August 24, 2017 / 5:20 PM / a year ago

U.S. holds powerful but risky tool to halt N.Korea's nuclear progress

    By Yeganeh Torbati and David Brunnstrom
    WASHINGTON, Aug 24 (Reuters) - The U.S. government is
turning the screws on companies that do business with North
Korea in violation of U.N. sanctions but has stopped short of
taking the more aggressive, and riskier, move of targeting
Chinese banks that facilitate Pyongyang's trade in arms and
other banned goods.
    On Tuesday, the Trump administration blacklisted 16 Chinese,
Russian and Singaporean companies and individuals for trading
with banned North Korean entities, including in coal, oil and
    The campaign to pressure North Korea's trading partners is
aimed at eventually forcing Pyongyang to give up its nuclear and
missile programs.
    The latest measures did not, however, sanction the Chinese
banks that experts and former U.S. officials say enable North
Korea's international trade, often by laundering funds through
the United States.
    Targeting those banks with measures known as "secondary
sanctions" could effectively bar them from making U.S. dollar
transactions or moving money through U.S. banks, a death knell
for most financial institutions, or subject them to huge fines
like those levied on European banks accused of failing to follow
sanctions on Iran's nuclear and missile programs.
    China hawks within the Trump administration who have been
frustrated by Beijing's perceived inaction on North Korea have
been pressing for secondary sanctions.
    But a more moderate, pro-business faction, including
Treasury Secretary Steven Mnuchin and Trump's chief economic
adviser Gary Cohn, is concerned about the impact such sanctions
would have on the economic relationship with Beijing.
    "I am not surprised they held off on (sanctioning) Chinese
financial institutions," said Joseph DeThomas, a former State
Department official who worked on Iran and North Korea
sanctions, referring to Tuesday's actions.
    "Once we go down the road of hitting a Chinese bank that is
deeply connected to the U.S. financial system, things will begin
to move very fast and be quite unpredictable."
    China, the world's second-largest economy, is the United
States' largest trading partner in terms of goods and an
enormous market for American businesses, making the United
States vulnerable to any retaliation by Beijing.
    Earlier this month, China signed on to new U.N. sanctions on
North Korea that banned the export of coal, iron, seafood, and
    Previous U.N. resolutions had restricted, rather than
banned, some of those exports. Chinese and Russian support for
the new sanctions was a major diplomatic win for the Trump
    Dan Fried, the State Department's sanctions coordinator
until February, said "as a general rule," Washington should warn
China before blacklisting Chinese banks, though that may not
always be possible. Sanctioning Chinese companies violating U.N.
sanctions by dealing with blacklisted North Korean firms would
be a good step before going after banks broadly, he said.
    "Coal and seafood exports from North Korea are now banned,"
Fried said. "So we should go after any and all companies
importing them."
    He said Washington should also consider "naming and shaming"
companies, particularly in textiles, that use North Korean
labor, adding that this could include both Chinese and Western
    Around 5,200 Chinese companies traded with North Korea from
2013 to 2016, according to an analysis by the non-profit
research group C4ADS, a relatively small number that could be
vulnerable to enforcement measures, experts said.             
    But David Cohen, a former deputy director of the CIA, said
implementing U.N. resolutions likely would not entirely address
financial relationships North Korean front companies in Hong
Kong or China have with Chinese banks and which are "used to
funnel funds back to the regime, particularly from illicit
    "So that's an area where secondary sanctions could be
effective," Cohen said. 
    A broad campaign to cut off North Korea's financial links
would have a successful recent precedent: the intensive U.S.
effort to halt Iran's nuclear program, which included levying
$12 billion in fines against European banks that facilitated
Iranian trade.
    Both the George W. Bush and Barack Obama administrations
limited Iran's access to financial channels, and eventually went
after Iran's broader trade links. That effort was backed by
strong Congressional sanctions.
    The measures worked. Iran's oil exports dropped by more than
half, inflation spiked, the currency plummeted, and economic
output shrank 5.6 percent in 2012 and 1.7 percent in 2013,
according to the International Monetary Fund. Iran agreed to
negotiate over its nuclear program, and eventually reached a
deal with the United States and world powers.
    In a warning shot against North Korea, the U.S. Treasury
Department in June targeted a small Chinese bank, the Bank of
Dandong, accusing it of laundering money for Pyongyang.
    Also in June, the Department of Justice said a China-based
company was laundering U.S. dollars through American banks for a
sanctioned North Korean bank. And a handful of other recent U.S.
measures have targeted North Korea's international trade and
finance networks.                          
    But Washington has not targeted Chinese banks working with
North Korea in a broad way, and Congress has not yet imposed the
kinds of mandatory secondary sanctions that strengthened the
hand of U.S. negotiators when dealing with Iran.
    Anthony Ruggiero, a former U.S. Treasury official now with
the Foundation for Defense of Democracies think tank, believes
fears of Chinese retaliation for action against Chinese banks
are overblown.
    "There's a way to do it," he said. "You don't have to freeze
their assets; you don't have to cut them off from the United
States. You can basically declare that their compliance
procedures are not appropriate and that they can get significant
    "(Then) they will start to ask the right questions."
    Congress is due to consider legislation requiring U.S.
measures against any banks that deal with North Korea. The bill
is based loosely on the same Congressional sanctions that were
imposed on Iran.
    "You've seen a series of administrations, Republicans and
Democrats, who believed that China would cooperate when it came
to applying economic pressure to North Korea," Senator Chris Van
Hollen, a Democrat and one of the bill's lead sponsors, said in
an interview last week.
    "We have to move from quiet requests for cooperation to very
clear demands that China enforce these sanctions that it signed
up for."

 (Editing by Kieran Murray and James Dalgleish)
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