draft bill and whether you think that banks and third
countries, above all China, actually possess the capacity to
identify these brokers, middle men, and front companies?
Mr. Ruggiero. On Russia, I would start with perhaps
President Putin should focus on his Russian companies that are
facilitating North Korea sanctions evasion, the ones that are
working with a North Korean proliferation entity called Tangun
that was designated by the U.N. in 2009, that the U.S.
sanctioned twice in the last couple of months. So perhaps if he
had his own companies implementing sanctions, they would do a
little bit better.
I would also go back to 2005 and my experience at that
time, that Banco Delta Asia was very effective in targeting
North Korea's financial activities. Now, there is a difference
here because North Korea is, frankly, not stupid enough to
concentrate all their financial activities in one bank.
In terms of being creative, certainly people criticized
sanctions because it is a game of whack-a-mole. And certainly,
it takes a lot of resources, it did with Iran, but they are not
invisible. As Mr. Klingner said, if C4ADS can find them, the
largest banks in the world can find them. And that is the part
I would highlight, amongst other things in the legislation, is
the due diligence.
If we are not having in particular Chinese banks and U.S.
banks looking for these activities, that is the problem, that
is the serious problem here.
Chairman Barr. Ms. Rosenberg?
Ms. Rosenberg. I would just add that China has a variety of
strong interests in ensuring that there is no money-laundering
occurring in their own economy, not just related to their
support or relationship with North Korea. So yes, I agree that
China has the capability to go after, investigate, and take
action on North Korean money laundering or the use of front
companies in the Chinese economy.
And if China, a country with extensive and sophisticated
capital controls and that has taken measures, including
installing facial recognition cameras at ATMs in order to
manage the flow of currency outside of China, then they can
certainly do a lot more to recognize some of these trusted
agents of the North Korean government that change their names
and change their legal entities in order to launder money
through China.
Chairman Barr. And Mr. Klingner, in the remaining time, if
you could answer the question. And given how North Korea has
evaded sanctions in the past, I wanted you to specifically
address your quote that every U.N. Security Council resolution
is an incremental step forward. Because of Chinese resistance,
what we have is incremental law enforcement because we get what
China allows us to have.
If the Security Council resolutions are incremental, can we
afford to just rely only on those, or do we need to do more in
Congress?
Mr. Klingner. Yes. I would tell Mr. Putin that sanctions
have several objectives. They are enforcing U.S. law, they are
imposing a penalty or a pain on those that violate our laws.
They put in place measures to make it harder for North Korea to
import items for their prohibited programs. It puts in place
tougher proliferation or counter-proliferation measures. And we
hope, with all the other instruments of national power, that
gets North Korea to abide by resolutions and laws. So I believe
in doing the right thing, even if it is difficult. Rather than
throwing up our hands in despair, I believe in rolling up our
sleeves and getting to work.
On implementation--
Chairman Barr. My time has expired. I will have to yield to
the gentleman from Illinois at this point, Mr. Foster.
Maybe you can follow up during the remainder of the time.
Mr. Foster. Thank you, Mr. Chairman.
And thank you to our witnesses.
The financial sanctions we are talking about seem to be
having two strategic goals. The first is to cut off access to
the technical components necessary for the development of what
looks to be many dozens of deliverable nuclear weapons in the
next several years.
What is the rough estimate? It has been widely reported
that there is a lot of indigenous capability to make components
inside North Korea at this point. So what is the rough amount,
what is the dollar figure, a decent ballpark estimate for the
dollar figure for how much they have to purchase outside their
country to execute that program that everyone is worried about?
Mr. Albright. I must confess, when we watch their business
of acquiring equipment, and we focus mostly on the nuclear
weapons program, they are buying things in orders of millions
of dollars and they are buying a lot. What they paid--
Mr. Foster. For example, is it a small fraction of a
billion dollars?
Mr. Albright. Yes. I would say for what--because they also
have an infrastructure that has been in place for 40 or 50
years that they have been paying for incrementally. So while I
see they seem to have no shortage of cash to buy things for the
nuclear program, it is not huge amounts of money that they are
using.
Mr. Foster. Yes. But in terms of trying to understand what
sort of leaks we could tolerate in a sanctions regime designed
to shut down their nuclear program, the answer is it would have
to be really prohibitively tight.
Mr. Albright. But these objects aren't, we have found
anyway--and even in the case of Iran where they put in place
more deceptive practices in their procurements, companies,
governments are pretty good at detecting these things. We get a
pretty good readout on a lot of what North Korea has acquired
over the years. And we use that both strategically to
understand their program and where it is going, but also
tactically you get a lot of information about the networks that
you can then act on.
The problem has been China is not cooperating. So a
company, let us say a German company in China is getting help
from its own government to try to defeat the North Korean
efforts, but the Chinese government isn't doing very much and
they are the ones who should be doing the most.
Mr. Foster. So the goal, rather than to actually cut off
money, which is a tough thing, is to actually increase
information and increase our shaming ability towards--
Mr. Albright. But once you identify the goods, you can then
move to cut off the financing because they have to pay for it,
as my colleagues have talked about. And so I think these things
build upon each other. And I think I would agree that going
after the money is the way to hurt them the most.
Mr. Foster. The Chinese are well-known to be sort of past
masters at shuffling around money in black markets. The
cryptocurrencies alone are just enormous compared to the amount
of fund transfers that we are talking about having to detect,
so that is my read.
The second part of the question, the second strategic goal
is actually to put pressure on the general economy. You
mentioned fuel, luxury goods, things like that. And the
strategic goal there seems to be to put the fear in the
leadership in North Korea of some sort of general unrest.
And my big worry on that is that if that actually comes to
fruition that it will be interpreted as a decapitating strike
or something like that may trigger even a preexisting plan to
retaliate certainly against our allies, which, as you
mentioned, are very hard to defend against given their current
nuclear capability.
And so I was wondering if you have any thoughts on that, on
the sort of risks that we are heading for?
Mr. Albright. I think, again, if the question was directed
at me, and maybe someone else can answer.
Mr. Foster. Ms. Rosenberg?
Ms. Rosenberg. In addition to those two goals that you
outlined, I would add a third, which has become what I see as a
primary goal for Congress in contemplating mandatory, secondary
sanctions now. That third goal is, putting pressure
specifically on the foreign or third-country enablers of North
Korea's either specific proliferation programs or their economy
more broadly.
So going after China in particular, Chinese government
entities, or private institutions, banks, and companies, to
encourage or compel their greater activity to advance your, as
you outlined, goals one and two.
Mr. Foster. Yes, Mr. Klingner?
Mr. Klingner. One of the functions of the pressure tactics,
along with increased information operations and ensuring
sufficient defenses, is to put greater pressure on the regime's
stability. We want to make Kim Jong-un fearful of regime
stability if he continues down the path of defying the
international community.
That said, I disagree with those who advocate a regime
change through a decapitation strike, either special forces or
limited military strikes or a more general invasion. I think we
are in a long-term game. It is like the long Cold War strategy
against the Soviet Union. We are deterring, defending,
pressuring, and seeking to undermine.
Mr. Foster. Thank you.
Chairman Barr. The gentleman's time has expired.
The Chair now recognizes the Vice Chair of the
subcommittee, the gentleman from Texas, Mr. Williams.
Mr. Williams. Thank you, Mr. Chairman.
And thanks to all of you witnesses for your testimony this
morning.
North Korea continues to destabilize Southeast Asia and
threaten the safety of the United States and our allies in the
region. The aggression shown by Kim Jong-un is equally as
concerning as the methods he uses to finance his hostile
activity. As the United States develops its strategy to further
curb the threat posed by the DPRK, we must consider the
profound effect that other nations have in enabling their
actions.
Because Kim has proven unresponsive to sanctions imposed by
the West, we must consider actions to target and cut off the
governments that prop him up. Nations that are unwilling to cut
ties with the rogue regimes that encourage mass destruction,
suppress their people, and threaten global security should not
be in business with the United States of America.
So with that, Mr. Klingner, can you explain the decision
that China is faced with when determining whether to do
business with the United States or continue financial and
technological support with North Korea? And furthermore, is
this a geopolitical issue for China, or is their investment in
North Korea so substantial that there are severe financial
implications to cutting them off?
Mr. Klingner. What I would focus on is those entities that
are acting against the U.N. resolutions as well as
international and U.S. law, so entities that are violating our
laws by misusing the U.S. financial system, the money
laundering and other criminal acts, or that are engaging in
facilitating the North Korean nuclear and missile programs.
So I would focus on more of a law enforcement basis of
going after those entities, banks, businesses, individuals,
that are violating laws and resolutions.
Mr. Williams. Okay. Another question, let me follow up. If
the DPRK eventually falls, what do you believe will be the fate
of the North Korean people who have been exposed to decades of
propaganda and oppression? And do you believe that they can
adapt to a new way of life or a new form of governance?
Mr. Klingner. I think the answer really, sir, is we don't
know. They have been isolated for decades. They have been fed a
daily diet of propaganda. That said, increasingly, information
from the outside world is getting in. So whether they believe
the propaganda is a question we debate amongst ourselves. I
think it varies by individual and by certainly the access they
have to outside information.
So that is one of the reasons, like with East Europe and
the Soviet Union, we are trying to get information into the
regime as much as we can to have the citizens question the
propaganda that their government gives them.
Mr. Williams. Thank you.
Mr. Albright, can you discuss the level of nuclear
cooperation that North Korea has with other countries? And who,
outside of China, do you believe to be of the greatest concern?
Mr. Albright. North Korea had considerable nuclear
cooperation with Syria, including essentially building a
nuclear reactor which was bombed by Israel in 2007 prior to its
operation. After that, it has been much harder to track any
nuclear cooperation.
There are suspicions that something could happen between
North Korea and Iran and that is a very active area. But as far
as I know, nothing substantial has been found.
During the six-party talks, North Korea committed in a
Singapore minute not to engage in proliferation. Obviously, we
don't believe that is true. But I think it is on notice that if
it does engage in significant nuclear cooperation it will be
incredibly significant and can trigger or cross a red line that
would be very hard for the United States not to take very
draconian action, including even military action, if it
involved plutonium, weapon-grade uranium, or a nuclear weapon.
Mr. Williams. Okay, thank you.
And, Mr. Ruggiero, can you discuss the ways in which the
U.S. Government exposes and then targets money-laundering
activity related to DPRK? And if we impose secondary sanctions,
are you confident that we can identify illicit transactions and
stop them?
Mr. Ruggiero. I think what we are seeing now, in particular
with China, is that the Trump Administration is using a
combination of the Justice Department tools and the Treasury
Department tools. On six occasions since late May, they have
used those tools to target money launderers in particular,
those who are trying to do financial transactions through the
United States, whether it is designations, requests for asset
forfeiture, or the new one was what are called damming warrants
which we are setting that up in U.S. banks, understanding that
Chinese banks were going to do the transactions through U.S.
banks.
We need more of that. We need nongovernmental organizations
exposing these networks and we need the U.S. Government in
particular putting the right amount of resources, like we had
on Iran, on this problem. And I am not sure that latter part is
happening yet.
Mr. Williams. Thank you.
Thank you, Mr. Chairman.
Chairman Barr. The gentleman's time has expired.
The Chair recognizes the gentleman from California, Mr.
Sherman, for 5 minutes.
Mr. Sherman. Mr. Chairman, I want to commend you on this
bill draft. I look forward to working with you on it, and I
look forward to cosponsoring it.
Chairman Barr. Thank you.
Mr. Sherman. But I have been doing this for 20 years. And
for 20 years--I want to applaud you for getting these witnesses
here, I have heard them often, and they have enlightened me--I
have sat on the Foreign Affairs Committee, and Administration
after Administration, expert after expert has come forward and
we have gone from no nuclear weapons in North Korea to hydrogen
bombs and near-ICBMs in North Korea.
What is less well-known is that we have seen a 50 percent
increase in the real GDP of North Korea, even while this regime
is subject to sanctions, and then we are told we are going to
change this with, ``unprecedented sanctions,'' which just means
a little bit more than what we have been doing before.
Now, hydrogen weapons, ICBMs, 50 percent GDP growth, some
would say our policy has been a failure. But viewed another
way, our policy has been a tremendous success, a success for
the political class in Washington. We have been able to tell
Americans we are doing all we can to protect them and don't
blame us, and at the same time we have avoided doing anything
that is difficult for the political class in Washington.
What would those too difficult things be? The first would
be to move beyond company sanctions to country sanctions.
Because these witnesses are experts in how we can tell China
goes after this bank instead of that bank, but as long as China
wants North Korea to be relatively stable, they will find a
bank that will do business with them or they will set one up.
And yet, country sanctions would be very difficult for the
political class here in Washington because that would really
concern big companies who would wonder whether there is some
risk to their supply chain.
The other thing we haven't done because it is politically
difficult is to set realistic objectives. We keep banging the
table and saying we are going to get this regime to give up all
its nuclear weapons. Saddam's dead, Gadhafi's dead and Kim
Jong-un does not want to join them and he is not going to give
up all his nuclear weapons. And if he thought his regime was
falling, he would use them.
So I want to commend you, Mr. Chairman, for the more
realistic objective you have in this bill, because you sunset
it upon verifiable limits on the nuclear weapons program. We
might achieve those. So you have done something that those who
spend their time on foreign affairs have been unwilling to do,
and you have taken a very constructive step. But I have seen
this go on.
Let me ask Mr. Albright, if Kim Jong-un really thought his
regime was going down, would he shrug his shoulders and go to
The Hague for trial or would he use his nuclear weapons?
Mr. Albright. I think if there was a conflict going on, I
would imagine that he would use them. But if he is knocked off
by some of his military generals, then he very well may not use
them. So I think it depends on how this unravels.
Mr. Sherman. So we can hope that they are saner and more
peaceful than he is.
Mr. Albright. I think they would be moving to survive, and
I think they would want to accommodate the neighbors.
Mr. Sherman. I will point out, Saddam's people didn't do
that to him, Gadhafi's people didn't do that to him, and many
of the people around Saddam and Gadhafi would have been worse
than their leader.
How has the North Korean economy grown by 50 percent--I am
trying to achieve 50 percent economic growth for my country--in
spite of all these sanctions, Ms. Rosenberg or anybody else?
Ms. Rosenberg. The first best answer to that is because
they have been allowed to do that by a broad culture of
noncompliance and nonenforcement with sanctions.
Mr. Sherman. Yes. Even if there were no sanctions, 50
percent economic growth, but I would also want to put this in
context. Their economy is only $15 billion today. They use as
much oil in the whole country as 150 gas stations. I have 150
gas stations on Ventura Boulevard. They grew from a very small
base and they are still very small, which makes the whack-a-
mole a little bit more difficult because we are dealing with
relatively small moles.
I yield back.
Chairman Barr. The gentleman yields back.
The Chair recognizes the gentleman from North Carolina, Mr.
Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman.
And I thank each of you for your expert witness today and
for the very important role that you play in these areas.
As you may know, I authored an amendment to NDAA that was
adopted. It would prohibit the Defense Department from doing
business with Chinese entities that provide material support to
North Korea's cyber attacks.
Earlier this year, I also led efforts to punish the Chinese
government-affiliated firm ZTE, located in the USA, for
violating export controls and selling embargoed technologies to
the North Korean government, which resulted in a billion-dollar
fine.
Mr. Ruggiero, in your opinion, should my amendment capture
ZTE? Is this an appropriate response? And would selling
embargoed technologies to North Korea to be presumably used for
cyber capabilities qualify as material support for North Korean
cyber attacks?
Mr. Ruggiero. On the amendment in terms of anything that
suggests that firms need to do better at identifying North
Korea transactions and North Korea companies, and I think an
amendment like that and the bill that is proposed by the
committee, the main goal is diligence and making sure that DOD
and others do not do transactions with companies in China.
On cyber, I would just point out that there has been some
focus on North Korea's cyber. There have been some reports
recently, I believe this month or this week, that North Korea
is looking at Bitcoin and other cyber-enabled technologies to
avoid sanctions, including trying to steal Bitcoin I believe
from South Korea. So that is certainly a different turn on
their illicit activities.
Mr. Pittenger. Do you believe these fines are an effective
deterrent?
Mr. Ruggiero. I think ZTE is a very interesting case. I
think that everybody would equate ZTE with a large Chinese bank
or large or medium-size Chinese bank. And I think, as you well
know, but others might forget, that ZTE actually agreed to that
fine and it was because ZTE was caught doing the transactions.
And I would also point out that there are some North Korean
front companies that are caught up in the ZTE--
Mr. Pittenger. Do you think, though, that it will be a
deterrent?
Mr. Ruggiero. I think, again, ZTE is--and I think for the
Chinese leadership, look, if you are a senior official in the C
suite of a Chinese bank, you have to be worried right now.
Mr. Pittenger. Sure.
Mr. Klingner, what other entities like ZTE provide the most
material support to any North Korean cyber attacks?
Mr. Klingner. I think a lot of the North Korean programs,
as I said before, are indigenous, but they do need technology
and components and knowledge.
Mr. Pittenger. Any specific ones you have in mind?
Mr. Klingner. I don't know specific companies right now,
sir.
Mr. Pittenger. Would you support blocking those firms from
doing business with the U.S. or with the Department of Defense?
Mr. Klingner. I think we should have a provision where you
can do business with North Korea or you can have access to the
U.S. financial system. So I think that is a choice that
companies should have to make.
Mr. Pittenger. Yes, sir.
Mr. Klingner, from a strategic standpoint, whenever we
discuss responses to North Korea, as you said earlier, we are
really talking about U.S.-China policy. And how can we better
compel the Chinese government to work with us on this issue?
Mr. Klingner. I think we need to separate law enforcement
from diplomacy. We can continue on the U.N. path and cajoling
and imploring and pressuring China to do more to implement
required U.N. sanctions, but we don't need Chinese permission
to enforce U.S. law. So we made clear to them that we are not
going to negotiate away our law enforcement. We have had
incrementally better U.N. resolutions, but we should not
incrementally enforce U.S. law.
Mr. Pittenger. Thank you.
Ms. Rosenberg, could you elaborate on data sharing between
the private and public sector that you mentioned in your
testimony and what we could do, what type of enhancement and
capabilities that could provide us and assist our efforts?
Ms. Rosenberg. Sure, thank you for the question. In my
written testimony, I outlined a couple of ideas that I think
would be a good opportunity for Congress to take action on
increasing data sharing among financial institutions. So
pursuant to Section 314(b) of the USA PATRIOT Act, instructing
the Administration to offer some new guidance and adaptation in
order to facilitate more information sharing between financial
institutions within U.S. jurisdiction. That will also transfer
to their--
Mr. Pittenger. Could this be done, protecting our privacies
while enhancing our capabilities?
Ms. Rosenberg. I believe that is absolutely feasible. To be
sure, it is not a walk in the park. There are a lot of serious
civil liberties and privacy considerations here. But if we can
pioneer this, as has been successfully done for the sharing of
terrorism financing information, then it can and should be done
for proliferation finance information as well.
Mr. Pittenger. Thank you. My time has expired. I appreciate
your comments.
Chairman Barr. The gentleman's time has expired.
The Chair now recognizes the gentleman from Arkansas, Mr.
Hill.
Mr. Hill. I thank the chairman for this hearing.
And I particularly appreciate the expertise of our
witnesses. And I share Mr. Sherman's compliments of their
longstanding work on this issue, and appreciate your service
for our government in office and out.
Bill Newcomb from Johns Hopkins was here a few weeks ago to
talk on this topic and he basically, in response to my
question--I asked him, I said, we have been dealing with this,
as you have, for 3 decades now, 4 Presidencies, and I asked
him, are we ever going to get serious about sanctions on North
Korea? And why weren't these great sanctions proposed to
President Clinton or President Bush or President Obama?
And he said, ``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--meaning
North Korea--as a national security vital interest.''
Boy, that confused me because I watched TV in 2002 when
President Bush declared North Korea a part of the axis of evil.
So I am confused about why North Korea is so low on your
chart, Mr. Ruggiero. You have been in government. Why is it
that we are just now getting serious about North Korea? Tell me
your top three reasons why for 20 years we have not sanctioned
North Korea in an effective way?
Mr. Ruggiero. It has not been the foreign policy priority.
That is the bottom line. Whether you look at getting rid of the
sanctions against or giving the money back on Banco Delta Asia
in 2005, whether it is, and this is going to be bipartisan,
whether it is removing North Korea from the state sponsor of
terrorism, as Dr. Albright said, right after we discovered that
they built a reactor in Syria, or whether it is looking at this
Congress approving, insisting that North Korea be evaluated as
a primary money laundering concern. And when you look at that
detailed information provided last year, you see that financial
transactions went back all the way to 2009, you start to ask
the question, what have we been doing over the last 10 years?
And the answer unfortunately is that it has not been the
foreign policy priority. And when I hear people suggest that
this new Administration policy is the same as the prior one,
that is just frankly not true. As I have said, they have gone
after China six times, they have gone after Russia, they have
moved North Korea up the chart, but there is a lot more to do.
And to the question of how are we going to get from this
point to denuclearization, the point I would make on this
Administration is, Secretary Tillerson said it is a dial and it
is at five or six, it is the United States that is determining
that it is not at 20 right now, and that is what we really need
and it should be moved to an extreme level so that North Korea
will start to feel that impact.
Mr. Hill. I appreciate that. And I appreciate the work
Ambassador Haley is doing in the United Nations, but I don't
think it is a substitute for increased pressure by the United
States. And I thank the chairman for bringing this draft bill
before us.
You said, Mr. Ruggiero, in your testimony that another
suggestion was mandated inspection for North Korean vessels. Is
that a United Nations sanction? Is that an American sanction?
How does one do that and be lawful, how does one do that in a
legal manner?
Mr. Ruggiero. Right. I think the U.N. sanctions use the
phrase, and even the new resolution uses the phrase,
``reasonable grounds,'' that some kind of sanctions violation
or prohibited material are being transferred.
I believe, just as we did with Iran, you can create a group
of like-minded countries, probably South Korea, Japan,
Australia, the U.K., France, and Germany, that say we interpret
that clause to now say there are reasonable grounds that every
shipment that North Korea puts back and forth from North Korea
is a violation and that it is subject to inspection.
Of course, there are international laws with regard to
flag-state consent and master consent and all of that, that
would have to be worked out, but that would be a key element,
just like the proliferation security initiative in the 2000s.
Mr. Hill. Thank you, Mr. Chairman. I have other questions,
but I yield back.
Chairman Barr. The gentleman yields back.
The Chair now recognizes the gentleman from Ohio, Mr.
Davidson.
Mr. Davidson. Thank you, Mr. Chairman.
And thank you to our guests. I really appreciate your
testimony, written and verbal, here. I have enjoyed your
dialogue on the questions.
And I just want to say that perhaps we are shooting for too
low of a goal. It seems that our goal there is a non-nuclear
peninsula in Korea except that most of the parties don't really
want that outcome, and so it makes it a pretty hard outcome to
attain.
We seem to desire it, but we may be one of the few. South
Korea doesn't want the North to have it, and as long as we have
their back, I guess they are okay that they don't have it
themselves. Japan doesn't want it, but the list might stop
there, frankly.
And so I think it might make sense to set a higher goal,
which should have been our goal since 1950, which is an end
state that does not have the United States defending the North
Korean Peninsula or the Korean Peninsula altogether.
What would it take to do that? Well, it would take peace.
It would take the same sorts of conditions that led to the
United States minimizing our presence in Germany where the East
and the West have reconciled. And so we haven't really moved
down a path that pursues that. We have moved down a path that
continues to escalate and continues to make seeking nuclear
weapons somewhat rational for a really irrational guy,
generation after generation.
So I think that begin with the end in mind, maybe perhaps
why we have failed. Along with lots of other things that my
colleague Mr. Hill highlighted, failure to act in the past.
I do feel that we have a good track record in Iran to build
on. And we have had good track records in other situations to
use economic action to hopefully pursue a peaceful outcome to
our desired end states.
And I get that there are some concerns about trade with
China. They are certainly a key part of our supply chains, but
they are also a vital part of North Korea's supply chain. And
at some level, when you look at the risk on supply chain
management, I think we need to get to the point where we use
all of the levers of U.S. power to force, just like banks are
forced to know your customer, the rest of the world needs to be
forced to know your supplier. And part of that will be hard in
China. But to enforce these good sanctions that I think are
highlighted in the North Korea Sanctions and Policy Enhancement
Act, it may take that.
And, Mr. Klingner, I think you highlighted a number of
those things in your testimony. And I would just like to say,
or ask, how is it that we can take action down to the small
manufacturing company in China that has allied themselves with
someone from North Korea and they are moving products,
services, and cash back and forth? What tangible steps can we
take to close off that pipeline?
Mr. Klingner. I think there are a number of things and,
first of all, it is really having the political will to do it.
I have been surprised over the years that the U.S. has
hesitated to enforce its own laws to the same degree to North
Korea as we have done to a greater degree on other countries
for far less egregious violations.
So I think that the three reasons, I might say, are
naivete, wishful thinking, and lack of political will. We have
gone down the diplomatic path a number of times. We have tried
freezes before and they didn't work. I think we need to give
greater resources to the intelligence community and the State
Department and the Treasury Department and sort of unleash the
law enforcement.
If you talk to officials in the government, they will say,
yes, for years I have had a list of Chinese and North Korean
violators in my drawer, and I am sort of allowed to take out 10
or so every time there is a provocation and then I have to put
the rest back in the drawer. I think it is time to empty the
drawer, as it were, of going against all those entities that we
have evidence for.
Mr. Davidson. Yes, Mr. Albright?
Mr. Albright. I think many of these companies are becoming
multinational and some of them come to the United States for
their subcomponents. And I think what U.S. companies should be
doing and they haven't been doing it is gaining assurance from
those Chinese companies in writing that they will control the
end use of their product that contains U.S. goods.
I think that it is in U.S. law, but it should be applied
much broader to start to push these Chinese companies. If they
want to do business with the U.S., they have to meet our
ethical and legal standards that you are not arming, in
essence, our adversaries.
Mr. Davidson. Thank you.
My time has expired, but I get that my conclusion is that
we have an existing law in place, we don't really need more
laws, we need to enforce our existing laws.
I look forward to any other feedback with our office to
help bridge that gap. So thank you for your testimony.
Mr. Chairman, I yield back.
Chairman Barr. Thank you. The gentleman's time has expired.
The gentlelady from Utah, Mrs. Love, is recognized.
Mrs. Love. Thank you.
Thank you all for being here.
In the wake of North Korea's sixth nuclear test, the
proposal was circulated among U.N. Security Council members
that would have frozen North Korea's leaders' assets. Could our
witnesses just very quickly comment on the desirability of
expanding the prohibition in our draft legislation to include
the members of the North Korean government and the DPRK
Workers' Party?
We can start with you, Mr. Albright.
Mr. Albright. Yes, I think it is useful to do.
Mrs. Love. Okay.
Mr. Ruggiero. I think there is already an Executive Order
on that. I would go in a different direction. I would say the
issue on leadership assets is identification of those assets.
So anything that can be done to incentivize those folks in
banks in Europe in particular that might have information on
leadership assets, I think that would be more beneficial.
Mrs. Love. Ms. Rosenberg?
Ms. Rosenberg. I would certainly agree. And not just
gathering that information and reporting back to the United
States as a law enforcement matter, but also being able to
share that among other banks because there is never an instance
where money laundering exists only in one financial
institution. That will allow the variety of banks where these
different assets are located to understand them as a network
and to stop it.
Mrs. Love. Okay.
Mr. Klingner. I would absolutely go after leadership
assets. Last year, the U.S. finally designated Kim Jong-un, and
I believe nine others, for human rights violations, so we have
identified Kim Jong-un in the past. There is an Executive Order
issued in January, 2015, that gives us the authority to
sanction any member of the North Korean government simply for
being a member of the North Korean government. So I think we
can and should go after not only Kim Jong-un, but the other
senior leaders.
Mrs. Love. Okay. Along those same lines, Mr. Klingner,
could you discuss the potential for North Korea to assist
countries such as Iran in developing nuclear weapons and
advanced ballistic missiles?
Mr. Klingner. As Mr. Albright was saying before, I think
there has clearly been a missile relationship between North
Korea and Iran. The first Shahab-3 missiles that Iran paraded
were actually a hundred percent made in North Korea, they were
No Dongs and given a local paint job.
The information on nuclear cooperation is much more
difficult to get. We know North Korea was engaged in nuclear
cooperation with Pakistan through the A.Q. Khan network and
Libya and others, but the information with cooperation with
Iran is much more difficult to get, particularly outside of
government.
I think there clearly is a relationship on the nuclear side
between the two countries, but I think it is very hard to get
particularly unclassified information on it.
Mrs. Love. Mr. Albright, here is my connection between the
two. I am concerned that if we continue to just try and be as--
and we want to be as diplomatic as possible, we want to be able
to work with people who are willing to work with us. However,
we have seen North Korea be incredibly defiant. We have seen
them do test after test after test.
To me, and I don't know if you have these same concerns,
but it seems as if they are not a threat by itself, that the
proliferation of these activities can support nuclear ambitions
for other foreign regimes. Are you concerned about that at all?
Mr. Albright. Certainly. I think you have to be concerned
with North Korea, because they like to go and sell things of
value, and their nuclear assets are of increasing value. So you
have to worry about that a great deal and that has to be part
of what is watched for and in the messages delivered to North
Korea.
I don't think it was a coincidence that the Director of the
CIA was on FOX News the other day raising this issue. And so I
think it is important to send the signal that if North Korea
crosses that line and is willing to sell weapons-grade uranium,
plutonium, or nuclear weapons, that we will probably respond
militarily to take out that regime.
It may be a bluff, but I think it is important that that
line be maintained and I would say enforced. And North Korea
will get the message. They don't want to commit suicide.
Mrs. Love. I just have one more question. Given Beijing's
reluctance to take a harder line with North Korea, what
arguments should be brought to bear in order to convince the
Chinese that pressuring the dictators of North Korea is in
their self-interest?
Mr. Albright. One, China wants to be a responsible member
of the international community. So a lot of these arguments on
applying sanctions on Chinese companies are the same arguments
we used in the 1980s against Germany. It was at that point,
arming Pakistan, Iraq, Libya, Iran and probably several others
with the wherewithal to make nuclear weapons. So I think these
are not new arguments. And China wants to be responsible and so
it should start to act that way.
Mrs. Love. Thank you very much.
My time has expired. Thank you, Mr. Chairman.
Chairman Barr. The gentlelady's time has expired.
The Chair now recognizes the gentleman from Indiana, Mr.
Hollingsworth.
Mr. Hollingsworth. Good morning. I really appreciate
everybody being here.
And as everyone has reiterated already, this is an
important and timely topic and something we need to take with
grave earnestness. And so I appreciate the consistent testimony
that everybody here has provided.
One of the things that I really wanted to talk about was
making sure that we have partners that are engaged in this as
well. And Russia comes to mind, and my concern has continued to
be that they don't have an interest in enforcing sanctions at
the same level that we do and a willingness to combat this
issue. The more the United States continues to be, I will use
the word, ``distracted,'' and I don't mean that lightly, but
distracted by North Korea, the better off they may see
themselves.
And so, can you talk a little bit about what we can do to
engender some cooperation and willingness on behalf of Russia
to be able to participate in whatever solution this looks like?
And that is for any of the panelists.
Ms. Rosenberg. Thank you for the question for us. I think a
good strategy is one that we have discussed here primarily with
regard to China, but in this case applying it to Russia, which
is, using sanctions or other law enforcement actions to go
after specific Russian entities that are acting in violation of
sanctions or specifically in violation of the U.N. sanctions
so--
Mr. Hollingsworth. To what extent do you think the Russian
government would be able to shield those companies from the ill
effects of those?
Ms. Rosenberg. It is possible that they would try and do
that, certainly rhetorically, such as the dismissive rhetorical
gestures that we were discussing from President Putin.
Nevertheless, if those companies want to use U.S. dollars, then
they won't be able to if U.S. sanctions enforcement or law
enforcement measures prevent them from doing that.
And any Russian company or bank that wants to stay in the
good graces of the United States will be very reluctant to
facilitate such sanctions evasion activity going forward,
notwithstanding what their political top cover may offer them
at home.
Mr. Hollingsworth. So you really believe that these can be
efficacious, even without participation from the political
sector in Russia?
Ms. Rosenberg. I do. And we have seen that in other
instances not related to North Korea. For instance, in Iran, in
the era before there was broad international consensus about
the need for strong sanctions, going after companies and
speaking directly to them was a way to have them get out far in
front of their own governments on their willingness to abide by
sanctions.
Mr. Hollingsworth. Great. So the second question I have,
and really, I am just a business guy at heart, so one of the
things I think about is, what does success look like? When will
we know that this has been successful? What does that look
like? And what is the next step after that?
Obviously, we want, to the greatest extent possible, to
either slow down or stop the technical progress both with ICBMs
and nuclear/hydrogen weapons. But what does it look like after
that? What is the next step? We put in place these very, very
tight sanctions and we just continue them forever? Or kind of
tell us a little bit about what phase two would look like
beyond putting in sanctions that theoretically would work?
Mr. Albright. I think one is--I should emphasize we haven't
talked about this that much. The point of this is to have
meaningful negotiations. That would be a sign of success. If
North Korea, without accepting benefits, that is one new change
in this Administration compared to others. The benefits come
after the concrete actions, not a reward for negotiating.
But if there are meaningful negotiations that are toward
denuclearization, creating limits on their nuclear program, you
see intrusive inspections. Inspectors have never gone outside
of Yongbyon in North Korea, and yet we know there are other
sites.
And if there is movement toward a peace treaty, that is
also something that is actually important to work into this
whole process.
So I think on that side, we know it when we see it. And
with the new criteria that are being used that are really built
on avoiding the mistakes of the past, I think that we will know
it when we see it.
Mr. Ruggiero. I would just--I agree with most of that. I
would caution that we want to make sure we get out of the trap
of negotiations for negotiations' sake. I think from my
perspective, a freeze is not as valuable as some people think
it is. I think the next step, if we are talking about
negotiations, is a demonstratable step by North Korea of its
commitment to denuclearization, which would flip the
negotiations on its head.
And it used to be we freeze then we drag them to
denuclearization. We need to flip that on its head. But we also
have to recognize that this might not be the regime that is
willing to do that. And if sanctions can't get them there, then
perhaps we need to start having that conversation.
Mr. Hollingsworth. Your second point notwithstanding, I
very much agree with the first as well. I just want to comment
on the second in that making sure we don't just freeze here at
the precipice of ICBM, at the precipice of being able to launch
a nuclear attack, but instead move them back, because we have
seen their willingness to renege on promises before. I don't
want us to be a month, a year, a year-and-a-half away from an
ICBM and find them reneging in the future.
And with that, Mr. Chairman, I will yield back.
Chairman Barr. I thank the gentleman. The gentleman's time
has expired.
The Chair now recognizes the Chair of our Oversight and
Investigations Subcommittee, and also a member of the House
Foreign Affairs Committee, the gentlelady from Missouri, Mrs.
Wagner. She is recognized for 5 minutes,
Mrs. Wagner. Thank you, Mr. Chairman, for hosting this very
timely hearing.
In August, I traveled to Korea and Japan and China to
dialogue with our allies in the peninsula. And I had the
opportunity to visit not only the DMZ, but also to visit
Dandong where I watched Chinese trucks loaded with goods drive
across the China-Korea Friendship Bridge into North Korea.
Seventy percent of North Korea's trade passes over that
bridge. And it was a stark reminder that the United States
should prioritize secondary sanctions against the Chinese
companies and banks that sustain the regime.
Mr. Ruggiero, I have had the pleasure of hearing your
testimony in the Foreign Affairs Committee before. You wrote
that North Korea is the fourth-most-sanctioned country in the
world. And given the recent September U.N. Security Council
resolution, how would you rank North Korea today, given that
certain Chinese investments and trade efforts are grandfathered
in or exempted from the August and September U.N. sanctions?
How effective do you think the resolutions will be?
Mr. Ruggiero. I would just point out that February 2016 was
number eight. And when I testified before this subcommittee in
mid-July, it was number five, so it is moving up the ranks. But
it has a long way to go, unfortunately.
The way I like to look at it is very similar to Iran. In
2010, we had Resolution 1929. That was really the foundation,
and sanctions passed by this U.S. Congress and implemented by
the prior Administration were what put Iran over the edge and
led it back to the negotiating table. We need that here. We
have the U.N. foundation, but what we need is the U.S.
sanctions.
And I would just say, it is concerning to hear the Treasury
Secretary say, well, we are going to wait and see if the
Chinese implement the U.N. resolution. I think that is the
wrong approach. I think what we should be moving forward with
right now is U.S. sanctions against Chinese banks. We should
not give China a veto over U.S. sanctions. They might have a
veto in the U.N., but they should not have a veto over U.S.
sanctions.
Mrs. Wagner. I agree.
Mr. Klingner, barring a threat to the Kim regime's very
survival, Kim will never come to the negotiating table in good
faith, I believe. We must change Kim's financial calculus, as
we have discussed here, which is why comprehensive secondary
sanctions are so critical, I believe.
I appreciated your statement on increasing inspection and
interdiction of North Korean shipping. Would you support
mandatory secondary sanctions on ports that don't implement
required inspections?
I agree we must pay much more attention to this.
Mr. Klingner. I agree. And that is something that the
Congress has been looking at, particularly if a port doesn't
implement required sanctions, then measures such as any ship
cannot transit that port and enter the United States waters for
6 months or so. So it is an area that has been looked at.
One thing we have been hampered by in the U.N. resolutions
is that all of them have been passed with what is called
Chapter 7, Article 41 authority where we are not allowed to
board a ship on the high seas, even if it is suspected of
carrying nuclear missile contraband. So we have been advocating
Chapter 42 which would give us the authority to have Coast
Guard or law enforcement agencies intercept and board ships.
Mrs. Wagner. Doesn't the recent package allow us to board
now and others on the high seas in terms of member states? I
think they have some new tools, don't they, to stop high-seas
smuggling of these prohibited products?
Mr. Klingner. I believe that was included in the original
U.S. draft, but it was something that I think was tossed
overboard, as it were, that did not make it in the final
resolution.
Mrs. Wagner. Yes, Mr. Ruggiero?
Mr. Ruggiero. I think that it is the ``reasonable grounds''
standard, but it still goes back to what Mr. Klingner is
saying. You need flag-state consent or masters consent in order
to board the ship.
Mrs. Wagner. Okay, quickly here.
Mr. Albright, in my view, North Korea already has nuclear
weapons. For my constituents without access to classified
information, it would be helpful if you can explain from public
sources how many nuclear weapons the Kim regime may have and
where they may be.
Mr. Albright. Yes. We estimate they have 13 to 30 as of the
end of 2016. It is a rough estimate. We have no idea where they
are.
Mrs. Wagner. Thirteen to--
Mr. Albright. Thirty. And I think the U.S. Government
estimates are higher than that. But I have worked on this
problem since 1985 and I have visited North Korea a couple of
times, met their nuclear people, and I think they are not
giants technologically and they encounter problems. So that
estimate tends to be lower than the U.S. Government one, but it
is still a significant number and it is growing.
Chairman Barr. The gentlelady's time has expired.
Mrs. Wagner. Thank you, Mr. Chairman, for your indulgence.
And thank you, Mr. Albright.
Chairman Barr. Thank you.
And because of the interest in the witnesses' testimony,
Members here I think are interested in a second round of
questioning. If we can seek the indulgence of the witnesses for
a brief round, we would appreciate that.
And with that, I will recognize myself for an additional 5
minutes of questioning.
Just to revisit this issue of effectiveness of sanctions,
and you all heard the comments and questions of my colleague
from California, Mr. Sherman, on that point. That over the last
several decades, there has been maybe a lower priority, but
there have been sanctions nonetheless on North Korea. And yet,
we have seen a continuous belligerence, a continuous
development and an acceleration of the development of the
nuclear program and the capabilities of the Kim regime,
particularly in recent years.
So my question to anyone who wants to answer is, what is
different, if anything, about the foreign policy, the sanctions
efforts of the current Administration, particularly the efforts
of Ambassador Haley and the U.N. sanctions packages that she
has been able to secure at the United Nations?
We will start with that question and start with Mr.
Albright.
Mr. Albright. Yes. I think one is I would like to go back.
U.S. policy has been to try to stop North Korea from acquiring
goods. And in the 1980s and 1990s, a lot of effort was made to
kick them out of Europe because their missions would go to
companies and buy the goods for their nuclear program. And they
were kicked out.
What was not anticipated was that they would move to China
and set up shop there and buy the same goods from European
companies, get them to China and then send them by truck up to
the nuclear program.
And so the problem has been, and this is, I would say, the
most important change to me, this Administration, is they are
willing to risk trade conflict with China to solve this
problem. And since China has set up shop in North Korea, the
Administrations have not been willing to do that until this
one. And I think that is critical.
Mr. Ruggiero, as you answer that question, you have read
the draft proposal, the draft bill that we have presented to
you. Could you comment on that bill and the extent to which it
would ratchet up this pressure through secondary sanctions on
the regime?
Mr. Ruggiero. From my approach, we tend to get ourselves in
this provocation response cycle and we have done that over the
last 10 years. But I agree with Dr. Albright that this
Administration has gone after China and Russia to an extent
that we haven't seen before. It needs to be sustained.
I think in the past, we have convinced ourselves--I
personally have written, I have delivered, I have been in the
same room when these have been delivered, we give China a list
and we convince ourselves we have done a tough way forward and
the Chinese just sort of hand wave and we are okay with that.
In terms of the legislation, I noted earlier the due
diligence component. But I would also, beyond the various
legislations that are out there, it is oversight, because I
think that the key aspect here is ensuring that these bills
that eventually become law are actually implemented.
There are many companies that are still not sanctioned and
should be subject to sanctions, even from the sanctions law
last year.
Chairman Barr. And could I just ask, Mr. Klingner, on the
heels of that answer, again, revisiting your comment, that the
importance of the distinction between the U.N. incremental
enforcement and the U.N. sanctions, the two rounds of U.N.
sanctions, and Congress and the Administration and the United
States acting independently. How much more pressure would the
legislation being proposed or U.S. independent additional
action on secondary sanctions, how much of a difference would
that make above and beyond the most recent round of U.N.
sanctions?
Mr. Klingner. Right. As I have said, the U.N. sanctions,
each one is incrementally better than the last. We can be
cynical or positive about moving the ball a few yards down the
field. But the U.S. actions, I think, are critical. They are
measures that we can do ourselves. We don't need permission by
China.
And to be honest, I don't see why we are having a debate
about whether we should be implementing secondary sanctions.
They are enforcing U.S. law, why should anyone be against
enforcing our law to the fullest degree?
So the legislation as well as the oversight through which
Congress can hold the Executive Branch's feet to the fire to
try to push them to fully enforce the laws that are either on
the books or could be on the books. The three main actions the
Obama Administration did last year were really because they
were pressured through the North Korea Sanctions and Policy
Enhancement Act.
Chairman Barr. I think the difference here is, it is the
things that you mention, but it is also an issue of lax
enforcement. So enforcement is very, very critical. The U.N.
panel of experts points to continued lax enforcement of U.N.
sanctions by foreign countries, so these secondary sanctions, I
think, are absolutely critical in applying the additional
peaceful pressure.
And I will let Ms. Rosenberg conclude on that point. Do you
think these secondary sanctions would make a difference from
previous efforts?
Ms. Rosenberg. I do. I think we have seen that happen in
the last year and this year as well. And I think it would do
more.
One of the challenges about the new U.N. security measures
passed this week are that, of course, they are not self-
reinforcing and where they rely on a reduction or a cap on, for
example, petroleum, that is something that the U.N. will have
to do accounting on. We have problems with inaccurate or
unavailable data with countries, member states not feeding the
data to the United Nations. So I think there is a very high
likelihood that we are not going to see compliance with this,
even just as a matter of arithmetic and slow and poor
reporting.
What that means is that when the United States can impose
its secondary sanctions to call out and highlight where foreign
countries are not undertaking their requirements as U.N. member
states, it will have a major and significant effect in bringing
them where they are willing to cooperate to do so.
Chairman Barr. My time has expired.
And I will now recognize the gentleman from Arkansas, Mr.
Hill, for a second round of questioning.
Mr. Hill. Thank you, Mr. Chairman.
We also learned in our previous testimony on this subject
that in the Standing Committee in the Politburo in China, two
of the seven members are from provinces that abut North Korea,
and that the presumption is that one gets on the Standing
Committee of the Politburo by hitting goals established on
economic development, et cetera.
So I am interested in your view on China's seriousness
here. And do you think that they can recognize what Secretary
Tillerson has laid out quite clearly, that we don't have aims
for U.S. presence or Western presence at their border?
And so given that, comment on that Politburo political view
from your point of view. And also, do you anticipate that China
would be more helpful after they have their significant party
congress that I believe is to be held in October? In other
words, let's talk about the politics in China, about them
understanding the United States' sincerity in ending this issue
once and for all.
Mr. Klingner, do you want to start?
Mr. Klingner. I think China is as helpful as it needs to be
to prevent the U.S. from taking further action on our own. The
message that has been given to China, but I think needs to
given and more forcefully is, you don't want a crisis on your
border, but your lack of pressure on North Korea is only
encouraging Pyongyang to continue going down that path that you
don't like. It is also inducing the U.S. and its allies to take
defensive measures, missile defense, et cetera, that China
doesn't like, but we are being pushed into it by your ally.
So you can pay me now or you can pay me later. You need to
increase pressure or we are going to head toward that crisis
you don't want, China.
Mr. Hill. Your assessment of, will their diplomatic or
public position be any different after they complete their
party congress?
Mr. Klingner. I have become pretty cynical about North
Korea and China. And I think it is just that they talk well,
they implement sanctions for about 1 to 4 months after each
U.N. resolution, and then they back off.
Mr. Hill. Mr. Ruggiero, any comment on that?
Mr. Ruggiero. I agree 100 percent. I think that anyone who
believes that China will be more cooperative after the party
congress is falling into Beijing's trap again. Everybody said
they had a good summit at Mar-a-Lago, and the Chinese were
onboard. And it turned out that they were not onboard.
Unfortunately, I can do that over the last 10 years. That has
happened time and time again.
And to your question on how do we measure seriousness, I
think that is a good question. How I measure it is the Chinese
should not be closing North Korean accounts, they should be
closing their own nationals' accounts. And they should be in
Dandong stopping those trucks from going over the bridge. They
should be in those companies and saying here are the sanctions,
how are you implementing them? They should be in those banks
doing the same thing.
Until they do that, they are not serious.
Mr. Hill. I appreciate it.
Dr. Albright?
Mr. Albright. I agree. I don't know Chinese politics, so I
can't really say. But I would agree with Mr. Ruggiero that we
do need signs of seriousness. And I can give an example: If a
country wanted to inspect the customs areas at the border with
China and North Korea, a country with vital trade arrangements
with China, and they weren't allowed in. They were literally
blocked by the private company running the customs storage
area.
So I think it is these signs that we are looking for. And I
would love to see some Chinese busted. I have been involved in
Federal prosecutions of at least one Chinese national
prosecuted successfully here. He was never or his colleagues
were never prosecuted in China. And so I think these signs are
critical.
Mr. Hill. So, Ms. Rosenberg, enforcement we know, and
upping the ante, but talk about, who is a bigger trading
partner of China, the United States or North Korea? And can we
use that stick?
Ms. Rosenberg. There is certainly no question there. And to
refer back to the question posed by the Chair at the beginning,
what has changed, one thing I will say and apropos of what you
have just said is the willingness of the current U.S. President
to offer tough rhetoric on North Korea, including raising the
possibility of whether trade can and should occur between the
United States and China, even if that is just meant to send a
really strong signal, that is different and that has clearly
been a huge wake-up call.
So obviously now the devil is in the details. How do you do
implementation? And to be frank, when we have seen China comply
with other international sanctions frameworks for Iran and
Russia, even others, when they have gotten with the program, it
has never looked like them saying to U.S. diplomats, who go sit
there and pass some intelligence, we got this, we are with you.
It comes under a different guise.
And so I would welcome seeing China come forward with its
own domestic law enforcement or regulatory action against
certain companies as a matter of going after money laundering
or prosecuting corruption, which they clearly have an interest
to do. And if it happens to have an effect on their
relationship with North Korea, all the better.
I don't need them to get out in front. And they will have a
problem politically looking like they are capitulating to U.S.
sanctions, but if they do it as a measure of domestic financial
sector integrity, all the better.
Mr. Hill. I agree with that.
Thank you, Mr. Chairman.
Chairman Barr. The gentleman's time has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green.
Mr. Green. Thank you, Mr. Chairman.
And I thank the witnesses for appearing as well.
And I would indicate that we have had many duties related
to some adverse circumstances that we have encountered related
to bad weather, and that is putting it mildly, and these things
have attracted my attention, so my apologies for not being here
for the entirety of the hearing.
I am concerned about the sanctions. I do have some
questions that probably have already been posed, so please
forgive me for being redundant or superfluous.
My initial question is, if we can perfect the sanctions as
codified, what would be the impact on China, first? And then I
would like to move to a secondary portion of the question,
which relates to the impact on North Korea.
So on China, what would be the impact if we perfect these
sanctions as codified?
And I will leave this question to whomever would like to
respond initially.
Ms. Rosenberg. Thank you for the question. I think that a
way to perfect or improve upon the sanctions that exist, and
they are extensive and they are powerful, is to go after them
prosecuting an aggressive strategy of implementation and
enforcement.
And that may or may not include secondary sanctions
measures, but by making an example of these sanctions and
calling out the companies in China, certainly in North Korea,
entities and persons, but also in China and other international
facilitators of North Korean proliferation entities or its
economic activity, that is a strong and important way to
improve upon these sanctions and make them more efficacious.
Mr. Green. Thank you.
The efficacy of the sanctions, please, would you care to
respond, sir?
Mr. Ruggiero. I would just take a step back. There is
obviously going to be an impact on Chinese companies and North
Korean companies. But I think as Dr. Albright noted, China has
been a problem for a long time in terms of proliferation,
whether it is with Iran or North Korea.
A successful goal could be that China finally realizes that
just issuing a notice from their commerce department with a
list of goods that are prohibited is not enough, that they need
to do more, engaging their own companies, engaging their banks,
and law enforcement actions, inspections at the border,
authorizing other countries to do those inspections.
The Chinese are, in a lot of ways, the center of a market
and it is the market for proliferators and that is a problem.
And until they realize that they have to change their ways, we
are unfortunately not going to be successful.
Mr. Green. Let me follow up with this question. If we
perfect the sanctions proposed in their entirety, what will be
the impact on North Korea?
Mr. Albright. One impact would be probably their gas
centrifuge program that makes weapon-grade uranium would
probably stop at some point. It may take a year or two. But
they do depend on what we would consider perishable goods in
order to operate that plant and they don't make those goods.
So I think if we had a perfect set of sanctions, I think
you could cause serious damage to the progress of their nuclear
program. You couldn't stop what they already have, but you
could stop more.
Mr. Green. Please do not assume that I have a position
based upon the questions I am posing. I think that these are
some things that I just need to hear answers to.
The next question has to do with China's position that if
the sanctions create turmoil to the extent that North Korea
becomes a government that no longer exists for all practical
purposes and people start to flood into China, they have always
raised that as a possibility. Is it possible that these
sanctions could create such a circumstance if completely
implemented against North Korea? Because China is a means by
which we get to North Korea, so would that create the breakdown
in governments?
Mr. Albright. That is China's fear. There has been some
newer talk in China that, in anticipation of that, the people's
army would occupy part of North Korea in order to block
refugees coming into China and also to build housing for--
Mr. Green. So the expectation is that China would somehow
seal North Korea such that people in North Korea could not
migrate into China?
Mr. Albright. There is discussion of that. It has been on
the table a long time, but the discussion is recurring. But
China fears that and that is part of the problem. China fears
that the instability of North Korea could create problems for
itself, and it worries about that more than it worries about
North Korea's nuclear weapons. So it is at the crux of the
matter and U.S. has to solve that problem for China.
Mr. Green. Thank you, Mr. Chairman.
Chairman Barr. Thank you. The gentleman's time has expired.
The Chair now recognizes the gentleman from Ohio, Mr.
Davidson.
Mr. Davidson. Thank you, Mr. Chairman.
I yield 1 minute to the chairman.
Chairman Barr. Thank you.
And very briefly, Mr. Ruggiero, just to follow up on this
hearing and the legislative proposal to impede North Korea's
access to finance that has been discussed here today, would the
passage of this legislation that is being proposed or the mere
introduction of a bill that directed Treasury to impose these
additional secondary sanctions, would that, in your judgment,
give Secretary Tillerson and Ambassador Haley additional
leverage in their negotiations with China and with Russia with
respect to North Korea?
Mr. Ruggiero. I think that is right. When you look at the
Comprehensive Iran Sanctions and Divestment Act of 2010
(CISADA), only two banks were designated: China's Kunlun Bank;
and Iraq's Elaf Bank. Elaf Bank was relieved of those
sanctions. There were many threats associated with that and
banks changed their compliance procedures because of that bill.
Chairman Barr. Thank you.
I yield back to my friend from Ohio.
Mr. Davidson. Thank you, Mr. Chairman.
South Korea has announced that they plan to participate in
some decapitation exercises. This is kinetic, not financial,
presumptively. And I guess I am just curious from the panel
what is your assessment of North Korea's reaction to the
rhetoric, if not in fact the deeds.
Mr. Klingner. Actually a year ago, the South Korean
minister of defense of the previous administration had
announced that they have a special forces unit whose mission is
decapitation. He also emphasized they have surface-to-surface
missiles. And then just a week or two ago, they demonstrated a
practice attack using their F-15Ks. And they had announced that
they would conduct such an attack if they detected signs that
North Korea was about to attack.
Pyongyang responded, well, we will preempt your preemption
if they detect indications that South Korea is going to attack.
So one of my concerns is the risk of miscalculation by
either Korea or the U.S., and that we sort of stumble across
the red line in some kind of kinetic military action based on
very difficult-to-discern intelligence.
Mr. Davidson. Thank you. I think that is accurate,
personally.
I think I am also curious, at some point, doesn't this make
having a nuclear deterrent, given their massively weaker
military stature, a rational choice for North Korea to pursue?
Mr. Albright. Not really. No one is planning to invade
North Korea. The decapitation idea is a reaction to North Korea
strikes, some of which happened against South Korea, the
sinking of their ship by the North Korean submarine, the
artillery attack where they did not respond, and they have said
next time we will.
So I think these kind of actions, I think, have to be put
in context, but the background is no one is planning. Saddam
had enemies, Libya had enemies.
Mr. Davidson. Yes, I understand that--
Mr. Albright. North Korea doesn't have anybody who wants to
invade them so they don't need nuclear weapons.
Mr. Davidson. Yes, I understand what our perspective is and
I understand our probability of invading North Korea is really
low. I think that on the other side of the border, they don't
understand that, frankly. I think when we do our rotational
efforts and they see division after division after division
getting experience in Korea, if I am a North Korean, that looks
a lot like people are preparing to do that. I respect the
ability to draw different conclusions.
I guess the next piece I want to talk about is our naval
power, there is obviously massive, differential naval power
there. Of the $15 billion mighty North Korean economy, how much
of it is dependent upon access to the sea? Does anybody know?
Mr. Klingner. The North Korean naval forces and air forces
are small and antiquated. So they have given their focus in the
past on ground forces, and then as those conditions
deteriorated, even in the 1990s when I was at the CIA, they
compensated for declining conventional capabilities by focusing
on asymmetric capabilities, like nuclear weapons, missiles, and
special forces.
Mr. Davidson. Right. Are they dependent upon the sea for
their oil?
Ms. Rosenberg. Not exclusively. They have the capacity to
take tanker or delivery as well as pipeline from China.
Mr. Davidson. So pipeline, but they do get a fair bit by
ocean?
Ms. Rosenberg. Or tanker over that bridge, for example.
Those are all--
Mr. Davidson. Oh, tanker trucks, not ocean tankers.
Okay. Thank you.
I guess the last thing is, in the ability to use naval
power, what portion of--if you took this up to the next thing
and a blockade, short of force, this is control the ocean, is
there an ability to have a discernible impact on North Korea's
economy?
Mr. Albright. I would imagine. We have to consider the
possibility of a submarine-launched ballistic missile.
Mr. Davidson. Of course.
Mr. Albright. They are far from that, but you have to worry
about their submarine force. But in answer to your question, I
think certainly an embargo would affect their economy.
Mr. Davidson. Yes, that is the question. So is the next
step sort of kinetic force--Mr. Chairman, my time has expired.
I yield back.
Chairman Barr. Thank you.
The gentleman's time has expired.
And I would like to thank our witnesses for their testimony
today.
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 12:01 p.m., the hearing was adjourned.]
A P P E N D I X
September 13, 2017
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