[Senate Hearing 115-117]
[From the U.S. Government Publishing Office]




                                                       S. Hrg. 115-117

 
   EVALUATING SANCTIONS ENFORCEMENT AND POLICY OPTIONS ON NORTH KOREA

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

                                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

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban Affairs
  
  
  
  
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
                                


                 Available at: http: //www.fdsys.gov /
                 
                 
                 
                              _________ 

                U.S. GOVERNMENT PUBLISHING OFFICE
                   
 27-569 PDF              WASHINGTON : 2017       
____________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
  Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001                      
                 
                 
                 


            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

                              ----------                              

                      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

                              ----------                              


                      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]