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Wakeup Call for Chinese Banks on North Korea Sanctions

Wakeup Call for Chinese Banks on North Korea Sanctions

Anthony Ruggiero
6th November 2017 - FDD's Center on Sanctions and Illicit Finance Policy Brief

The Treasury Department on Thursday issued an advisory on North Korea’s use of the international financial system to evade U.S. and UN sanctions. The advisory sent an unmistakable message to senior compliance officers in Chinese banks: Treasury knows you are violating North Korea sanctions and this is your last warning.

The most significant element of the advisory is Treasury’s finding “that bank accounts used by [Chinese and Hong Kong-based] sanctioned persons are maintained predominantly at major Chinese financial institutions.” This is a clear warning shot intended for the Chinese banking sector, which includes some of the largest banks in the world. Treasury just told those banks they are exposed to North Korea sanctions activities, which could result in sizable penalties.

Compliance officers in major Chinese banks should be paying attention. If the banks’ illegal activity continues, Treasury may decide to block a medium-to-large Chinese bank from the U.S. financial system or freeze its assets. Treasury could also impose a large fine against a Chinese bank, similar to the $12 billion in fines issued in 2012-2015 against European banks for their evasion of Iran sanctions. These fines would be detrimental to the banks’ reputation given the stigma of being a money launderer for the Kim regime.

The good news is Chinese banks have the ability to act now to cut off such an eventuality, if they so choose. In addition, they will likely find partners at U.S. and other Western banks who can help them isolate North Korea’s illicit activity. To begin, Chinese banks should immediately investigate all banking activities in Liaoning province, located just across the border from North Korea. In Thursday’s advisory, Treasury telegraphed its displeasure with Liaoning-based financial activities, noting: “North Korean-related financing involving correspondent account transactions [are] conducted by, or on behalf of, Liaoning-based banks.”

Chinese banks should also review China-North Korea trade records and run the names of sanctioned and suspected North Korean and Chinese persons engaged in sanctions evasion. The work of the UN Panel of Experts and the data analytics firm C4ADS proves that investigations using commercially available information can expose North Korea’s activities. The largest banks in the world can certainly put the necessary resources behind a similar effort.

Time is running out for Chinese banks; the question is whether they are ready to make the adjustments necessary to save their reputations. Chinese President Xi Jinping now has unrivaled power and should use it to cleanse the Chinese banking sector of its North Korean ties. If he does not, the Trump administration should use all of the means at its disposal to do it for him.

Anthony Ruggiero, a senior fellow at the Foundation for the Defense of Democracies, was the nonproliferation advisor to the U.S. delegation to the 2005 rounds of the Six-Party Talks and spent more than 17 years in the U.S. government. Follow him on Twitter @_ARuggiero.

 Follow the Foundation for Defense of Democracies on Twitter @FDD

Tags

china, north-korea, sanctions