[Senate Hearing 115-117]
[From the U.S. Government Publishing Office]
S. Hrg. 115-117
EVALUATING SANCTIONS ENFORCEMENT AND POLICY OPTIONS ON NORTH KOREA
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HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING VARIOUS SANCTIONS POLICY OPTIONS, INCLUDING THE POTENTIAL FOR
INCREASED SANCTIONS AND TO FURTHER ASSESS THE EXISTING SANCTIONS
IMPOSED ON THE DEMOCRATIC PEOPLE'S REPUBLIC OF KOREA
__________
SEPTEMBER 7, 2017
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
John O'Hara, Chief Counsel for National Security Policy
Sierra Robinson, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Colin McGinnis, Democratic Policy Director
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, SEPTEMBER 7, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESSES
Adam Szubin, Distinguished Practitioner in Residence, Strategic
Studies, Johns Hopkins University School of Advanced
International Studies.......................................... 4
Prepared statement........................................... 34
Anthony Ruggiero, Senior Fellow, Foundation for Defense of
Democracies.................................................... 6
Prepared statement........................................... 38
John Park, Director of the Korea Working Group and Adjunct
Lecturer in Public Policy, Harvard Kennedy School.............. 8
Prepared statement........................................... 57
Additional Material Supplied for the Record
Letter from Senators Sasse and Donnelly.......................... 60
(iii)
EVALUATING SANCTIONS ENFORCEMENT AND POLICY OPTIONS ON NORTH KOREA
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THURSDAY, SEPTEMBER 7, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs
Washington, DC.
The Committee met at 9:48 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Michael Crapo, Chairman of the
Committee, presiding.
Chairman Crapo. The hearing will come to order.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. Today, the Committee will receive testimony
from three sanctions experts on how to intelligently and
effectively use the various tools of sanctions and their
enforcement to reverse a nuclear crisis being inflamed by the
regime of Kim Jong Un in North Korea.
Mr. Adam Szubin, currently a Johns Hopkins scholar, is a
former acting Under Secretary of Terrorism and Financial Crimes
and Director of the Office of Foreign Assets Control, or OFAC,
and was one of Treasury's best financial warriors, marshaling
the Treasury's considerable power to effect real change with
rogue Nations.
Mr. Anthony Ruggiero, again, a former Government sanctions
official from both the Treasury and State Departments, is
currently in residence at the Foundation for Defense of
Democracies.
And, finally, Mr. John Park, having recently concluded a
study on the use and effectiveness of North Korean sanctions,
is a scholar at the Harvard Kennedy School.
Welcome, and we look forward to hearing from you today.
We have heard over the last week, in both words and deeds
and in no uncertain terms, that Kim Jong Un is bringing North
Korea, and the world along with him, to what may be the brink
of disaster.
Kim's latest claim is that on Sunday, his scientists tested
a hydrogen bomb that could potentially be loaded onto an
intercontinental ballistic missile, or ICBM, and this on the
tail of yet another illicit ballistic missile test, just days
earlier.
According to the press, experts and intelligence
estimates--excuse me. According to the press, experts and
intelligence estimates differ on whether it was or was not a
so-called ``H-bomb.''
One thing that is clear is that the test of this bomb
revealed a blast six times stronger than the last and according
to some reports up to 16 times the power of the Hiroshima bomb.
As noted by Nikki Haley, our U.S. Ambassador to the United
Nations, in a speech Monday outlining 24 years of failed
attempts to change North Korea's nuclear behavior, Kim is
begging for war, and President Trump and his Administration can
no longer follow a North Korean policy that has marked a
quarter century of empty threats.
So what can be done? Many seem to believe that there are no
good options for responding to North Korea in whatever time is
actually left before Kim can assemble a serviceable nuclear-
tipped ICBM, but accepting Kim's North Korea as armed with
nuclear weapons cannot be a serious option right now either.
Today's hearing is about what can be done, short of
military options, specifically focusing on what tools Congress
may support Ambassador Haley's declared intention that only the
strongest sanctions will enable us to resolve this through
diplomacy.
In this area, I acknowledge the work of Banking Committee
Senators Toomey and Van Hollen, who have introduced a very
strong sanctions bill in the Senate which was recently referred
to the Banking Committee for consideration.
Senators Gardner and Markey similarly introduced a strong
sanctions bill, and I appreciate their work as well.
Most people know by now any meaningful de-escalation of
Kim's nuclear threats will require the United States to
reassess its relationship with China, and here, I thank
Senators Sasse and Donnelly, as the Chair and Ranking Member
respectively of the National Security and International Trade
and Finance Subcommittee, for holding a hearing in May that
explored the use of secondary sanctions against Chinese
institutions to further constrain North Korea.
In order to do that, the United States more than ever needs
to focus on a coordinated strategy that may turn out to impact
many people in a number of countries, ours included.
For too long now, China has sat on the sidelines of this
crisis and attended to its own interests. It is time for China
to join the world in not just condemning Kim's hostile actions,
but using its considerable economic and diplomatic power in
concert with the rest of the world to bring about effective
change to Kim's destabilizing nuclear program.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for again pursuing
this issue so important to our national security. North Korea's
advancing weapons program is alarming not only to the U.S. and
to our close allies, South Korea and Japan, but also to China
and to all those with whom we share an interest in a
denuclearized Korean Peninsula.
Senators Sasse and Donnelly, as the Chairman said, held an
informative National Security Subcommittee hearing earlier this
summer to assess whether U.S. secondary sanctions against
Chinese businesses and banks might help strengthen our hand and
complement enforcement of existing sanctions. They offered a
measured set of conclusions and questions drawn from those
hearings in a letter to the Chairman and to me, which I would
like to include in the record, Mr. Chairman.
Chairman Crapo. Without objection.
Senator Brown. Thank you.
Senators Van Hollen and Toomey and Senators Gardner and
Markey, off this Committee, have separately put forward
additional bipartisan sanctions legislation. Some of them
recently traveled to the region to assess policy options. I
thank them for their work.
We enacted a new package of North Korea sanctions last year
and then included additional tough new sanctions in the Russia-
Iran-North Korea legislation enacted earlier this month by a
vote, if I recall, of 98 to 2.
Beyond sanctions, several years ago, President Obama began
to work with regional allies to develop a robust package of
military capabilities to realign U.S. and allied military
posture for this different and more dangerous security
landscape.
Today, we will hear from experts on the prospects for
further economic sanctions on North Korea. I welcome all three
of you, and, Mr. Szubin, welcome back to the Committee.
We are figuring out how best to target the money that flows
to Pyongyang through other countries, including China. As a
Government, the Chinese oppose the North Korean nuclear weapons
program. They find it destabilizing. They also fear, of course,
the collapse of the regime, in its wake a destabilizing flood
of refugees across their borders into China. They see their
national interests as different from ours.
With the acceleration of North Korea's tests, including the
explosion of what they claim was a hydrogen bomb last week, and
launches of increasingly capable ballistic missiles, we must
persuade Chinese leaders that it is in their interest to do all
they can now to denuclearize the peninsula. I hope the upcoming
5-year party conference in the People's Republic of China in
mid-October will stiffen that country's resolve to push the
North Koreans to denuclearize.
To move China and Pyongyang, we need to be clear and
credible in our strategy and policy. This is no time for
bluster. It is no time to be picking a fight with our key ally,
the South Koreans.
Tweets from the President accusing South Korea of
appeasement are counter-productive and unwise and rash. We will
only serve to confuse and divide our allies and destabilize the
situation if that kind of the behavior from the White House
continues. It plays right into North Korea's hands, as it seeks
to divide us.
Instead, this is a time for serious and hard work by U.S.
diplomats to deter and to contain this regime. It is a time for
a steady, sober assessment of U.S. national security goals, for
close coordination with our allies, to reassess what we might
actually accomplish.
Given these complexities, what do we do? What role should
this Committee and this Congress play? Among other things, we
can require the Administration to set clear, stated policy
goals and then measure whether China and others are making
sufficient progress to curtail sanctions violations.
We can develop tough new sanctions to further target
entities that violate or evade current sanctions, enable the
use of forced labor, or abuse human rights.
For me, the brutal treatment of Otto Warmbier by North
Korean authorities that ended in his death is an especially
poignant reminder of the brutality of Kim's regime.
We must also not lose sight of the Americans still held in
Pyongyang and the importance of securing their release.
Congress can signal clearly to the Chinese and others that
we are determined, determined to require tougher enforcement of
sanctions, will steadily ratchet up pressure on this front, and
our shared interest in the stability and denuclearization of
the Korean Peninsula is paramount.
Our sanctions must, of course, be contained within a
broader diplomatic, political, military, and economic strategy
designed to meet our goals, which makes clear our sanctions are
a means to an end, not an end in themselves. That end is to
force Pyongyang to the table to negotiate, as we did
successfully--and I thank Mr. Szubin again for that--with Iran.
Given our history on Iran, Congress brings credibility to
this issue. It is helpful as some see the Administration's
credibility undermined by its erratic behavior.
I am sure the North Koreans, for example, are watching
closely this Administration's threats to walk away from the
Iran Nuclear Agreement this fall. If that comes to pass, even
as the IAEA certifies that Iran has continued to comply with
the deal, Kim Jong Un will draw the conclusion that the U.S.
will refuse to observe even firm commitments on the nuclear
front, and we are hearing those comments over and over and over
about the importance of Iran.
I am glad we are moving forward with a regular order
process on this sensitive and urgent issue. I know there will
likely be another hearing on the matter, when we will hear from
Administration witnesses.
I welcome our witnesses today. Your expertise on what might
work and what likely will not work to ratchet up pressure and
bring the results we are seeking are most welcome. We all thank
you for that.
Chairman Crapo. Thank you, Senator Brown, and I also want
to, again, thank our witnesses for being willing to come here.
I have already introduced you by name, and so now we will
simply proceed.
I remind our witnesses that we have put your written
testimony in the record. It will be in the record, and we ask
you to keep your oral remarks to 5 minutes. I expect that there
will be a lot of interest from the Members of the Committee, so
you will have plenty of opportunity to expand on those comments
if you will try to follow our timeframe.
I also remind the Senators to follow their timeframes for
their questions.
With that, Mr. Szubin, we will begin with you.
STATEMENT OF ADAM SZUBIN, DISTINGUISHED PRACTITIONER IN
RESIDENCE, STRATEGIC STUDIES, JOHNS HOPKINS UNIVERSITY SCHOOL
OF ADVANCED INTERNATIONAL STUDIES
Mr. Szubin. Thank you.
Chairman Crapo, Ranking Member Brown, and distinguished
Members of this Committee, thank you for convening this hearing
on such an important and timely topic. Thank you for your work
and delegations out to the region. Thank you for the strong
legislative efforts you have made on this national security
front and on others.
The scale and range of North Korea's nuclear and long-range
missile programs is, as was noted by the Chairman and Ranking
Member, advancing by the month. It is hard to think of a
nuclear threat this acute since the Cuban missile crisis, and
despite repeated pronouncements, a scenario that has been
repeatedly described as unacceptable grows ever closer to
becoming reality.
I do believe there is still a diplomatic way forward, but
if we are to bring North Korea to the negotiating table in a
meaningful way, the international community will need to play
severe and unprecedented pressure on the regime.
For the U.S., our response will need to incorporate all of
the levers at our disposal--diplomatic, financial economic,
military--and we will need the full commitment of our partners,
especially those in China, South Korea, Japan, Australia, and
the European Union.
The only hope here lies in a qualitatively different level
of pressure than we have seen to date, one that threatens Kim
Jong Un's very hold on power.
On the sanctions end, that would mean placing a
stranglehold on the North Korean economy that makes it
impossible for the leader to pay his military and security
forces, to fuel his planes and trucks, to provide bribes to his
family and cronies.
It is possible that Kim Jong Un is so mired in delusion and
defiance that even in such a case, he would not come to the
table, but if Kim Jong Un will face the end of his regime
before he relinquishes his nuclear program, then we need to see
his leadership end.
China will, of course, be a determining factor. We must
find a way to enlist the cooperation of the Chinese Government
and the compliance of Chinese private actors. To date, the
problem has been that as much as China may dislike Kim Jong Un
and his nuclear program and threats, a collapse of the regime
is a far worse alternative in their view. Serious and deft
diplomacy will, therefore, be needed to assure China that,
first, this issue is paramount for the U.S. above all others.
Second, the proposed sanctions and pressure campaign against
North Korea is aimed narrowly at resolving the nuclear crisis,
not transforming North Korea or reunification; and third, that
the U.S. will work in concert with China if China will work
with us.
Discussions will likely require both carrot and stick. We
can expect China to increase sanctions pressure half-steps but
not to a decisive level. Ultimately, I believe the key will be
making clear to China that the status quo is not tolerable
because of a range of escalating costs, including sanctions
exposure.
In approaching questions about sanctions against Chinese
entities, especially larger State-owned entities and banks,
U.S. policymakers need to be prudent and strategic, prudent
because any larger sanctions will inevitably carry spillover
costs to ourselves and our allies and strategic because, at the
end of the day, we must remember the objective is to win
China's cooperation, not provoke a breakdown between our
Nations or a trade war.
Those who would tell you that we can levy massive financial
sanctions against China without serious reverberations for the
global economy or businesses in the United States are mistaken.
China's economy may have once been self-contained 10 or 15
years ago, but it certainly is not today. China is the second
largest economy in the world. The four largest banks in China
are the four largest banks in the world by assets.
Beyond banks, our trade ties with China are deep. China is
the third largest market in the world for U.S. exporters after
Canada and Mexico, and our Commerce Department estimate that
U.S. exports to China support nearly 1 million American jobs.
Beyond any trade effects, a strong blow to China's economy
would put downward pressure on the renminbi and upward pressure
on the U.S. dollar. We would essentially be lowering the value
of China's currency, a trend that our Government has fought for
years to combat. None of these are reasons to walk away, but we
must be prudent as we are determined.
On a final note, I would like to speak to the roles of
Congress and the executive branches in designing and
implementing sanctions. Congress has a vital role to play in
sanctions policy, as I know well. That said, in comparison to
executive branch sanctions, legislation is very difficult to
repeal or amend, and sanctions laws have historically been one-
way ratchets.
I raise this because of a recent trend toward what I see as
a rigid codification of sanctions in a bid to strip the
executive branch of discretion over the implementation and
lifting of sanctions. Ultimately, the purpose of these
sanctions is to incentivize behavioral change, and for that to
work, the targets of sanctions must see that the President has
the ability to adjust or lift the pressure. If the target
perceives the sanctions to be immutable, then sanctions have
ceased to act as an inducement to change, and they function
solely as a penalty.
In 13 years working on U.S. sanctions policy alongside this
Committee, I have witnessed up close the power of Congress
working alongside the President to pursue sanctions campaigns,
and it is formidable. My hope is that the two branches will
work in concert to address this and the other pressing threats
that confront our Nation.
Thank you very much.
Chairman Crapo. Thank you.
Mr. Ruggiero.
STATEMENT OF ANTHONY RUGGIERO, SENIOR FELLOW, FOUNDATION FOR
DEFENSE OF DEMOCRACIES
Mr. Ruggiero. Chairman Crapo, Ranking Member Brown, and
distinguished Members of this Committee, thank you for the
opportunity to address you today on this important subject.
Often U.S. policy toward North Korea gets stuff in a
provocation response cycle, whereby a North Korean provocation
is met with strong rhetoric and a token increase in sanctions,
a pattern repeated over and over. In practice, the Kim regime
can keep distracting the United States with repeated
provocations. We should break this cycle and ensure that the
U.S. response to every North Korean provocation advances our
goal of denuclearizing the Korean Peninsula.
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 the ending is not
encouraging.
Not only has North Korea told us it is not interested in
denuclearization, its actions reinforce it. 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.
It is common for scholars and journalists to note that
years of strong sanctions against North Korea have failed. It
is true that thus far, sanctions have not achieved the U.S.
objective of disarming North Korea, but it is not true that
sanctions have been either strong or well enforced or that they
cannot work.
Before last year's sanctions law came into effect in
February, sanctions against Pyongyang were weaker than our
efforts to isolate low-level threats like Zimbabwe, Sudan, and
the Balkans, even as North Korea conducted four nuclear tests.
U.S. sanctions against North Korea have finally approached the
level where Pyongyang is in the same ball park as Russia and
Syria, although still far from being as constrained as Iran was
before the 2015 nuclear deal.
Before March 2017, U.S. sanctions did not have a serious
impact because they were not targeting enough of either
Pyongyang's international business or non-North Koreans
facilitating sanctions evasion.
This year, the Trump administration 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.
Over the last decade, the U.S. has been reluctant to target
Chinese firms, individuals, and banks facilitating North
Korea's sanctions evasion in the hope that American restraint
would encourage greater cooperation in Beijing, yet one pattern
that emerges from a review of North Korea's financial
activities is the disturbing extent to which Chinese banks help
North Korea leverage the U.S. financial system to evade
sanctions.
Recent disclosures show that from 2009 to 2017, North Korea
used Chinese banks to process at least $2.2 billion in
transactions through the U.S. financial system.
Since late May, the Trump administration has sanctions
China six times using Justice Department and Treasury
Department authorities. More needs to be done, including
sanctioning medium and large Chinese banks. While some assert
that China will never respond to foreign pressure, experience
shows that it will, in fact, bend, especially if well-designed
sanctions force Beijing to choose between the welfare of North
Korea and the welfare of China's own banking sector.
Another disturbing development I want to emphasize today is
the increasing role of Russia in sanctions evasion, including
helping North Korea finance energy sales in U.S. dollars and
selling items to North Korean proliferation entities. We can do
a lot more to stop it, and our experience with sanction policy
points the way forward.
The U.S. goal should be to protect the U.S. and its allies
at all costs by strangling the sources of revenue and materiel
on which North Korea relies for its nuclear weapons program.
The Trump administration should use the Iran sanctions
playbook for its North Korea policy, which force companies,
individuals, banks, and Governments to make a choice. Stop
doing business with Iran or lose access to the U.S. dollar. The
approach worked as banks and companies and eventually
Governments curtailed or eliminated business with Iran.
Pyongyang's provocations deserve increasingly harsh
responses from Washington. A new sanctions approach is needed
to secure the United States and its allies against the
dangerous and growing threat from this rogue regime. Iran-style
sanctions are the only peaceful means of coercing the Kim
regime and for that reason are indispensable.
Thank you again for inviting me to testify, and I look
forward to addressing your questions.
Chairman Crapo. Thank you, Mr. Ruggiero.
Dr. Park.
STATEMENT OF JOHN PARK, DIRECTOR OF THE KOREA WORKING GROUP AND
ADJUNCT LECTURER IN PUBLIC POLICY, HARVARD KENNEDY SCHOOL
Mr. Park. Thank you.
Chairman Crapo, Ranking Member Brown, and Members of the
Committee, thank you for the opportunity to testify before you
today.
As requested by the Committee, I will be presenting key
findings from my research into North Korean regime's
accumulated learning in evading sanctions and outlining ways to
bolster efforts to stop its procurement of banned items for its
WMD programs. Such efforts are urgently needed as the regime
continues to make rapid advances in its nuclear weapons
development program; most recently, a sixth nuclear test and an
intermediate-range ballistic missile flight over Japan.
As I highlighted in my testimony in July before a
subcommittee of the House Financial Services Committee, the
North Korean regime's sanctions evasion techniques have
improved significantly because of North Korea, Incorporated's
migration to the Chinese marketplace. As a result, U.S.
policymakers need to diversity the set of policy tools beyond
sanctions to disrupt North Korean-Chinese business partnerships
operating inside of China.
My MIT colleague, Dr. Jim Walsh, and I recently conducted
research on North Korea, Incorporated. It is a term that we use
to describe the regime's web of elite State trading companies.
We found that the net effect of sanctions was that they, in
practice, ended up strengthening the regime's procurement
capabilities, what we call the ``sanctions conundrum.''
In the marketplace, increasing sanctions on North Korea's
State trading companies had the effect of elevating the risk of
doing business with these entities. However, rather than
deterring local Chinese business partners, the elevation of
risks and rewards attracted more capable, professional
middlemen to procure items--illicit items on behalf of the
North Korean clients. The process that drive this outcome was
the monetization of risk. The higher the sanctions risk, the
higher the commission fee that a North Korean entity had to
compensate a local middleman.
In sum, targeted sanctions, unintentionally and
counterintuitively, helped to create more efficient markets in
China for North Korea, Incorporated.
Significantly, one of the biggest setbacks for North Korea,
Incorporated, in recent years was an accidental one. In the
early years of Xi Jinping's anti-corruption campaign in
sweeping up the ``tigers and flies'' is a term that refers to
the national as well as local-level corrupt party officials.
Some of these officials, indirectly and directly, were involved
in business deals with North Korean procurement agents embedded
in the Chinese marketplace.
In applying this potent domestic policy tool, the Chinese
authorities had unintentionally and highly effectively
disrupted specialized North Korean-Chinese business
partnerships. There are important lessons that we can apply to
the immediate objective of halting the North Korean regime's
procurement of illicit items for its nuclear and ballistic
missiles development programs.
We can and must disrupt these partnerships upstream before
the procured item becomes a part of globalized trade flows on
its way to North Korea. To do so, we need to diversify the set
of policy tools beyond sanctions and coordinate with more
robustly with different policy actors, like compliance
departments in financial institutions and law enforcement in
China, to significantly reduce the wide-open space in which
North Korea, Incorporated, currently operates.
With this goal in mind, I would like to bring to the
Committee's attention what I call the ``three antis.'' Number
one, anti-corruption apparatus. The September 2016 case of the
Dandong Hongxiang Industrial Development Corporation serves as
an important, intentional precedent for scaling up the
application of the anti-corruption apparatus to target corrupt
party officials involved in these Sino-North Korean business
partnerships. Given the vital link between private Chinese
middlemen and local officials, using the anti-corruption
apparatus intentionally to target these partnerships would have
an immediate impact on procurement deals. Of all the policy
tools, this substantial one is readily available but dependent
on the senior Chinese leadership's decision to go down this
path. The U.S. threat of applying secondary sanctions on large
Chinese banks and companies could elevate the Chinese
leadership's interest in pursuing this path.
Number two, anti-narcotics campaign. An open secret in
China's northeastern provinces is that there is an expanding
narcotics problem emanating from North Korea. Called ``ice,''
this cheap and highly addictive form of meth is produced in
North Korea. Drawing on the precedent of Sino-U.S. cooperation
in the late 2000s when China was confronting an inflow of
opiates through its border with Afghanistan, there was an
opportunity to adapt--there is an opportunity to adapt this
previous program to China's northeastern provinces. Although
aimed at the narcotics trade, the positive spillover effects of
increased Chinese law enforcement activities would further
constrain the areas in which North Korea, Incorporated, and its
Chinese partners operate.
Number three, anti-counterfeiting activities. The North
Korean regime is well documented as the most prolific creators
of supernotes, counterfeited U.S. $100 bills. What is not so
well known in the West is that there is strong concern in China
that its neighbor has been counterfeiting Chinese currency.
From Beijing's perspective, this criminal activity is a direct
threat to China's national economic security. Given the high-
level threat, the Chinese leadership can create special
authorization to investigate and inspect North Korea-related
consignments and facilities.
In conclusion, objectively assessing how criminal North
Korean activities affect China's national interests yields a
clear view of areas of common ground upon which we can build a
common cause with Chinese authorities in stopping North Korea,
Incorporated. The work of the Committee, the panel members, as
well as sanctions-focused officials in the U.S. Government is
more critical than ever in this endeavor.
Thank you.
Chairman Crapo. Thank you, Mr. Park.
I will go with the first questions, and this question is
for the whole panel or any of you who wish to respond to it.
Over the years, the United Nations reports have singled out
States for helping North Korea evade U.N. sanctions. In
addition to China, countries specifically mentioned include
Egypt, Malaysia, Singapore, Vietnam, Syria, Sudan, Eritrea,
Russia, Thailand, Namibia, and Myanmar. And, Mr. Ruggiero, you
specifically mentioned Russia in your testimony in terms of
some significant impacts there.
If secondary sanctions are imposed against Chinese banks or
other Chinese businesses, what is the likelihood that these
other countries will not just move in and fill the gap?
Anyone want to discuss that? Mr. Ruggiero.
Mr. Ruggiero. Well, in terms of backfill, I guess I would
say that that is a concern that I have with Russia. I do not
think it would be the same scale as what China is doing with
North Korea now, but I think it is a concern. And it certainly
looks like a concern of the Trump administration because
several months ago, they started laying the foundation saying
that China had increased implementation of some sanctions and
an unknown party was backfilling, and then we started to see
one round of Russia sanctions and another round.
I would just say when I went through and looked at the
POE's--the panel of experts' midterm report, some of those same
countries come through--Angola, DRC, Eritrea, Mozambique, and
on and on and on--Syria. Unfortunately, I mean, the way I look
at this is that it has to be a global campaign against North
Korea, but if we are doing that global campaign because we are
not willing to make the hard decisions on China and Russia, it
will not succeed.
Chairman Crapo. Anyone else on that?
[No response.]
Chairman Crapo. I would like to pursue the China angle here
a little bit further. We often hear the statistics that 80, 90
percent of the trade of North Korea is with China or through
Chinese banks, and yet your testimony, Dr. Park, clearly shows
some areas where cooperation with China on certain enforcement
can be very beneficial, not just in sanctions policy, but in
other areas, as you indicated, like narcotics and
counterfeiting.
The broader question I would like to have each of you
respond to--and we only got 2 minutes here, so please be
brief--is it is what I see as a bit of a conundrum, and that
is, we need to deal with China through this sanctions
legislation that we are developing. But we also need China to
be a partner with us in implementing a sanctions policy.
Just discuss that with me. How do we achieve both of those
objectives? Mr. Szubin.
Mr. Szubin. Chairman Crapo, I think you framed it exactly
right, and that is what I was referring to when I said our
approach to China needs to be determined, it needs to be firm,
but it also needs to be prudent and strategic.
I think right now, we have been able to win China's
cooperation on specific enforcement cases, such as the ones Dr.
Park references, and in my time in Treasury, we were able to
successfully bring China's pressure to bear on certain
networks, such as the Ma network and the DHID network, but none
of that is going to amount to the type of decisive pressure on
North Korea that we need at this late stage in North Korea's
nuclear progress. And China, I assess, is currently unwilling
to put that level of pressure on North Korea, and so the status
quo has to change.
I think it is going to have to become more uncomfortable
for China for it to perceive that the status quo is less
acceptable than allowing severe pressure to grow against North
Korea, and that can happen in a number of ways.
We have many interests in common with China. We have many
levers to play, but it is going to take some high-level and
some deft diplomacy with the Chinese to work this through.
Chairman Crapo. Thank you.
Mr. Ruggiero. I mean, I would just say we should not give
Beijing too much credit. Most of those examples were when the
United States acted first and pushed Beijing to compliance.
I will be convinced that China is a partner when they go to
Dandong, which we all know is a serious problem, and they are
implementing sanctions in Dandong when they go to their own
banks and say, ``You need to do better,'' when we have
nongovernmental organizations here in the United States
ferreting out these networks and the largest bank in the world
cannot do that. I am not convinced they cannot do more.
Chairman Crapo. Dr. Park.
Mr. Park. Chairman Crapo, the very dysfunctional
relationship between the Communist Party of China and the
Workers Party of Korea, I think, reduces a lot of the
opportunities that we would see for external pressure.
However, because the business partnerships are with Chinese
nationals under Chinese law and using Chinese law enforcement
tools and labeling these business partnerships as ``criminal
activity,'' there is a lot of bandwidth there. So it is not to
say abandon sanctions, but in addition, this is the plus alpha.
This is an area that I think we can use the leverage from the
threat of secondary sanctions in large Chinese banks and
companies that may produce the type of outcome that we have not
seen before.
Chairman Crapo. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Mr. Ruggiero mentioned Dandong. I want to touch on that
with my question to Mr. Szubin.
The Treasury Department in July sanctioned that relatively
small Chinese bank, the Bank of Dandong. It is a primary money-
laundering concern.
In your testimony in May before the Subcommittee, Mr.
Szubin, you noted Chinese banks facilitating North Korean trade
are not limited to small banks, but also could include some of
China's largest banks, which are notably some of the largest
banks in the world.
Describe what the implications are in your mind of the U.S.
sanctioning one of these larger banks. How would China likely
respond? What macroeconomic impact with such actions have in
your mind?
Mr. Szubin. It is a very complicated question, Senator.
The first thing I would say is that we see a spectrum of
conduct when you look at the largest Chinese banks. And I am
out of Government now for 8 months, so my expertise is already
beginning to wane. But at least from my time at Treasury, there
were some who are more diligent and some who are less, and the
fact that North Korean money is moving through a Chinese bank,
that is happening in the same way that narcotics money is
moving through Western banks, European and American banks. The
question is, How diligent are they being and how careful are
they being to ferret it out?
And if we see that in cases they are being reckless or
willfully blind, then that is a problem, and that is a problem
that we need to confront.
In terms of the impacts, these banks are massive, and they
are no longer walled off from the international economic
system, international financial system.
We saw in August 2015 and at the turn of 2015 to 2016, what
shocks to the Chinese economy mean for our markets, with major
sell-offs and 2 to 3 percent drops in the Dow Jones on those
days when China's economy took a hit. So our economies are
interrelated, and there is no question that a major blow
against one of these Chinese banks, a blow that led it, for
example, to collapse would have massive reverberations for U.S.
markets. We would feel it here, and American businesses would
feel it.
Senator Brown. You are saying that the sanctions could lead
to a--it could affect the stability of these large Chinese
banks. Are you implying that, suggesting that?
Mr. Szubin. Yes. And your question was open-ended as to
which sanctions we would be pursuing. So I am saying at the
outer edge, the more comprehensive sanctions, such as cutting
off one of these four largest banks from the U.S. financial
system entirely or designating it, blocking its assets,
prohibiting all transactions with it, that tends to be a death
sentence for an internationally active banks, as these banks
are, and that is where you get to the outer end of the
consequences that I was flagging.
Senator Brown. In all the major, all the largest Chinese
banks that we classify as some of the largest in the world, all
of them are interconnected to the international banking system?
All of them?
Mr. Szubin. Yes, sir.
Senator Brown. OK. Thank you.
Mr. Park, last year, you and an MIT colleague, Dr. Walsh,
published a detailed DPRK procurement network study. You
describe professional sanctions evaders who facilitate illicit
trade there. You found that under tightened sanctions, North
Korean facilitators actually hired more capable Chinese
middlemen to better handle financing, logistics, and doing
business with private Chinese firms, increase the use of
embassies as a vehicle for procurement. You recommend we
encourage China to use its domestic anti-corruption, anti-
counterfeiting, and anti-narcotics laws to disrupt those
networks.
So expand that. What more should we be doing? What can we
do to urge China to act more forcefully now, to get them to act
now within Chinese law to stymie these sorts of illicit trade?
Mr. Park. Thank you. Senator Brown, one of the interesting
set of precedents in the China-U.S. relationship, there are a
number of key areas, and I would label them as ``effective
programs,'' so the narcotics, anti-narcotics program, looking
at the flow of opiates from Afghanistan being one. So when you
look at the law enforcement level of cooperation, I think these
are programs that you can modify and tailor to some of these
issues.
What more can be done, I think, is in this area of looking
at additional types of rooms to maneuver, where you are
providing information. Certainly, that has been done in the
past. Whether the Chinese side acts upon it or not, there are
political considerations then.
The situation is different now, and I think with the
urgency of the situation, with the threat of secondary
sanctions, you have the Chinese leadership's attention now, and
what you do with that threat of using this measure, not to use
it outright, and combine it with a larger strategy, these are
areas that I think the Chinese authorities will revisit some of
these domestic policy tools that they can apply to criminal
North Korean activities at the end of the day.
Chairman Crapo. Thank you.
Senator Toomey. Thank you very much, Mr. Chairman. Thank
you to the witnesses as well. I think we all understand and
agree on the severity of the threat posed by North Korea. I
think there are a lot of other areas where there is broad
agreement, including from in the testimony that our witnesses
provided. I think it is widely acknowledged that we have not
yet imposed the toughest possible sanctions against North
Korea. I think there have been minimal secondary sanctions
applied so far.
There is ample evidence that North Korea is extensively
evading the existing sanctions regimes, an interesting article
in today's Wall Street Journal that further explains how that
is happening.
It is my understanding that the North Korean economy was
able to grow last year, and my own subjective conclusion would
be that it would strike me as unlikely that Kim would feel that
the continuity of his regime is currently threatened by this
regime of sanctions.
And for these and other reasons, Senator Van Hollen and I
have decided to pursue the BRINK Act legislation that would
impose tough secondary sanctions. I thank Senator Van Hollen
and his staff for the great work that they have done on this.
Very briefly, I just want to confirm. First of all, the
BRINK Act, as you may know, is designed to implement sanctions
that are similar in their nature to those that were imposed on
Iran. Is there uniform agreement among the witnesses that the
secondary sanctions that were imposed on Iran were a very
important factor in driving Iran to the negotiating table for
the agreement which led to the JCPOA? Does everybody agree that
that was an important part?
[Heads nodding affirmatively.]
Senator Toomey. Then the next question is, Does everybody
agree that secondary sanctions on the financial institutions--
and I should point out that our legislation would impose them
globally. They are not exclusively under our legislation meant
to be imposed on Chinese banks. They are meant to be imposed on
any financial institutions that facilitate transactions with
the North Koreans. Is there agreement that such secondary
sanctions would impose significant new pressure on the regime?
Mr. Ruggiero, would you care to respond?
Mr. Ruggiero. Sure. I think building on what Mr. Szubin
said, there is a range of secondary sanctions, and I agree, and
I have made clear, that going right now to designating or
cutting off the largest banks in the world form the U.S.
financial system, now is not the time to do that.
And this is what is in the BRINK Act, is using fines
against those financial institutions for their lack of due
diligence, and I think that is a key point that is in the BRINK
Act as well, is requiring a report on whether these financial
institutions are doing enough to ask the right questions to
prevent these transactions from going through the U.S.
financial system.
Senator Toomey. And, as a technical matter, does everybody
agree that we do have the ability to identify the financial
institutions that are engaging in these transactions? Maybe not
every last one, but we know of financial institutions,
including Chinese banks, that are currently facilitating
business with North Korea. Does everybody agree with that?
[Heads nodding affirmatively.]
Senator Toomey. Now let me go to this question of the
adverse impact on the United States if one of these banks were
to fail. I am not sure I have a suitable analogy, but, Mr.
Szubin, you pointed out that the four largest Chinese banks are
the four largest banks in the world. Is not it really true that
whatever business they are doing with North Korea, while it is
absolutely essential to North Korea, it is trivial in scale to
their own business? Is that true?
Mr. Szubin. Yes, Senator.
Senator Toomey. So if they were faced with an ultimatum
that continuing doing business with North Korea would result in
a catastrophic disaster for their institution in the form of
being cutoff from U.S. dollar-denominated transactions, is not
the only rational decision to discontinue doing business with
North Korea?
Mr. Szubin. That might be the decision.
I think we have to remember here, these are State-owned
banks.
Senator Toomey. Right.
Mr. Szubin. And so we are really--we are not talking about
J.P. Morgan.
Senator Toomey. I understand.
Mr. Szubin. We are talking about a pressure campaign vis-a-
vis the Chinese Government.
Senator Toomey. Right. But the Chinese Government,
presumably, is extremely vested in avoiding a financial crisis
and collapse of their largest financial institutions, it would
seem to me.
Mr. Szubin. Absolutely. China has far more to lose when
this escalates than we do.
Senator Toomey. Absolutely.
Mr. Szubin. My point was only that there are real costs
here, and we need to be mindful of them.
Senator Toomey. Yes. My point is that there is a rational
behavior that I think we can likely anticipate.
The last point I want to make, Mr. Szubin, in your
testimony, you make a point that I agree with. You mention on
page 7 that sanctions that cannot be eased without an
affirmative joint resolution of Congress are not likely to be
constructive. Likewise, it is not advisable to impose sanctions
that only allow for easing once the ultimate objectives of the
sanctions have been obtained. This is part of your broader
message that there ought to be some flexibility for the
Administration.
I just want to underscore our legislation provides an
Administration with that flexibility. In fact, there is a very
high bar that Congress would have to achieve in order to
prevent any Administration from lifting these sanctions.
Congress would have to pass legislation and have to take the
step to affirmatively pass legislation, and presumably, if the
Administration wanted to lift these sanctions, the
Administration would veto such legislation. Congress would then
have to override that veto.
So in order for a President to be unable to lift the
sanctions under our legislation, he would have to be unable to
convince one-third plus one of either house of the legislature
that that is a good idea.
So I do not know what your view is, but I think that is a
very sensible balance and maintains a lot of discretion for the
President, while involving Congress in the decision making.
Does anybody have a comment on that mechanism?
Mr. Szubin. I would say that mechanism, where the President
is given the discretion to adjust and lift sanctions, with
Congress always having the ability to act in a bicameral way to
stop him, is the right model. That has also been the historic
model that we have seen used for decades.
I am worried less by a specific bill that is under
consideration now than by what I see as a broader trend to try
to shift that balance decisively in a way to constrain
executive branch discretion, and I appreciate your thoughts,
Senator, on this because I am very much in agreement with it.
Senator Toomey. Thank you.
Thank you, Mr. Chairman, for indulging my time limit.
Chairman Crapo. Thank you.
Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman, and thank
you, gentlemen, for your testimony. It is very, very
thoughtful.
Mr. Szubin, from what I have been hearing from Defense
officials the critical resource that will move the North
Koreans is oil, that other economic problems, can be worked
around or, as Mr. Putin said, they can ``eat grass'' instead of
doing something else. So how would we structure sanctions to
force a reduction in oil? Is that a fair question?
Mr. Szubin. I think it is a key point of leverage. It is
one of the three that I point to in my written testimony,
Senator, because of exactly the reasons you point out. Not only
is it a key input for them as an economy writ large, but it is
a direct input for their military. They need oil, and they are
dependent on others, most importantly China, for the supply of
that oil.
We have run this play before. In the Iran context, with
Congress' help, we put pressure on other countries--China,
South Korea, Japan, the Europeans--and they brought down
substantially their purchases of Iranian oil. We are going to
need more than that here. We are going to need a very
precipitous increase in the pressure against the supply of fuel
and oil to North Korea, I believe, just because we have much
less time and the threat is much more exigent.
Remember, Iran was in the early stages of building up its
enrichment program. North Korea already has multiple nuclear
weapons. So I think that has to be a key point of leverage in
our discussions with the Chinese.
Senator Reed. So the focal point of the sanctions,
critically, should be on reducing oil flowing into North Korea?
Mr. Szubin. I think that should be a key focal point.
Senator Reed. OK.
Mr. Szubin. And if China is willing to cooperate with us on
doing that, then we have averted the need for secondary
sanctions and all the better.
Sanctions here are only an indirect means to the end of
getting the pressure out of Beijing.
Senator Reed. And a question that has been raised
throughout is, What is the calculation that the Chinese will,
in fact, pursue? What do they fear more, basically? A financial
collapse of their banks and their market or a collapse in North
Korea? And from things we have heard is that they are very much
concerned about North Korean collapse, perhaps even more so
than weathering a financial storm. They have done that before.
Do you have any insights on that?
Mr. Szubin. Those are clearly both nightmarish scenarios
for the Chinese Government.
I would--this is only my personal assessment. I believe
they are more vested in the strength, stability of their own
economy than they are in stability on the Korean Peninsula, but
that does not mean that the latter is secondary or a small
interest for them. Clearly, as you point out, it is not.
Senator Reed. And just let me ask a question, is that we
have active discussions with the Chinese, with the Japanese,
with the South Koreans. Is it necessary to have back channels
with the North Koreans? In your experience in Government is
communicating with the object of your, you know, problem,
helpful?
Mr. Szubin. It can be, and that is a question that I think
is really best left to the Secretary of State, others who are
managing these diplomatic relations on a day-to-day basis.
If North Korea is ready to open up a serious channel, by
all means, we should be listening and talking to them. If not,
then it is not--it may not be the time. But that is, of course,
what we are ultimately aiming here for, is to open up serious
constructive talks.
Senator Reed. Dr. Park, do you have any sort of notions
about the comments that Mr. Szubin has made, particularly about
opening up some back channels or some form of communication?
Mr. Park. I would just add that those type of channels are
very important in terms of just getting explanations.
We are working on a lot of assumptions right now. As some
of my senior colleagues at the Belfer Center who come from a
military background, they are fond of us saying, ``Between the
terrain and the map, the terrain always wins.'' I think we are
relying on a lot of maps right now, and these type of dialogs
can help us understand the human terrain and some of the
developments on the ground in a way that we are not really
capturing right now.
Senator Reed. Thank you very much.
Thank you.
Senator Reed. Thank you.
Senator Scott. Thank you, Mr. Chairman, and thank you to
the witnesses for being here this morning. Good to see you
again, Mr. Szubin.
I may submit some questions for the record as it relates to
our interdependence on China and our ability to provide more
sanctions that may have a positive or, hopefully, a negative
impact on North Korea's economy and what that means in a
rippling effect to us as it relates to our relationship with
China. I would love to hear your thoughts on some of those
questions.
But for this morning, Mr. Szubin, you previously testified
that North Korea is not sanctions proof. Its leadership depends
upon access to foreign goods and international banking
services. China supplies about 90 percent of the goods and
services to the Kim regime.
Furthermore, North Korea has been able to evade our
sanctions by funneling resources through a network of Chinese-
based front companies. Common sense dictates that if China is
not committed to reining in North Korea, there is only so much
the United States can do alone.
My question to you, sir, is, How effective are American
sanctions on North Korea if China is not doing their part?
Mr. Szubin. Not effective, Senator.
Senator Scott. Yeah. How far does the Chinese banking
sector reach into North Korea? Why is cutting off these
tentacles so foundational to putting pressure on the regime?
Mr. Szubin. I would actually frame it in the other
direction. I feel like it is North Korea trying to insert its
tentacles into the Chinese banking system, and the reason I say
that is North Korea does not have proper country-to-country
relationships with Chinese banks. There are not correspondent
banks like Brazil would have with the United States between
North Korea and China.
What they have are a whole network of front companies,
shell companies that they are using to open accounts at Chinese
banks, and many of them are incorporated in China by Chinese
nationals. So it is not necessarily so easy to discern, on the
face of it, which Chinese company that is coming into your bank
to open an account is fronting for the North Koreans.
But I think there are ways to discern. We have been able to
figure it out through major work on the intelligence, on the
law enforcement side, and I believe China has the capacity to
do so as well. Obviously, it is an extremely sophisticate
Government and increasingly sophisticated banking system, and
if they view this as the primary threat that I believe it to
be, I think they could make massive headway in shutting down
these networks and closing them out of their banking system.
And that would be very much to the good, not just for the
international safety, but also for the strength of China's
banks.
Senator Scott. So they have the capacity but not
necessarily the incentive yet to do so?
Mr. Szubin. Yes.
Senator Scott. Thank you.
We make a lot of tires in South Carolina. We exported about
$35 million worth of them to South Korea in 2015 alone. Putting
aside the economic merits, of course, it would seem to me that
there is an important national security aspect here as well.
Stepping back from our leadership with South Korea is going to
create a vacuum, and no country likes vacuums. No region likes
vacuums. So we would assume that China would then step in to
fill that vacuum.
Mr. Ruggiero, my question for you is, How would dissolving
coarse impact, American influence in the Pacific Rim, and the
dynamic between South Korea and China?
Mr. Ruggiero. Well, I believe that we need to be going the
other direction. We need to work closer with our allies in the
region.
I think this--unfortunately, things like that may play into
the hands of Kim Jong Un, whose ultimate goal is to reunify the
Peninsula, preferably not be force, and he wants to drive a
wedge between the United States and South Korea.
I mean, I have called for something that is very similar to
what happened on Iran, which was a coalition of like-minded
countries. That is what we need to be working with, to increase
sanctions implementation, to talk about military maneuvers, to
do more exercises like interdictions in the region that the
North Koreans will notice.
So from my perspective, we really need to be going the
other direction, working closer with South Korea, because it
does look like South Korean President Moon has finally realized
that he is not really going to be able to talk to North Korea
and provide incentives to make this go away.
Senator Scott. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
This first question is for Mr. Park. Obviously, we need a
coalition of the willing, as is described. How willing is China
at this point? How concerned, in your judgment, is China about
what is happening in North Korea?
Mr. Park. Senator, there are two areas that are
counterintuitive in terms of some of the more recent Chinese
concerns.
One is that if you look at it from the North Korean
development, the pace, their view is this 34-year-old leader
has developed nuclear weapons too fast, so command control
concerns, professionalization, accidental launches, things of
those nature, very similar set of concerns that they had about
Pakistan in the summer of 1998.
The second concern they have is about an overreaction by
the U.S. side, the inadvertent escalation. This is something
that--not to minimize the threat that they perceive coming from
North Korea and the destabilizing acts there, but there is a
sense that they have seen this before, and they are accustomed
to it. And, as China rises in economic and military
capabilities, there is a sense that they have more tools to
apply to this issue.
But something that is new is what is coming from the U.S.
side, and I think that is what they are grappling with in real
time.
Senator Heitkamp. So that for the Chinese, the U.S.
reaction is the unknown with the change of the Administration?
Mr. Park. Well, we all also are in uncharted territory in
the sense that North Korea exhibiting intercontinental
ballistic missile and the ability to put a nuclear warhead on
that. It is different from the type of threat that North Korea
was previously, regionally.
Senator Heitkamp. I mean, one of the concerns that I have--
and I think long term--building this coalition and building
this sanctions regime is absolutely critical. I am not sure we
have that much time, and so the critical question that I have
is the immediacy of the challenge that we have and how can we
immediately get everyone to walk back, stand still while we
develop an opportunity here to do something more long term to
control the situation.
Mr. Park. Senator, there is a lot of concern, and one of
the things is if we do move quickly in some of these areas,
because North Korea is so far advanced, that it would
incentivize them to accelerate even further. And so those are
things that we have to take into account. These are the
measures that--there are a lot of secondary and tertiary
effects that come out of them as well.
Senator Heitkamp. I found your testimony, actually,
fascinating and something that we need to think more about,
which is always the law of unintended consequences and then
really understanding the situation on the ground.
And so I want to turn to Mr. Szubin and ask you just to
respond to some of the testimony that we have heard from Mr.
Park, Dr. Park, about the challenges of trying to re-create
one-size-fits-all kind of sanction regimes without really
understanding the uniqueness of the Pacific.
Mr. Szubin. I also found Dr. Park's testimony and writings
on this to be very informative.
We cannot have a one-size-fits-all approach. The networks
that North Korea is using may have become more efficient, may
have allowed it to pursue procurement goals more efficiently,
more easily through Chinese banks, and one could call that an
unintended consequence of sanctions pressure. That said, I do
not think it calls for backing up.
Senator Heitkamp. Right.
Mr. Szubin. I think it calls for doubling down.
And all sanctions targets are going to evade. They are
always going to try to move to more covert, smaller, more
nimble means, but we have proven equal to the task.
We have, for working with our partners, the intelligence
capabilities and the enforcement capabilities to play that cat-
and-mouse game and win.
Senator Heitkamp. So just quickly responding to Dr. Park's
comment about any kind of major effort at this point may, in
fact, escalate and advance the work that the North Koreans are
doing?
Mr. Szubin. So there, I would respectfully disagree. I
think that North Korea is already fully incentivized to go full
speed, and I do not think we are going to encourage them to go
any faster than they are currently going.
Senator Heitkamp. OK. Those are all really critical points
because I think that with this Committee and with the work that
is already being done in Congress, we can build a sanctions
regime that could be effective. We just do not have a lot of
time here, and so, Mr. Szubin, if you could just give us one
suggestion of something we should be doing diplomatically or in
this Congress that you think would have an immediate reaction.
Mr. Szubin. I think there is room for Congress to be
providing additional tools of pressure, as Congress did with
Iran, to allow the Administration to go to China and say,
``Look, the game is changing, if not already changed, and the
costs for you, for your companies, even for your financial
institutions are going to become unacceptably high. Help us
figure out a way out of this.'' And sometimes it is caricature,
a good-cop/bad-cop routine, where Congress is the bad cop,
there is a role for Congress in helping assist that.
And I want to be sure that, as I noted in my testimony, the
Administration is left with the latitude to ratchet up, ratchet
down, and play that leverage in a smart, strategic way.
Senator Heitkamp. If I can just have one more question.
Obviously, Senator Tester and I sent a letter to the State
Department asking for a special envoy to North Korea. We did
that at the suggestion of a lot of folks that we thought were
engaged and understood this problem a little bit more. What
would you--would you suggest that that is a good idea at this
point?
Mr. Szubin. I would respectfully defer. I do not know
whether that is needed.
I do know that what I believe is motivating your letter is
sorely needed, which is a concentrated effort from this
Administration, from the top down, and it has to involve, as I
saw in Iran, our Ambassadors across our many embassies. It has
to involve the Defense Department, the State Department, the
Treasury Department. It has to be a full-court press.
Senator Heitkamp. And it has to be consistent----
Mr. Szubin. Correct.
Senator Heitkamp. --from trade policy all the way down to
foreign policy, diplomatic policy, military policy.
Mr. Szubin. Absolutely.
And, as I noted at this Committee's Subcommittee hearing
back in May, it does not help if the State Department is
winnowing down at exactly the time that we need to be ramping
up this campaign.
Chairman Crapo. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Mr. Szubin, I am just curious. You mentioned earlier that
there were basically tentacles moving into the Chinese banking
system from North Korea, and that they were using Chinese
nationals in this process. Do you believe that China recognizes
these North Korean tentacles as being a threat or a problem
within their banking system today?
Mr. Szubin. Yes, but I think insufficiently so.
So, as with many parts of the North Korea problem, I think
China wishes this were other. They wish that Kim Jong Un did
not have any nuclear program at all, because it is just a huge
headache for them, and it leads to an increased U.S. force
presence right off their border.
But wishing that has not made it so, and the question is,
Are they sufficiently motivated to crack down on it? And right
now, I would say no.
Senator Rounds. Based upon what Dr. Park has indicated as
being one of their tools in the three antis approach, the areas
in which they have promoted a reduction in criminal activity, a
reduction in narcotics, a reduction in corruption, would it
appear--and I will ask this question of Dr. Park. Would it
appear that they have the tools available to them within their
existing--language of their existing law? Do they have the
tools available to them to stop this encroachment on the part
of North Korea if they are appropriately incentivized today?
Mr. Park. Absolutely. I think it is a question of political
will.
Defining the North Korean issues and activities inside of
the Chinese marketplace is criminal activities under Chinese
law, is an important way to move forward and view it from the
Chinese perspective.
As we saw with the counterfeiting of the Chinese currency,
that is a direct threat to Chinese national economic security.
If we incorporate these additional approaches in addition to
sanctions, this is where I think we get into uncharted
territory in a positive way.
The final thing I would mention is that, as I referred
earlier, there is the highly dysfunctional relationship between
the Communist Party of China and the Workers Party of Korea. A
lot of these activities taking place right now, those tentacles
that Mr. Szubin is referring to, the genesis was from roughly
around the October 2009 period. Then Premier Wen Jiabao led a
very senior delegation to Pyongyang to meet with Kim Jong Un,
and they signed a number of agreements that under Chinese law
gave the green light to Chinese companies to do business with
North Koreans.
We have to revisit that, and we have to say while a lot of
these areas are still valid and they are OK, there are these
areas that are criminal and they are having a direct impact in
furthering the North Korean nuclear weapons program.
Senator Rounds. And so the reality is that while they may
very well have tools available to them, there are also
restrictions that an official in China would look at and say,
``We have already made a decision that these are appropriate in
many cases, and that we now have to do additional work counter
to find out whether or not there is truly an inappropriate act
going on.'' It is not as black and white or cut and dried as
perhaps we would like it to be. Is that a fair statement?
Mr. Park. Well, thanks to technology, we have colleagues at
a place called C4ADS, the Center for Advanced Defense Studies.
They are using data analytics to track down North Korean
interlocutors and partners on the Chinese side, and they have
been able to map out Chinese nodes. So these are inconvenient
facts, so I think these are the types of areas where you can
directly engage the Chinese.
But it is important to frame it, again, from their national
interest and how these hurt their national interest. That is
something we have not really done, aside from the nuclear
proliferation and the security concerns.
Senator Rounds. Let me ask, just very quickly, to each of
you. I have got about a minute left. If we were going to focus
quickly on the areas in which we could have the most impact on
North Korea today, using an appropriate and partnership
arrangement, if it could be arranged, would it be more
appropriate to focus on the restriction of oil importation by
North Korea from China, or would it be more appropriate and
effective to focus on the financial institutions and the
tentacles that we find right now from North Korea into Chinese
banking systems? Which would you focus on if you could only
focus on one?
Mr. Park. Senator, the three antis or just broadly what
would I focus on?
Senator Rounds. Whichever way you believe would be the most
effective.
Mr. Park. So the way you have framed it, most impact now,
something that we have not discussed, incentives. I think in
monetary rewards to these Chinese middlemen, leading to
information to the interdiction of North Korean shipments and
other things, we have not explored that. There are ways they
can game it out, but I think there are important lessons from
other monetary reward situations where we would get a flood of
commercial information that we could act upon, very quickly.
Mr. Ruggiero. I would say the financial side. I am
concerned that Russia would backfill on restrictions on oil and
other petroleum products, so I think financial, it is the
biggest part of that. We could stop a lot of that at the
source.
Mr. Szubin. And I would be guided here by China. In other
words, if China says they are more willing to focus on the
financial side or more willing to focus on cutting off
purchases from North Korea of coal and other North Korean
exports, those could be very effective pressure points and
could be impactful quickly.
If China is willing to work with us on the fuel side, then
let us do that, but all of the ones that you are pointing to
are pressure points that will be felt in Pyongyang quickly.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
So just last weekend, North Korea conducted its sixth and
possibly its largest nuclear test. Although we have had various
sanctions in place now for years, North Korea has evaded many
of these sanctions and aggressively advanced its nuclear
weapons program. So it seems to me we need a better approach if
we are going to have any hope of pressuring the North Koreans
to change their behavior.
Dr. Park, I know that in 2014, you interviewed 21 high-
level North Korean defectors about the impact of financial
sanctions, and you found that sanctions imposed costs on the
regime, but that they had the unintended impact of forcing
North Korean procurement networks to innovate and, as a result,
actually to get stronger.
So let me ask you the question this way, Dr. Park. Many of
the sanctions imposed thus far have not deterred North Korea.
Does this mean that sanctions against North Korea cannot work?
Mr. Park. Senator Warren, I would frame it as sanctions
plus other policy tools, and under that heading, diversifying
the policy toolkit. The time is now, and I think this is where
we can do the full-court press in these other areas.
So there is the opportunity right now, and I think they
are, in certain quarters, the political will. But it has to be
done in a way that is viewed from the national interest of the
other parties in order to get the type of cooperation and the
time and the scale that we need right now.
Senator Warren. Well, you know, it seems to me that if the
recently passed U.S. and U.N. sanctions do not address the ways
that North Korea evades sanctions, then we need to redesign the
sanctions or redesign the enforcement so that we can make that
happen.
President Trump can threaten fire and fury, but experts say
that a land war on the Korean Peninsula would result in the
deaths of millions of people. He can threaten to cutoff trade
with any country that trades with North Korea, but we all
understand that that would cripple the U.S. economy.
We need to use every realistic tool available to reduce the
threat posed by North Korea, and I think that means military
readiness and intelligence and sanctions and diplomatic
pressure on the North Korean regime.
Now, Mr. Szubin, in your prepared testimony before a recent
Banking Subcommittee on North Korea, you said--and I want to
quote you here--``We will need massive diplomatic investment
and multilateral engagement and help from banks and businesses
and other countries if we are going to have any chance at all
to succeed.''
The State Department is one of the primary agencies
responsible for building those coalitions, and yet the Trump
administration has proposed cutting the State Department budget
by 32 percent.
Mr. Szubin, if the Trump administration cuts the State
Department budget by 32 percent, would it increase or decrease
any chance we have of countering the threat posed by a nuclear-
armed North Korea?
Mr. Szubin. Senator, as I said in the May hearing and as I
said today, this is the time to have our strongest diplomatic
representatives out there, and that means not only to have our
State Department staffed, but also to have leadership in place
and to carry the types of sensitive messages we are talking
about here and to show that we mean it, it cannot be done by
junior career foreign service people. We need Ambassadors, we
need Assistant Secretaries, Under Secretaries on planes, as we
saw with Iran, to show the world that we are serious.
Senator Warren. Yeah.
We provide the strongest defense of the United States and
our allies when we support both a strong military and a State
Department that has the resources it needs to push back on
North Korea and push them back from the edge of a nuclear
apocalypse. Cuts to the State Department are just stupid. They
are dangerous. I hope we do not go in that direction.
Thank you, Mr. Chairman.
Chairman Rounds [presiding]. On behalf of the Chairman,
Senator Tillis.
Senator Tillis. Thank you, Mr. Chair.
To the comments by Senator Warren, I cannot imagine any
reasonable Member in Congress seriously considering cutting the
State Department budget. If you serve on Senate Armed Service,
as I do, when you have former Joint Chiefs of Staff, when you
have the service chiefs saying, ``If you cut our diplomatic
funding, make sure you allocate more money for bullets''--so I
think it is very clear that there has got to be a strategic use
of diplomatic tools, and I do not think--I think it may be a
position that is taken by some in the Administration. But to
have that appear to be something that is being seriously
considered here in Congress, I just do not see a path to that,
so I think it is a non-issue.
With respect to sanctions, can you tell me a little bit
about--the petroleum imports from China to Korea are
significant. I understand that they may be reducing their
number of finished products for economic reasons. I do not
think North Korea is paying their bills, which to me is
promising. It means they are running out of resources. But can
you talk a little bit about the reality that China is in a
difficult situation?
They would certainly give up North Korean commerce for all
the other commerce they could lose if everybody said, ``We are
not doing business with you.'' So there are clearly strategic
factors involved. I mean, for them to, all of a sudden, become
an unfriendly Nation to China is also destabilizing to the
Chinese economy.
So how do you kind of get the pressure we should rationally
expect China to place on North Korea, recognizing their own
regional stability issues that they have to grapple with that
go far beyond the economic relationship with North Korea? To
any of you.
Mr. Park. That is, I think, the crux of the question in
terms of how we are going to get China on board to do what they
need to do in disrupting these procurement networks and also to
put the type of pressure on North Korea. I----
Senator Tillis. And just because I know I am going to run
out of time----
Mr. Park. Sure.
Senator Tillis. --I think that that is what we have to
continue to discuss and evolve so that we would get that
optimal point, recognizing just an outright--you know,
demanding an outright--cut the links with North Korea have
stability, regional stability issues that I think are a bigger
factor than the economic consequences.
We also have the dimension of to what extent Russia could
increase its energy inputs to offset some of what China would
do. So all those sorts of scenarios, I think, have to be played
out.
Do you all know how many Nations, if North Korea were to
pursue a hostile act or complete a hostile act, that we are
obligated to come to their defense?
Mr. Park. In terms of allies?
Senator Tillis. Yeah.
Mr. Park. South Korea, Japan, and northeastern Asia, and
you look farther afield, you are looking at North Korea ranges
of their ballistic missiles if they do another test and they go
southward, as they did with their space launch vehicle just
north of the Philippines.
Senator Tillis. And to what extent do those Nations already
have a highly assertive policy with respect to doing business
with North Korea?
Mr. Park. Japan has been the innovator in terms of
sanctions measures.
Senator Tillis. How about the others?
Mr. Park. South Korea adopted more recently, but I think
under this new Government, they are still hoping that there is
an opportunity, diplomatic opening, to reengage economically.
Senator Tillis. With respect to the--you brought up
something, I think, Mr. Park, about counterfeiting, which I had
not heard before. First off, I am no longer going to accept
hundred-dollar bills when I get big bills, and that is not very
often. My wife normally keeps me to $60 withdrawals.
But what more--I mean, what more do we need to learn about
that, and what specific actions in the global community are
being taken to really tighten the noose on that?
Mr. Park. My colleagues who have the Treasury background
are the experts here.
Senator Tillis. Yeah. OK.
Mr. Ruggiero. I think on counterfeiting, in the 2000s,
there was a demonstrated effort against the supernote, which
was the effort by North Korea to counterfeit U.S. currency.
Senator Tillis. To what extent could--because I am about to
run out of time. I am sorry to cut you off, but I would like to
learn more about it. But to what extent would--what specific
actions could we take or should we consider with respect to
sanctions that have some nexus in this known counterfeiting
activity, if any?
Mr. Ruggiero. Well, the approach in the 2000s was, I think
at the very beginning, to look at the items needed for
counterfeiting, so, for example, inks and presses and things of
that sort that North Korea would need to allow them to do this
counterfeiting. If it is ongoing, that would be the first
approach I would advocate, and a lot of those, there are only a
couple of companies in the world that have that expertise. So
you could go to those countries in a diplomatic way and say,
``Please do not allow the transfer.''
This is where North Korea having the tentacles or nexus in
China becomes complicated because it will not look like North
Korea is looking at this procurement. It is a Chinese company
or a Hong Kong company or a Western company in some instances.
Senator Tillis. Thank you. I am sorry I had to be so short
on your responses. You have got a lot of great information, and
we appreciate your help.
Chairman Crapo [presiding]. Thank you.
Senator Tester.
Senator Tester. Yeah. Thank you, Mr. Chairman, and I want
to thank the panels for being here today. Unfortunately, as the
Chairman has pointed out, there are committees stacked on
committees today, and this may be the most important committee
we are dealing with. And we have got some very important
committees this morning.
Look, I do not know that anything has kept me up more at
night than what is going on in North Korea at this point in
time over the last 10 years. I have had the impression that the
President has been rather cavalier in his dealings with North
Korea, and I really do not know what has been done
diplomatically to really bring people together.
For example, there has been criticism of South Korea. I do
not know that that is helpful. Germany has said you no longer
can depend upon the United States anymore. So there is this
feeling out there at a time when we need to bring our allies
together, in my opinion, that the United States is very
unpredictable.
I guess my question is you guys are not on the military
side of things. You are more on the sanctions side of things
and diplomatic side of things. Could you grade this
Administration's job in what they have done in handling the
North Korea situation since they have come into office, knowing
full well that the previous Administration also--and the
Administration before that and so on--but could you grade the
work that they have done from a diplomatic standpoint as far as
their effectiveness?
Mr. Szubin. Senator, I am newly minted as a professor, and
so my grading skills are not yet----
Senator Tester. But you may be the smartest guy I have met.
Mr. Szubin. You know, at the end of your question, you
noted this is not just this Administration.
Senator Tester. No, it is not.
Mr. Szubin. This has been moving forward inexorably.
Senator Tester. Yep.
Mr. Szubin. And my time at the Treasury span President Bush
and President Obama, and I cannot give us good grades on this.
I do not think we--and I am pointing at myself here--did
enough, and the----
Senator Tester. So you do not think they did enough. So
what should they be doing? What should they be doing different
now than you have done in the past?
Mr. Szubin. It is really taking the pressure up into a
qualitatively different place than it has been, not
incremental, and it cannot be more half-steps, like we have
seen from China. We cannot be U.N. resolutions that look tough
on paper but are implemented in a half-hearted way. We need a
concerned pressure. It needs to be massive, and it needs to be
now.
Senator Tester. Does the State Department have the staffing
to do that?
Mr. Szubin. I do not know. I am not on the inside anymore.
Senator Tester. OK.
Mr. Szubin. I mean, the key people are going to be the most
senior folks--the Deputy Secretary, the Secretary of State,
other key folks leading this effort, and the Ambassadors.
Senator Tester. Do you guys agree with that assessment that
we need to really step it up in a big, big way and not just
incrementally, but--go ahead.
Mr. Ruggiero. Right. I agree with Mr. Szubin. I mean, U.S.-
North Korea policy has failed since 1994.
Senator Tester. Yeah.
Mr. Ruggiero. I mean, we have to be honest with ourselves.
Senator Tester. Yep.
Mr. Ruggiero. And we are not having the conversations we
need to have about whether this regime will actually
denuclearize----
Senator Tester. Yep.
Mr. Ruggiero. ----no matter the pressure and how we get to
a level of pressure.
Senator Tester. OK.
Mr. Ruggiero. And I would just say that it is also the
Treasury Department in terms of staffing, and there, I think we
have a lot of political appointees already in place. And that
is an area where they can increase pressure there.
Senator Tester. OK. Do you think the Treasury Department is
adequately staffed to do this?
Mr. Ruggiero. They have a confirmed Under Secretary and
Assistant Secretary, and they have an OFAC director.
Senator Tester. Dr. Park, could you comment on what we
should be doing that we have not done in the past and, second,
where we are at staffing-wise?
Mr. Park. I concur with my colleagues here. I would just
add that when it comes to the acting now, the coordination with
particularly the Chinese actors, moving beyond just the
national level, but also the different actors in the companies
and the banks, there is a compliance department culture that is
growing very quickly.
And, as Mr. Szubin mentioned, these are large banks. It is
in their interest, and it is part of their business protection
to do the compliance.
Senator Tester. How much of their capital flows through
China, percentage-wise? Can any of you give me that answer?
Mr. Park. I would turn to Mr. Szubin and Mr. Ruggiero on
those.
Mr. Szubin. We do not know, is the answer, but we know it
to be the great majority.
Senator Tester. OK. Has the United States done everything
they can do from a sanctions standpoint on capital that they
can control? Let us assume that 80 or 90 percent goes through
China, and I do not know if that is true or not, as you do not.
But the truth is, has the United States done everything they
can possibly do, just because they have the ability because of
our currency to throw--have we done everything we can do, or is
there still more that we can do to actually put the screws to
North Korea to make them understand that their behavior is
unacceptable?
Mr. Szubin. Is your question with respect to pressuring
China----
Senator Tester. No.
Mr. Szubin. ----or with respect to North Korean financial--
--
Senator Tester. China's side, yes, with our allies and with
everybody else.
Mr. Szubin. Yeah. So I do not think there is North Korean
money coming through U.S. banks either here or U.S. banks
abroad. I think we have been very vigilant in our financial
sector. It is very finely tuned to detect these types of
things.
Senator Tester. And with our allies, same thing?
Mr. Szubin. Our allies have been relatively good. I think
we have seen incidents in, for example, Southeast Asia, where
flows have gone through, and it can be recklessness. It can be
negligence. Sometimes the financial institutions are not as
sophisticated as our financial institutions. So I am not saying
things are perfect, but there is enough eggs in the China
basket that were we to solve that issue, I am confident we
would see a major move of the needle in terms of the pressure.
Senator Tester. OK. I am way over time. Thank you very,
very much.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman.
Chairman Crapo. You have been patient.
Senator Van Hollen. Yeah, we have. We also have the
appropriations foreign ops markup going on.
But I want to just start by thanking you and Ranking Member
Brown for this timely hearing and for your joint determination
to make sure that this Committee does its part in making sure
that we bring what Mr. Szubin described as concerted, massive,
and immediate pressure on North Korea, using all the tools at
our disposal to do that.
And I did have the opportunity over the break to visit
South Korea, Japan, and China on a bipartisan delegation that
was led by Senator Markey, and in Korea, we went to the DMZ
area, but we also traveled up to the North Korea-China border
to the city of Dandong that many have talked about, where you
have that cross-border trade between North Korea and China. We
thought it was important to go up there and take a look at what
was going on and talk to people.
And we also had a chance to meet with President Moon, and I
just want to assure my colleagues, based on our conversations,
that he is determined to address the threat. He is not engaged
in appeasement, and I do think it is important that we are all
on the same page going forward.
He is also deploying the THAAD anti-missile defense system
there, despite some concerns in South Korea, and what is
troubling to me is that when South Korea is taking these
defensive measures to deploy these defensive systems, China has
actually imposed an informal embargo on some South Korean
consumer goods. They have actively discouraged visits from
China to South Korea, which were growing, a big part of the
tourism industry; in fact, some estimates suggest that it has
dropped by about 40 percent. And so instead of doing more to
work with us and the international community to actually force
the U.N. sanctions on North Korea, they are actually penalizing
South Korea for deploying the THAAD missile defense system.
So, as we have all discussed today, it is very important
that we find ways to work with China to get them to bring more
pressure on North Korea and recognize that the most chaos you
would see in terms of a regime in North Korea is if you have
military action and a war.
And the U.N. panel of experts last February did a thorough
analysis of the trade and commercial interactions with North
Korea, and they concluded that the sanctions which were then in
place were not being fully complied with, that there were lots
of holes in them.
And Senator Toomey mentioned this morning the Wall Street
Journal article that mentions the fact that this same U.N.
panel of experts is just about to issue an interim report
saying that that pattern continues, that the sanctions are not
being adequately enforced. And I want to quote from the Wall
Street Journal article here. It says, ``The U.N. panel''--and
this is today--``The U.N. panel also named several North Korean
banks established, managed, or owned by Chinese companies.
Beijing told the panel that the companies are not authorized to
establish banks in North Korea, but the panel said it had not
heard whether Chinese authorities had acted to shut them
down.''
And that is why Senator Toomey and I and many others on a
bipartisan basis believe it is important to take this next
step, and that is why we have introduced the BRINK Act. And the
idea of the BRINK Act is to model it after the Iran sanctions.
Obviously, there are some differences between the situation in
Iran and the situation in North Korea, but the idea is to put
in place a clear structure of escalating sanctions that will
take place.
But it also does provide the Administration with some
flexibility, and I want to ask you about that because, first of
all, it says let us just name and identify the banks and firms,
name and shame, that are engaged in trade with North Korea. Do
any of you see any problem with publicly identifying, just
naming those banks that we have information about if they are
evading the sanctions?
Mr. Szubin. And, Senator, are you talking about evading
U.S. sanctions, or are you talking about evading U.N.
sanctions?
Senator Van Hollen. These would be both, whether they are
evading U.N. sanctions but also if they are--whether that bank
is engaged in conduct that evades U.S. sanctions or U.N.
sanctions.
Mr. Szubin. So I think, obviously, naming and shaming is a
tried-and-true tool in the sanctions toolkit. As such, I would
not object to it, no.
Senator Van Hollen. Any objections?
[No response.]
Senator Van Hollen. Yeah. And then it does have an
escalating series of choices that the Administration can make,
right? You do not have to immediately cutoff any bank from the
financial system. The whole idea is to provide warning and then
determine whether or not that bank or financial institution is
knowingly violating these provisions, which is why fines are
also an option.
So I guess, have you had a chance to look at those suite of
options within the overall structure? And if we could start
with you, Mr. Ruggiero, and then we will----
Mr. Ruggiero. Yes. I think that starting with fines--well,
starting with identification and then fines, and I think the
other interesting part of the bill is the carve-out for law
enforcement activity, which is also important, because I think
that law enforcement should have the option to seek
cooperation, like they did with Chinese telecoms, ETE.
Senator Van Hollen. Right. No, and I am glad you mentioned
that piece of it.
And I see I may have gone over my time. Senator Warner is
here, but let me thank you, Mr. Chairman, thank all of you for
being here, and appreciate your insights.
Chairman Crapo. Thank you.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
I saw your face fall when I walked in because you thought
one more Senator is coming in.
Chairman Crapo. How could you tell?
[Laughter.]
Senator Warner. I will want to appreciate all your
testimony. I will get briefed. I was down on a Finance
Committee hearing, and I had a witness. And I will try to ask
two brief questions, not to duplicate ground that has already
been covered.
Mr. Ruggiero, this is following up on some of Chris'
questions. I think it has probably been discussed at some
length that if we go to a sanctions on any banking institution
that does business with North Korea, you potentially go into a
realm of mutually assured destructions, since some of the
largest Chinese banks affect the whole financial system. And I
believe you have suggested perhaps beyond simply naming and
shaming, the question of going after not some of the largest
banks, but some of the smaller and medium-size banks. Do you
all think that would be an effective--send an appropriate
message or as a first step? Obviously, I guess you would
because you have suggested that, but I would like to also hear
from Mr. Szubin and Mr. Park.
Mr. Ruggiero. Well, I guess I would start with saying that
in the Iran sanctions context, the United States issued over
$12 billion in fines against European financial institutions,
so I would not necessarily say we would keep it in the small to
medium.
And I would also point out that banks like Bank of China,
where a representative in a Singapore court, it was revealed
that a representative coached a Singapore company on how to do
U.S. dollar transactions, essentially, by keeping North Korea's
name out, things like that. Now, maybe that does not rise to
the level of a fine, but I think the Treasury Department could
use examples like that, whether in a cooperative way with
Chinese banks or in an, unfortunately, combative way.
But I agree with Mr. Szubin that the options of designating
these banks, whether to cut them off from the U.S. financial
system or freeze their assets, are down the road. That is not--
when you are looking at an escalation ladder, that is not where
we are right now.
Senator Warner. Dr. Park. Mr. Szubin.
Mr. Szubin. To me, the question of what entities you focus
on should be driven by the intelligence, by the evidence. If we
have actors, big or small, who are knowingly facilitating North
Korea's weapons procurement or who are knowingly facilitating
sanctions evasion, then I think that is exactly where we should
be going with our enforcement authorities, and the question of
which tool, which sanction is the right tool, I would defer to
those who are close to the evidence.
But the points that I was making in my written testimony
about the size, the economic impacts of major blows against
Chinese entities and banks was not to say that we should walk
away from this issue. To the contrary, I think we need to
redouble our efforts, and we have to be ready to look at any
and all alternatives. We are facing a really serious nuclear
threat, and when you have people talking about potential
military commitment or potential attacks against a city of an
ally like Seoul with millions and millions of people, including
hundreds of thousands of U.S. citizens, we have to be ready to
do some things that might be uncomfortable for us, to do some
things that might be economically costly for us. I just think
we need to be eyes open about what those costs are, and that is
what I meant by prudent and strategic.
Senator Warner. Did you want to add anything?
Mr. Park. I would just very quickly add, in terms of some
of the unintended consequences that may look like they are
unforeseeable, one thing that we have to take into account, we
have the precedent of what is happening right now vis-a-vis
South Korea and the Chinese marketplace. This is something that
if we do go this route of applying secondary sanctions on these
large Chinese entities, there will be some version of a Chinese
retaliation on American companies and American interests. That
is an area that we have to start thinking about now.
In terms of if we are going this route, then we have to
have things ready in order to deal with those consequences or
blowbacks as we approach that area. We should not be
blindsided. If we are blindsided, then I think that is shame on
us in terms of that particular circumstance.
Senator Warner. Last question, and again, thank you, Mr.
Chairman, for letting me go on.
It seemed to me North Korea has been in levels of economic
sanctions for some time. They seem fairly effective at setting
up front companies, and, Mr. Ruggiero, as you mentioned, their
names may not appear. I mean, how aware do you think China and
Singapore, for example, are of how extensive the North Korean
kind of false fronts and front companies are?
Mr. Ruggiero. Well, I would make two points. The first is
that we have nongovernmental organizations using customs
records to ferret this out, so I think that the largest banks
in the world can do that if they want to.
The second point I would make in reading some of the
Justice Department actions, what we learned is some of these
front companies and the main organization, Chinese companies
advertise themselves as China-North Korea trade partners. So
those are the types of things that banks and compliance
officers should be asking questions about, and it is very
difficult.
But, as Mr. Szubin said, we are at a point now where we
have to go to the Chinese and say, ``If your banks are not
going to ask those questions, then we are going to have to take
our own actions to protect ourselves.''
Mr. Szubin. Yes. With your permission----
Chairman Crapo. Mr. Szubin, if you would like to add, the
last word, we will give that to you.
Mr. Szubin. Mr. Chairman, thank you so much, and it is
actually on a point that came up a little bit earlier in the
hearing, I believe, from Senator Tester who asked how I would
assess, how we would assess the Administration's efforts vis-a-
vis North Korea.
I am not up close. I am not inside the Government, and I am
not in a position to assess the diplomacy that is going on
behind the scenes.
But I did want to note one thing that is playing out in a
more public way, which is the Administration's consideration of
removing the certification on the Iran side, which obviously is
an issue that is watched very carefully by those in Pyongyang
and those in Beijing. It does have effects on the issues we
have been talking about today, and I think that the decision
that I have heard being considered of withdrawing a
certification that Iran is in compliance with the deal, while
still keeping sanctions, waivers in place, feels very much like
playing games with the nuclear deal. And it is not the way
great Nations conduct themselves.
The world's opinion is Iran has been complying with all the
material provisions of the deal, and I think it is important
that if that is true, that we certify that that is true. That
gives us credibility when we talk about needing a diplomatic
solution with North Korea. If Iran breaches the deal in a
material way, we need to come down on them like a ton of
bricks, and I believe we will have international support to do
so. But in the current status, this is not something that we
should be toying with, my own personal opinion, obviously.
Thank you very much, Chairman.
Chairman Crapo. Thank you.
And, again, thank you to all the witnesses. As is usually
the case, you will probably get some questions following the
hearing from Senators who either were not able to get here or
who did not get to ask all of their questions during their
opportunity.
And in--frankly, in that regard, how long do we want to
give--we will have the questions due by--so I am going to say
to the Members of the Committee, have your questions within a
week and ask you to just respond as quickly as you can
afterward, if you would.
And, frankly, I am serious. I appreciate your expertise and
the information you have provided us here today. This is an
issue that develops almost daily, and so if there are
additional observations you would like to offer us on your own,
please feel free to do so. It would be very well received.
With that, this hearing is adjourned.
[Whereupon, at 11:26 a.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF ADAM SZUBIN
Distinguished Practitioner in Residence, Strategic Studies, Johns
Hopkins University School of Advanced International Studies
September 7, 2017
Chairman Crapo, Ranking Member Brown, and distinguished Members of
this Committee. Thank you for convening this hearing on such an
important and timely topic and for inviting me to testify today.
The scale and range of North Korea's nuclear and long-range missile
programs is advancing by the month, with a corresponding increase in
the regime's threats and defiance. The threat to our allies and to U.S.
persons in the region is already too high, and the regime has made no
secret of its aim to develop a missile that can reach the continental
United States. It is hard to think of a nuclear threat this acute since
the Cuban missile crisis. And, despite all of the world's diplomatic
pronouncements, a scenario that has been repeatedly described as
unacceptable grows ever closer to becoming reality.
Our response needs to be decisive and firm. It will need to
incorporate all of the leverage at our disposal: diplomatic, financial,
economic, and military. And it will require the full commitment of our
partners, especially those in South Korea, Japan, China, Australia, and
the European Union. Ultimately, we must hope that there is a diplomatic
solution here, in which the international community negotiates a
peaceful and verifiable end to North Korea's nuclear weapons program.
Currently, the North Korean leadership has no interest in such
discussions. If we are to get to negotiations, then, the international
community will need to place severe pressure on North Korea until it
agrees to come to the table in a serious way. Sanctions will be a key
component of that pressure.
Most experts assess--and I agree--that a quantitative increase in
sanctions pressure will be insufficient to change Kim Jong Un's
calculus. Even a major drop in North Korea's export revenues or
financial access will not affect his behavior. With a repressive
security apparatus at his disposal, Kim Jong Un can weather economic
hardship by passing it along to the helpless North Korean people. The
only hope we have lies in a qualitatively different and more severe
level of pressure--one that threatens Kim Jong Un's hold on power. It
would mean placing a stranglehold on the North Korean economy that
makes it impossible for the leader to pay his military and security
forces, to fuel his planes and trucks, or to provide bribes to his
family and cronies. This is a level of pressure far beyond what the
international community applied to Iran. In such a scenario, with his
Government on the brink of collapse, it is possible that Kim Jong Un
would come to the table to save his regime.
That said, a number of experts believe that even in extremis Kim
Jong Un would not negotiate in a serious way. They assess that he would
dig in out of a combination of defiance and delusion even if his
Government risked collapse. I suspect that these experts are right. But
if Kim Jong Un will face the collapse of his leadership before he
relinquishes his nuclear program, than we need to see his leadership
end, whether through a military coup or other means. And severe
multilateral sanctions pressure is a route to that end.
The bottom line is, the international community needs to put such
pressure on Kim Jong Un that he will either come to the table to
protect the well being of his country or be replaced by someone who
will. This level of pressure is far higher than where we are today.
And, despite some good developments over the last few months, including
a strong U.N. Security Council sanctions resolution, I do not believe
that the pressure is mounting at nearly a sufficient rate.
A Renewed Sanctions Campaign
What would a sufficiently tough sanctions program look like and how
would it be obtained? The good news here is that--contrary to some
observers--North Korea is not somehow ``sanctions proof.'' It is
isolated but it is not self-reliant. In fact, in many ways, its
isolation renders it more vulnerable to sanctions pressure than Iran
was in the mid-2000s when we commenced our pressure campaign.
North Korea's anemic economy requires the regular import of
petroleum, coking coal, and textiles. Its antiquated industrial and
communications sectors require significant imports of machinery,
equipment, and expertise. On top of the general economic needs of the
country, Kim Jong Un depends upon a system of patronage to purchase the
loyalty of senior political and military officials, for which he needs
cash as well as foreign luxury goods such as cars, technology, and
high-end consumables. In the aggregate, these imports and purchases are
estimated at approximately $5 billion a year. None of them can be
bought using North Korean currency; no exporter outside of North Korea
will accept payment in North Korean won. All of this means that the
leadership of North Korea must (a) continuously generate new foreign
currency earnings through the sales of minerals, weapons, counterfeit
goods, etc.; (b) receive payment for those exports in foreign bank
accounts via the international banking system; and (c) pay for and
arrange for the delivery of needed imports. All three of these elements
are needed to prevent a broader economic collapse and to maintain the
loyalty of Kim Jong Un's inner circle. A serious sanctions campaign
should target all three. It would stifle North Korea's foreign currency
earnings--for example by cutting off purchases of North Korea's coal
and minerals. It would shut down the front company bank accounts in
China and elsewhere that North Korea uses to access foreign currency.
And it would constrain the shipment of fuel to North Korea.
China will be the determining factor in such a campaign. To bring
the pressure up to the threshold required, we must find a way to enlist
the cooperation of the Chinese Government and the compliance of Chinese
private actors. In theory, this should be doable. China is not pleased
with either Kim Jong Un or with North Korea's burgeoning nuclear and
ballistic missile capabilities. China certainly does not like the
stepped up U.S. military presence in the region that North Korea has
provoked.
To date, the problem has been that, as much as China may dislike
Kim Jong Un and his nuclear program, a collapse of the North Korean
regime is a far worse alternative. Even an erratic Kin Jong Un is
preferable to a Government implosion in North Korea, which could
trigger an outpouring of millions of indigent refugees across China's
border, a struggle for control over North Korea's military and nuclear
programs, and the potential prospect of reunification of the Korean
peninsula under a South Korean Government, bringing a close U.S.
military ally to China's borders.
It is important to recognize, then, that China will not ratchet up
the pressure on North Korea to anything close to a leadership-
threatening level unless it understands what comes next and views the
scenario/s as acceptable. China will not ``roll the dice'' and hope for
the best.
Serious and high-level engagement will therefore be needed to
assure China that (1) this issue is paramount for the United States,
above other commercial and geopolitical priorities; (2) the proposed
sanctions campaign against North Korea is aimed at addressing the
nuclear problem not regime collapse; and (3) our interests in this
diplomatic effort overlap with and are reconcilable with China's
national security interests, including maintaining stability on the
Korean peninsula. I believe that there is enough overlap between
China's concerns vis-a-vis North Korea and our own for us to work out a
mutually acceptable approach and end-game.
Discussions with China will likely require both carrot and stick.
We can expect China to take half-steps to increase sanctions pressure
but not to a decisive level. Ultimately, the key will be making clear
to China that the status quo is not tolerable because of a range of
escalating costs, including sanctions exposure.
In approaching questions about sanctions against Chinese entities--
especially larger State-owned entities or banks--U.S. policymakers need
to be prudent and strategic. Prudent because any larger sanctions would
inevitably carry spillover costs to ourselves and our allies. And
strategic because, at the end of the day, the objective is to win
China's cooperation, not provoke a breakdown between our Nations or a
trade war.
There has been much discussion recently about the global economic
repercussions of an aggressive sanctions campaign targeting larger
Chinese entities or banks. Those who would tell you that we can levy
massive financial and economic sanctions against China without serious
reverberations for the global economy or businesses in the United
States are mistaken. China's economy and banking system may have been
self-contained and insulated against spillover 15 years ago, but it
certainly is not today.
The U.S. has the largest economy in the world and China has the
second. Looking at China's banks, the four largest banks in China are
the four largest banks in the world, each larger than JPMorgan Chase by
assets. Yes, they are inextricably dependent on access to the U.S.
financial system but the dependencies run both ways. They hold several
trillion dollars of assets in our markets and at our largest
institutions. By comparison, Lehman Brothers before its collapse was
only one-seventh as large. The implosion of one of the world's largest
financial institutions would send shock waves through the international
financial system and trigger large and unpredictable fall-out.
Beyond the banks, our trade ties with China are deep and growing.
U.S. companies export about $115 billion of goods to China, making it
our third largest market after Canada and Mexico. Since 2009, U.S.
exports to China have grown about 92 percent, as compared to 27 percent
growth to the rest of the world. The U.S. exported an additional $53.5
billion in services to China in 2016, a growth of 400 percent from 10
years ago. The Commerce Department estimates that U.S. exports to China
support nearly one million American jobs, concentrated in the
agricultural, automobile, airline, and financial services sectors.
Beyond any direct trade effects from sanctions, a strong blow to
China's banks or economy would put downward pressure on the renminbi
and upward pressure on the U.S. dollar. We would essentially be
lowering the value of China's currency--a trend that our Government has
fought for years to combat--with pronounced costs for American
manufacturers and exporters and to the many countries around the world
that compete with China. And, as former Secretary Robert Rubin has
said, ``if China really had an economic crisis and as a consequence,
the currency plummeted, that would put tremendous pressure on emerging
market country around the world to depreciate their currencies, and you
can be off to a global currency war.''
Finally, the interconnected nature of the global economy means that
our economy and our markets face risks if there is a sudden shock to
China's economy. We don't need to speculate on this question. Meltdowns
in China's stock market during August 2015 and January 2016 were
immediately felt in New York. On August 24, 2015--China's ``Black
Monday''--the Dow Jones Industrial Average dropped 3.6 percent, while
the S&P 500 index fell 3.9 percent. On January 7, 2016, another episode
of pronounced weakness in Chinese markets, the Dow Jones Industrial
Average fell nearly 2.3 percent, while the S&P 500 index dropped 2.4
percent. These were among the worst trading days in U.S. equity markets
in years. Estimates on the global equity market spillover impact from
the August 2015 and January 2016 selloffs were on the order of $3
trillion and $2 trillion, respectively. A strong blow to China's
economy or weakened banking sector could unleash large capital
outflows, triggering a repeat of the August 2015 or January 2016
episodes, or worse. And none of this takes into account the inevitable
response and counter-sanctions from China against U.S. firms,
especially those with a presence in China.
These are not reasons to walk away from a serious effort to win
China's cooperation on North Korean threat. We must do so. But we must
be determined as well as prudent.
New Sanctions Legislation
On a final note, I would like to speak to the respective roles of
the Legislative and Executive branches in designing and implementing
sanctions. The way in which we design sanctions can determine their
success or failure. Congress has a key role to play, as I saw firsthand
over 13 years at the Treasury Department. From Iran to Sudan to Russia,
Congress provided powerful authorities to protect our financial system
and to combat foreign threats. That said, in comparison to executive
branch sanctions, laws are very difficult to repeal or amend, and
sanctions laws have historically been one-way ratchets.
To provide just one example, Mikhail Gorbachev ended the
restrictions on the emigration of Soviet Jews in 1989. The Supreme
Soviet passed a law codifying this step in May of 1991. In recognition,
President George H.W. Bush waived the Jackson-Vanik Amendment's
sanctions on the Soviet Union in June of 1991. It took another 11 years
for Congress to repeal Jackson-Vanik and, even then, it only did so in
an attachment to the Magnitsky Act, which imposed new sanctions against
Russia over human rights violations.
I raise this because of a recent trend towards what I see as
extreme codification of sanctions, in a bid to strip the executive
branch of discretion over the implementation and lifting of sanctions.
One recent sanctions bill devotes 20 pages of text to restraining the
executive branch's discretion.
President George H.W. Bush was able to incentivize the Soviet Union
by utilizing the waiver provisions in Jackson-Vanik, and responded to
the repeal of emigration restrictions immediately. The waiver
provisions in Jackson-Vanik were designed as guardrails to ensure that
the Administration faithfully carried out the objectives of the
sanctions but they also left the President leeway to exercise his
foreign policy authorities. In one paragraph, they required that the
President determine that the waiver would substantially promote the
objectives of the law--in this case freedom of emigration--and that the
President had received assurances that the emigration practices in
question would henceforth lead to the substantial attainment of the
objectives of the Act. If Congress disagreed, it could overrule the
President's use of the waiver through a joint resolution.
Had that flexibility not been in place, had Jackson-Vanik tied the
hands of the executive branch until the final objectives of the law
were satisfied or required an affirmative vote by Congress before the
waiver could be issued, the Soviet Union would have perceived these
sanctions to be immutable, and the Jackson-Vanik Amendment would not
have been nearly as powerful as an inducement to change.
Ultimately, this is what sanctions against States are for. They are
meant to incentivize behavioral change. For that inducement to work,
the targets of sanctions must see that the President has the ability to
lighten or remove the pressure. That is, those that conduct our
Nation's foreign affairs must have discretion over how and when
sanctions are eased or removed. If the sanctions target perceives the
sanctions to be fixed, then sanctions have ceased to act as a motivator
for change and exist solely as a penalty.
Congress should have a role in crafting sanctions policy. It is, as
with many of the aspects of our system that our framers devised, a
balance. Where this balance in the separation of powers lies may differ
across contexts. In my view, however, sanctions that cannot be eased
without an affirmative joint resolution of Congress are not likely to
be constructive. Likewise, it is not advisable to impose sanctions that
only allow for easing once the ultimate objectives of the sanctions
have been obtained. As in Jackson-Vanik, the executive must be able to
recognize and reward substantial progress towards a goal, otherwise our
diplomats' only available strategy is to negotiate end-state
resolutions.
I have witnessed first-hand the power of congress working alongside
the President to pursue a sanctions campaign and it is formidable. My
hope is that the two branches can work in concert, particularly to
address threats like North Korea where objectives are fully shared.
Conclusion
Even with a concentrated and strategic effort across our
Government, we cannot guarantee that a diplomatic effort powered by new
sanctions pressure will succeed. But it has a chance to do so. And,
faced with this ever-growing threat, I believe that it is our duty to
put all of our energies into this effort.
Thank you again for inviting me to testify.
______
PREPARED STATEMENT OF ANTHONY RUGGIERO
Senior Fellow, Foundation for Defense of Democracies
September 7, 2017
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF JOHN PARK
Director of the Korea Working Group and Adjunct Lecturer in Public
Policy, Harvard Kennedy School
September 7, 2017
Introduction
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for the opportunity to testify before you today. As requested
by the Committee, I'll be providing key findings from my research into
the North Korean regime's accumulated learning in evading sanctions,
and outlining ways to bolster efforts to stop its procurement of banned
items for its WMD programs. Such efforts are urgently needed as the
regime continues to make rapid advances in its nuclear weapons
development program--most recently a 6th nuclear test and an
intermediate-range ballistic missile flight over Japan. \1\
---------------------------------------------------------------------------
\1\ The primary U.S.-led response to these provocations has been a
robust call for enhanced sanctions in the U.N. Security Council (UNSC).
The pillars of the UNSC sanctions regime on North Korea include
resolutions 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), 2270
(2016), and 2371 (2017). The context surrounding these resolutions is
usually a nuclear test or launch using ballistic missile technology,
which then triggers a UNSC response through Chapter VII measures. These
tests and launches are repeatedly condemned as a clear threat to
international peace and security. North Korea is urged not to conduct
any further test or launch, reminded of its international obligations,
and called upon to abandon all of its nuclear weapons and existing
program in a complete, verifiable, and irreversible manner. With each
passing resolution, the scope and substance have both widened and
deepened, entailing very specific provisions. ``Halting North Korea's
Nuclear and Ballistic Missile Development Programs'', Asan Institute-
Harvard Belfer Center Workshop, Seoul, June 2017.
---------------------------------------------------------------------------
How Has the North Korean Regime Evaded Sanctions?
As I highlighted in my testimony in July before a subcommittee of
the House Committee on Financial Services, the North Korean regime's
sanctions evasion techniques have improved significantly because of
North Korea, Incorporated's migration to the Chinese marketplace. \2\
As a result, U.S. policymakers need to diversify the set of policy
tools beyond sanctions to disrupt North Korean-Chinese business
partnerships operating inside of China.
---------------------------------------------------------------------------
\2\ Park, John. Testimony before the House Committee on Financial
Services' Monetary Policy and Trade Subcommittee, ``Restricting North
Korea's Access to Finance'', 19 July 2017. Accessed at: https://
financialservices.house.gov/calendar/eventsingle.aspx?EventID=402134.
---------------------------------------------------------------------------
My MIT colleague, Dr. Jim Walsh, and I conducted research on North
Korea, Incorporated--a term we use to describe the regime's web of
elite State trading companies. We found that the net effect of
sanctions was that they, in practice, ended up strengthening the
regime's procurement capabilities--what we call the ``sanctions
conundrum.'' \3\
---------------------------------------------------------------------------
\3\ Park, John, and Jim Walsh, ``Stopping North Korea, Inc.:
Sanctions Effectiveness and Unintended Consequences'', MIT Security
Studies Program, August 2016. Accessed at: https://drive.google.com/
file/d/0B_ph0c6i87C_eGhCOGRhUVFaU28/view.
---------------------------------------------------------------------------
In the marketplace, increasing sanctions on North Korea's State
trading companies had the effect of elevating the risk of doing
business with these entities. However, rather than deterring local
Chinese business partners, the elevation of risks and rewards attracted
more capable, professional middlemen to procure illicit items on behalf
of North Korean clients. The process that drove this outcome was the
monetization of risk. The higher the sanctions risk, the higher the
commission fee that a North Korean entity had to compensate a local
middleman.
In sum, targeted sanctions--unintentionally and
counterintuitively--helped to create more efficient markets in China
for North Korea, Incorporated.
Significantly, one of the biggest setbacks for North Korea,
Incorporated in recent years was an accidental one. In the early years
of Xi Jinping's tenure as General-Secretary of the Communist Party of
China, his signature Anti-corruption campaign swept up ``tigers and
flies.'' \4\ Some of these corrupt party officials were, directly or
indirectly, involved in business deals with North Korean procurement
agents embedded in the Chinese marketplace.
---------------------------------------------------------------------------
\4\ The term ``tigers and flies'' refers to national as well as
local-level corrupt Party officials, who have been the targets of Xi's
Anti-corruption apparatus. ``Portrait of a Purge: Who Is Being
Investigated for Corruption and Why?'' The Economist, 13 February 2016.
Accessed at: https://www.economist.com/news/china/21692928-who-being-
investigated-corruption-and-why-portrait-purge.
---------------------------------------------------------------------------
In applying this potent domestic policy tool, the Chinese
authorities had--unintentionally and highly effectively--disrupted
specialized North Korea-China business partnerships. While this
precedent was an accidental one, there are important lessons that can
be applied to the immediate goal of halting the North Korean regime's
procurement of illicit items for its nuclear and ballistic missile
development programs.
We can and must disrupt these partnerships upstream--before the
procured item becomes a part of globalized trade flows on its way to
North Korea. To do so, we need to diversify the set of policy tools
beyond sanctions and coordinate with different policy actors--like
compliance departments in financial institutions and Chinese law
enforcement--to significantly reduce the wide-open space in which North
Korea, Incorporated currently operates.
What Additional Policy Tools Are There?
In addition to the policy recommendations offered by my
distinguished colleagues on the panel, I'd like to bring to the
Committee's attention what I call the ``Three Antis.'' These are a set
of China's domestic policy tools--namely, Anti-corruption apparatus,
Anti-narcotics campaign, and Anti-counterfeiting activities--that can
be used to impede North Korea's illicit procurement.
1. Anti-Corruption Apparatus
The September 2016 case of the Dandong Hongxiang Industrial
Development Company \5\ serves as an important--intentional--precedent
for scaling up the application of the Anti-corruption apparatus to
target corrupt Party officials involved in these Sino-North Korean
business partnerships. Given the link between private Chinese middlemen
and local corrupt Party officials, using the Anti-corruption apparatus
intentionally to target North Korean-Chinese business partnerships
would have an immediate impact on procurement deals. Of all the policy
tools, this substantial one is readily available, but dependent on the
senior Chinese leadership's decision to go down this path. The U.S.
threat of applying secondary sanctions on large Chinese banks and
companies could elevate the Chinese leadership's interest in pursuing
this path. \6\
---------------------------------------------------------------------------
\5\ ``In China's Shadow: Exposing North Korean Overseas
Networks'', Asan Institute for Policy Studies and C4ADS, August 2016.
Accessed at: https://c4ads.org/reports/.
\6\ If the U.S. Government were to solely apply secondary
sanctions on large Chinese banks and companies, there would be two
likely main consequences that it would have to anticipate and for which
it would have to prepare. The first would be an immutable Chinese
stance that such measures amount to being forced to apply foreign laws
in an area under Chinese jurisdiction, which would be viewed as a
violation of China's sovereignty. The second would be unintended
setbacks for U.S. business interests following the designation of these
large Chinese entities, which operate widely in the global marketplace.
These setbacks could range from delays in completing transactions to
cancellation of major business projects. Engaging major Asia-based U.S.
business firms in a full-scope assessment of the setbacks they
anticipate from the application of secondary sanctions on their Chinese
counterparts would yield valuable insights. These insights, in turn,
could be useful in recalibrating the application of secondary
sanctions.
---------------------------------------------------------------------------
2. Anti-Narcotics Campaign
An open secret in China's northeastern provinces is that there's an
expanding narcotics problem emanating from North Korea. Called ``ice,''
this cheap and highly addictive form of methamphetamine is produced in
large quantities in North Korean pharmaceutical factories. Drawing on
the precedent of Sino-U.S. cooperation in the late 2000s when China was
confronting an inflow of opiates through its border with Afghanistan,
there's an opportunity to adapt the previous program to China's
northeastern provinces. Although aimed at the narcotics trade, the
positive spillover effect of increased Chinese law enforcement
activities would further constrain the areas in which North Korea,
Incorporated and its Chinese partners operate.
3. Anti-Counterfeiting Activities
The North Korean regime is well documented as the most prolific
creators of ``supernotes''--counterfeited US$100 bills. What's not so
well known in the West is that there's strong concern in China that its
neighbor has been counterfeiting Chinese currency. From Beijing's
perspective, this criminal activity is a direct threat to China's
national economic security. U.S. policymakers could leverage this
Chinese concern to elevate channels of bilateral cooperation drawing on
U.S. experience tracking down the North Korean regime's sophisticated
counterfeiting operations. Given the high threat level, the United
States should encourage China to further expand the deployment of
Chinese law enforcement resources trained on counterfeiting activities,
with special authorization to investigate and inspect North Korea-
related consignments and facilities.
Conclusion
Objectively assessing how criminal North Korean activities affect
China's national interests yields a clear view of areas of common
ground upon which we can build a common cause with Chinese authorities
in stopping North Korea, Incorporated. The work of the Committee, the
panel members, as well as sanctions-focused officials in the U.S.
Government is more critical than ever in this endeavor.
Thank you.
Additional Material Supplied for the Record
LETTER FROM SENATORS SASSE AND DONNELLY
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]