Maximum Pressure Made Permeable: The Trouble with Washington’s North Korea Sanctions

January 24, 2020

You’ve probably noticed, but sanctions against North Korea are not working. Despite economic hardship, Kim Jong Un has doubled down on building North Korea’s nuclear arsenal and economic independence. In an effort to turn the screws tighter, on Dec. 20, 2019, President Donald Trump signed into law the Otto Warmbier North Korea Nuclear Sanctions and Enforcement Act of 2019 (known more simply as the “Warmbier Act”) as part of the 2020 National Defense Authorization Act (NDAA). Named after a U.S. student detained and allegedly tortured by North Korean authorities before succumbing to his injuries, this law expands U.S. unilateral sanctions against North Korea and signals America’s ongoing commitment to denuclearizing Pyongyang through a campaign of “maximum pressure.” To understand the state of play and why sanctions are failing, it is important to take a close look at them, understand the political context in which the Warmbier Act was introduced, outline its major provisions, and identify likely challenges in its implementation.

 

 

The Politics of ‘Maximum Pressure’

The U.N. sanctions regime against North Korea is composed of 14 separate resolutions extending back 13 years. These resolutions prohibit member states from a wide range of political, military and economic engagement with North Korea, including trade in its largest import and export markets, foreign direct investment, arms sales, financial services, and scientific and technical cooperation, to name a few. Despite the comprehensiveness of these U.N. measures, they are supplemented with additional unilateral sanctions by various states including the United States, European Union, Japan, and others, including a complete U.S. trade embargo. As this sanctions regime has grown, however, its implementation has proven challenging, with recent U.N. Panel of Experts reports revealing that U.N. sanctions against North Korea are subject to “rampant violations.” Veto-wielding China and Russia have also indicated that they will not support further U.N. sanctions against North Korea and have even advocated the withdrawal of certain sanctions instruments.

Waning support for sanctions in international quarters has been matched by a noticeable shift away from the policy of maximum pressure by the Trump administration. As part of the president’s wheedling diplomacy with Kim, he has made major concessions in sanctions implementation, including withholding hundreds of designations for North Korean entities in the run-up to the Singapore summit. The U.S. Treasury, headed Secretary Steven Mnuchin, has similarly backed down from going after Chinese banks implicated in North Korean money laundering, ostensibly due to concerns about pushback from Beijing.

Facing declining interest in maximum pressure at home and abroad, the U.S. Congress is pushing through new unilateral sanctions instruments designed to ramp up pressure on the executive branch and other states to implement sanctions, including the Warmbier Act which explicitly restates the U.S. commitment to maximum pressure in its preamble. Significantly, these new U.S. instruments are increasingly legislating “secondary sanctions.” Unlike primary sanctions which directly punish a target for its transgressions, secondary sanctions punish third parties for their engagement with the primary target. The logic of secondary sanctions is to encourage third parties to cut ties with the primary target, further isolating the target and amplifying the effects of primary sanctions. In the case of the United States, secondary sanctions usually involve threatening to cut third parties’ access to the U.S. financial system unless they cut ties with primary U.S. sanctions targets. The power of the U.S. financial system means that these third parties — foreign banks, traders, insurers, etc. — have little choice but to comply, even when their actions are lawful. Unsurprisingly, U.S. secondary sanctions have proven controversial amongst adversaries and allies alike, with charges of economic imperialism coming with this targeting of non-U.S. entities.

Enter the Warmbier Act

There are three primary additions to U.S. sanctions contained within the Warmbier Act. The first is an expansion of U.S. secondary sanctions targeting foreign financial institutions engaged in commerce with North Korean-linked designated entities. The law requires that any foreign financial institution that “provides significant financial services” to any North Korean-linked U.S.-designated entity be subject to asset freezes and/or a ban on correspondent/payable-through accounts with American banks (the latter being an effective severance from the U.S. financial system), along with associated civil and criminal penalties. In effect, under this provision any financial institution anywhere in the world that provides financial services to a North Korean-linked entity designated by the United States risks losing access to the world’s largest economy and a ban on U.S. dollar transactions, which would typically have catastrophic implications for profitability and liquidity. This emphasis on targeting foreign financial institutions appears to be a response to recent Panel of Experts reports that identified financial sanctions as “some of the most poorly implemented and actively evaded measures of the sanctions regime.” Sen. Chris Van Hollen, a sponsor of the Warmbier Act, had similarly described financial sanctions as “kind of like Swiss cheese. There’s a lot of leakage in this.”

Though significant provisions in and of themselves, these financial measures were largely pre-empted by the Korean Interdiction and Modernization of Sanctions Act (August 2017) and Executive Order 13810 (September 2017) which mandated similar punishments for foreign financial institutions that “knowingly conducted or facilitated any significant transaction” either (a) on behalf of a U.S.-designated individual; (b) in support of particular North Korean industries such as mining and transport; or (c) “in connection with trade with North Korea,” the latter removing any conditionalities regarding individual parties to the transaction.

The second addition is the expansion of U.S. powers to designate entities that engage with North Korea or its agents (United States-designated entities being prohibited from dealings with U.S. persons and selectively subjected to secondary sanctions). Under past acts and executive orders, a suite of designatable offences have been legislated, for example facilitating the transfer of controlled goods to North Korea, engaging in illicit North Korean activities such as narcotics trafficking or currency counterfeiting, and contributing to North Korean WMD development. Under this legislative framework some 400 persons, corporations, banks, vessels and government agencies (principally based in North Korea and China) have been designated by the United States. The Warmbier Act expands the range of offences subject to mandatory designation to include:

  • Trading in North Korea’s largest import and export markets: coal, textiles, seafood, etc.
  • Facilitating the exportation or employment of North Korean labor.
  • Providing North Korea with vessels or facilitating the voyage at sea of North Korean vessels (insurance, flag registration, etc.).

By designating entities engaged in such activities the United States is ostensibly aiming to stem North Korea’s remaining revenue streams — in particular the sale of minerals, seafood, and textiles, which together make up over 75 percent of North Korea’s export revenue.

The third addition of the Warmbier Act is a renewed pressure on foreign governments to ensure sanctions implementation within their jurisdictions. This pressure comes in two forms: first, a policy of opposing the provision of development assistance by international financial institutions (the International Monetary Fund, Asian Development Bank, etc.) to foreign governments that “knowingly failed to adequately enforce sanctions under an applicable United Nations Security Council resolution”; and second, new internal reporting requirements assessing the extent of sanctions compliance by foreign governments.

The implication of these provisions is that states that drag their heels on sanctions implementation against North Korea will jeopardize their access to development assistance and put themselves in the crosshairs for further U.S. action, be it designations, démarches, or some other deterioration in its politico-economic relationship with the United States.

It’s also possible that Congress intended these internal reporting requirements to raise awareness in relevant domestic political units of gaps in the implementation of sanctions against North Korea, thereby placing upward pressure on the executive to more aggressively exercise the powers granted to it by this and previous legislation to strengthen implementation at home and abroad. From this perspective Section 7129 is especially telling as it requires the Treasury to provide additional reporting on North Korean sanctions evasion along with legislative and administrative recommendations for improving sanctions enforcement. This adds additional political weight to further inaction by the executive on implementing sanctions: It’s no longer just idle foreign policy, it’s ignoring recommendations from the Treasury.

Challenges in Implementation

While the Warmbier Act ostensibly bolsters America’s maximum pressure campaign against North Korea, it also contains two noticeable shortcomings that are likely to undermine its overall effectiveness. Firstly, though the Warmbier Act comes with a raft of mandatory provisions, the extent to which they are applied is likely to be diminished by carefully crafted waivers and weasel words that grant U.S. authorities the space to withhold punishments where it is expedient to do so. For example, secondary sanctions measures restricting foreign financial institutions’ access to U.S. correspondent and payable-through accounts can range from outright “prohibition” to the “imposition of strict conditions,” with no guidance offered as to what “conditions” are sufficiently “strict.” In another example, mandatory designations for the transfer of coal, seafood, textiles, etc. only apply when the entity “knowingly” transfers “significant quantities” of the good as per the determination of the president.

These are vague standards subject to political interpretation, and even where they are met, Section 7143 grants the president the power to suspend any provision of the Warmbier Act if “the suspension is vital to the national security interests of the United States,” a benchmark that is poorly defined and highly subjective. This wiggle room is likely to be exploited by U.S. authorities — in particular the executive as above — that wish to avoid more politically or economically challenging applications of those sanctions, undermining the pursuit of maximum pressure. Further, such uncertainty in enforcement weakens the normative power of this sanctions instrument. That is, the less certainty of punishment that entities generally face for violating sanctions, the less aggressively they will self-regulate to meet their compliance requirements.

A second challenge to implementing the Warmbier Act, and one that has bedeviled the sanctions regime against North Korea since its inception, is in building sanctions implementation capacity in foreign implementors. While there are some entities for which the subversion of sanctions against North Korea is a matter of policy, in the majority of cases sanctions evasion occurs because smaller entities — banks, importers/exporters, flag registries, etc. — simply lack the capacity to meet the best practice levels demanded by a multifaceted and increasingly complex sanctions regime, particularly given the sophistication of North Korean sanctions-busting tradecraft. The Warmbier Act acknowledges this limitation in two ways. Firstly, waivers for sanctions implementation are offered on the basis of capacity gaps. Section 7124, for example, allows the opposition to development assistance on the basis of non-implementation of North Korean sanctions to be withheld if that failure “is due exclusively to a lack of capacity on the part of the foreign government.” And secondly, the Act advocates for increased international funding to build sanctions implementation capacity. Section 7125, for example, compels the American executive director r at the International Monetary Fund to campaign for increasing the share of the fund’s administrative budget allocated to technical assistance for member states in strengthening anti-money laundering capabilities. While the latter provision is a sensible first step in addressing a root cause of sanctions evasion, a greater share of the organization’s administrative budget (presuming that the United States can secure this) is on its own unlikely to meet the complex requirements of ensuring best practice across a wide array of sanctions implementors in diverse national contexts.

What to Do?

With North Korea now at the precipice of a way to reliably hit the United States with nuclear weapons, perhaps more than one, Washington should finally and firmly decide whether it is willing to live with a nuclear-armed North Korea. If the answer is ‘yes,’ the United States ought to shift from a policy of denuclearization to threat reduction to avoid the risk of undue escalation and nuclear war. Sanctions should be lifted, diplomatic efforts redoubled, and concessions entertained on contentious issues in North Korean relations such as military deployments in South Korea. The United States should also begin developing policies to manage the strategic costs of a de facto nuclear North Korea, including damage to the sanctity of the non-proliferation regime, diminished regional U.S. alliance credibility, the threat of nuclear dominos in Northeast Asia, and the risks of North Korean horizontal proliferation. If the answer is ‘no,’ then Washington ought to get serious – and soon – about wrenching nuclear weapons from North Korea.

For strategic and domestic political reasons North Korea will never voluntarily forfeit its nuclear weapons. North Korea’s nuclear weapons and ballistic missile programs are now advanced enough that limited strikes on critical nuclear facilities will not be enough to irreversibly damage to its nuclear capabilities. And regime change through military intervention is not feasible due to the likelihood of Chinese military support for Pyongyang and the Kim regime’s ability to damage regional U.S. interests through military force, to include weapons of mass destruction.

Therefore, as unsatisfying as it might be, maximum pressure could be the only path to denuclearizing North Korea. And yet its efficacy is being undermined by a lack of commitment from the executive. Without a firm commitment to maximize U.S. pressure on North Korea, the best that one could hope for is incremental additions to U.S. sanctions commensurate with whatever upwards pressure Congress can muster through legislation such as the Warmbier Act, hoping that each new round of marginal sanctions will be the straw that breaks the camel’s back. Alternatively, the United States can commit to its declaratory policy and go after the big Chinese banks laundering North Korean money, aggressively designate foreign facilitators of North Korea’s remaining revenue streams, and provide for a stronger program of capacity building for sanctions implementation in foreign states — all powers enjoyed by the president and secretary of the Treasury under existing legislation. The foreshadowed deterioration in U.S.-North Korean relations might be the shot in the arm that the executive needs to get serious about bringing the hammer down on North Korea.

 

 

Dr. Christopher J. Watterson is a Research Associate at King’s College London where he specializes in nuclear non-proliferation and sanctions implementation in Northeast Asia. You can follow him @cj_watterson.

Image: White House (Photo by Shealah Craighead)