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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 

( 

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

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

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)

(1) 

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. 

2 

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 hearVerDate Nov 24 2008 14:07 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-07ZDIST\90717.TXT JASON
3 

ings 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. 

4 

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. 

5 

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 

6 

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 

7 

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 

8 

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 atVerDate Nov 24 2008 14:07 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-07ZDIST\90717.TXT JASON
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tracted 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 wideopen 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 furVerDate Nov 24 2008 14:07 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-07ZDIST\90717.TXT JASON
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ther 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 

11 

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 

12 

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 moneylaundering 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. 

13 

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. 

14 

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. 

15 

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 onethird 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. 

16 

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 

17 

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 

18 

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. 

19 

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 

20 

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. 

21 

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 

22 

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. 

23 

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.’’ 

24 

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. 

25 

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? 

26 

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—— 

27 

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. 

28 

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 crossborder 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 apVerDate Nov 24 2008 14:07 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-07ZDIST\90717.TXT JASON
29 

peasement, 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. 

30 

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 mediumsize 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 repVerDate Nov 24 2008 14:07 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\09-07ZDIST\90717.TXT JASON
31 

resentative 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, 

32 

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 

33 

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:] 

34 

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 

35 

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 perVerDate Nov 24 2008 14:07 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00039 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\09-07ZDIST\90717.TXT JASON
36 

cent 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. 

37 

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. 

38 

PREPARED STATEMENT OF ANTHONY RUGGIERO 

SENIOR FELLOW, FOUNDATION FOR DEFENSE OF DEMOCRACIES

SEPTEMBER 7, 2017 


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Anthony Ruggiero September 7, 2017 

introduction 

Chairman Crapo, Ranking Member Brown, and distinguished members of this committee, thank 

you for the opportunity to address you today on this important issue. 

My testimony 11111 examine why current sanctions on North Korea are insufiicient to exert 

meaningful pressure while also explaining how the U.S. government and its foreign partne!S can 

implement sanctions that have a much better chance of restraining Pyongyang's brutal dictatorship. 

Above all, the U.S. and its partners must apply the lessons learned from its successful effort to 

force Iran to the negotiating table via comprehensive sanctions. 

Despite the common misperception that tough sanctions on North Korea are already in place, my 

testimony will illustrate how the current restraints on Pyongyang pale in comparison to the ones 

that compelled Tehran to negotiate. Above all, the U.S. and its partners must target the Chinese 

firms, individuals, banks, and others who play a crucial role in enabling North Korea to evade 

sanctions. Again, there is a common misperception that China is immune to pressure from abroad, 

yet there are already strong indications that Beijing 11111 bend when facing the right kind of 

pressure. 

In the course of my testimony, I 1vill offer nine specific recommendations for how Congress and 

the Trump administration can implement an efl"ective sanctions regime. 

Before proceeding, it is essential to underscore the urgency of the threat from Pyongyang. Kim 

long Un is a despot who murdered an American citizen; tortures, starves, and kills his own people; 

and will spare no expense to develop an intercontinental ballistic missile OCBM) that can deliver 

a nuclear weapon to the United States. The July 4 and July 28 ICBM launches and September 3 

si~1h nuclear test are a wakeup call to all of us, especially those who once described Kim as a 

"SII1ss-educated reformer" or believe North Korea has any interest in serious negotiations \11th 

the United States.

1 

Furthermore, one should not assume Kim will hold back from using his nuclear weapons on 

America and our allies. 

Often, U.S. policy toward North Korea gets stuck in the provocation-response cycle whereby a 

North Korean provocation is met \11th strong rhetoric and/or a token increase in sanctions, which 

is repeated over and over. These scattershot responses have not to date added up to a serious and 

effective sanctions policy because they are driven by the momentary need to look tough, rather 

than by a clear strategy for denuclearizing the Korean peninsula In practice, the Kim regime can 

keep distracting the United Stat~ with its repeated provocation. We should break this cycle and 

ensure that the U.S. response to every North Korean provocation advances our ultimate goal. 

Regrettably, many experts call for the acceptance of North Korea as a nuclear weapons state and 

insist that the U.S. can protect itself \11th a policy of deterrence. To evaluate the effectiveness of 

deterrence, one must be clear about such a policy's goals. Some suggest the United Stat~ has 

1 Michael MO) nil~,,~ ''Kim long Un & The Myth of the Rcform:r Dictator." The Daily Ekast, DccciiW 2U0tl 

l!!ltDiilnn••.thedall\]east.coml]nm-jong-unj!nd·d>e-mytltof-the-reformer-dic!atorl 

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90717003.eps

Anthony Ruggiero September 7, 2017 

successfully deterred Pyongyang over the last 25 years, since there has been no second Korean 

war. Butt he goal should be deterring North Korea from actions that threaten the U.S. or its allies. 

On that score, deterrence has a mixed record at best. For example, Pyongyang killed over 40 South 

Korean sailors when it sunk the Cheonan, maintains a robust relationship with Iran, built a nuclear 

reactor in Syria that Israel destroyed in 2007, and launched a ballistic missile directly over Japan. 

Unfortunately, this is a short list of the failures of deterrence. 

Thus, the U.S. finds itself in a rapidly deteriorating situation where counterproductive policy 

options like a negotiated freeze of North Korea's nuclear and missile programs or a hypothetical 

peace treaty are treated like real options. Advocates say North Korea is ready to accept a freeze 

and/or peace treaty and it will lead to denuclearization. Unfortunately, we have seen this movie 

before. 

Not only has North Korea told us it is not interested in denuclearization, its actions reinforce it. 

Pyongyang showed us the "Map of Death" in 2013 suggesting its nuclear targets are Washington, 

DC; Hawaii, home to Pacific Command; possibly San Diego, home to the Pacific Fleet; and 

possibly San Antonio, home to U.S. Air Force Cyber Command.

2 Just afterthe July 4 ICBM test, 

North Korea's state media said that the Kim regime would not negotiate its nuclear weapons or 

ballistic missiles or stop bolstering its nuclear force unless the United States ended its "hostile 

policy and nuclear threat" to North Korea.

3 Translation: When Washington abandons its allies in 

Tokyo and Seoul and removes all trOOps, North Korea might be 1villing to talk about its programs. 

At some point, Washington 1vill need to consider the Kim regime as the obstacle toward achieving 

denuclearization of the Korean peninsula, and sanctions c.an decrease the threat from the regime 

in a way that negotiations cannot. 

Tbe Nature of North Korea Sanctions 

Understanding the utility of sanctions as pan of a broader, coherent North Korea policy is often 

clouded by myths about the country's history. 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. The four most prevalent myths 

about sanctions are: 

I) Norlh Korea is isolated financially. North Korea consistently obscures its access to the 

international financial system using non-traceable fronl companies, a practice that the Treasury 

Department has called "a threat to the integrity of the U.S. financial system.''

4 Nonh Korea's use 

of front companies puts banks at a disadvantage, especially when governments are unwilling to 

'Jeffrey Lenis. "The Map of Death." FartlgTI Policy. April 3. 2013.111tp l/foreignoolicv.coml.lO!lt!»rll1hhe-n!3Jt 

llilwl!) 

'"Kimloog UnSupel\·isesTest-launcboflnter<Ontiren•11 Ballistic Rocket Hwasong·l~: Korean Cenlra/Xtws 

Agtncy, Ju~· 5, 2017. lltps:/lkcnawatcltco/newstrcami2769-15Jkim i91!!! UIKli!!CI\ tses-tcst~aruriHlf-illercorcjOOJial=baJiiSic·rockeJ·Inmon•·IW • U.S. Ocpanment of the TmtSt•Q·. Fimrriat Crimes Enforcement Network, ''Finding that the Ocmocrntic PeOple's Rcpllbtic of Korea is a Jurildictioo of Prilll3Q' Money Laundering Concern." 8 I Federal Register 35+1 I, Jure 2, 

2016.11ilps·/i11111\ finccn.t!O,/sitesldefaolt!fileslsbared/2016-t3Q381DPRK Firoing\ pdO 

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Anthony Ruggiero September 7, 2017 

identify these companies. The UN, in its February2017 report, noted that North Korea used foreign 

banks to process transactions through accounts in the U.S. and Europe. 

1 M I describe later, the 

Treasury and Justice Depanments similarly discovered that designated North Korean banks have 

conducted financial transactions through the American banking system. 

2) The U.S. will nm out of North Korea en/1/ies to designate. The number of North Korea 

designations has more than doubled since mid-February 2016 when tlte North Korea Sanctions 

and Policy Enhancement Act went into effect.

6 Washington has finally directly sanctioned the 

countJy's leader Kim long Un, numerous government ministries, shipping companies, seven 

banks, and the national airline. This year, the Trump administration started to sancrion North 

Korean international business partners. Since March 31, the U.S. has sanctioned 43 persons, of 

whom 86 percent operate outside North Korea and 54 percent are non-North Koreans who facilitate 

North Korea's sanctions evasion. 

3) China willtNJt respond to pressure ow1r North Korea. Conventional wisdom says Beijing will 

shelter North Korea from international sanctions at all costs.7 That is not nocessarily true. China's 

response to U.S. sanctions against its banks, firms, and individuals has been muted. In 20 I 3, after 

the U.S. Treasury sanctioned North Korea's Foreign Trade Bank, the Bank of China sent the 

Foreign Trade Bank a notice closing its accoun~ cutting off its access to the Chinese financial 

system.

1 When Washing~on moved against Chinese nationals aiding a designated North Korean 

bank in Septen1ber 2016, Beijing arrested 10 people and froze the assets of those involved.

9 

Clearly, when Pyongyang threatens Chinese economic interests, Beijing can tighten its leash on 

North Korea, even moving against its own citizens who had likely been authorized to trade with 

the countJy. 

4) North Korea is the world's most-sanctioned coulllry. A quantitative review of U.S. sanctions 

reveals that North Korea currently sits fourth on the list of countries 11~th the most sanctioned 

entities. North Korea has moved up one position since mid-July, placing it behind Ukraine/Russia, 

Syria, and Iran - even after the tilling of numerous sanctions on lran to comply with the Joint 

Comprehensive Plan of Action (JCPOA), as the 20 I 5 nuclear deal is formally known - and ahead 

l United Natiom Security Couocil "Repon oftb: Panel ofE.xpensestJblishcd putmallto resolljjon 1814 (2009)," 

S/2017/llO, feblU31)' 27, 20t7.1bno/hmdoc;orgiS@J7/ISO) 

' North Kolt<l Sanctions and Policy Enl~rcemem Act of2016, Pub. L. No. lt~·121, 130$131. 93,codified as atrended at114 U.S. C. lltnos//\nnt.conmss.gOI·fl1411litlslhr7571BILLS-114hrmenrpdO 

' Joel Wit 300 Richard Sokotsl;y, "The An of a Deal ~>ith Nonh Korea," Politico. January 24. 2017. 

(httpJAnn• oolnico.oomlmawme/S1oNf2017/0ihhe-an"f-a-deat \\Jth oonh-korea-21~) 

8 U.S. Dcpartnrru of the Treasu~ . Press Release. '1'1t<lsury Sanctions Bank and Official Linl:ed to North Korean 

Weapons of Mass Des! ruction P10gnuns; MaJth It, 2013. (h!tpt/hnnv rre•IS!HY goy oress<~:nwrlprw· 

relcascs/Pa&es!il!876 aS!)lS): Simon Rabiooviteband Simon Mundy, "China reduces banki~ lifclirc toN Kolt<l." 

Financial Times (UK). May 7. 2013. (bUps/hmw Ocony'cornen!la7!54272-b702-l!e2-Q249.()(}1.t.l(ea!xkjll 

' U.S. Dcpanmeru of Justice, Press Release. ·four Chinese Natiomls and Cllim·Based Compafl) Chalgtd with 

Using Front Companies to Evade U.S. Saoctions Targeting Nonh Korea's Norlcar Wcapomand BaUistic Missile 

Progmms. • September 26. 20 t6. (biJoslllnn• n!S)jcc oovlop:Ypr/foJlf:Chjnese:f!allomls.gndshina:bascdii<!lli!3ID • 

clnm;d·usjng-fmnt:(O!lll!)mCH!ll!!tj!s): Elizabeth Shim. "Cium arrests more than 10 busircsse..ecutives for 

Nonh Kolt<l tradc," UP/, SeptenDcr21, 20t6.(h!tp:l/n"w.upi.confloo Ncns/\Vorld-Ncws/2Qtlimt21/China· 

am:sts npre~han-!O-busines1i=e'<CCU!o-es.for-North-Kolt<l~rnde/15l147~9593D 

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42 


90717005.eps

Anthony Ruggiero September 7, 2017 

of Iraq (see graphic I). to Nonh Korea sanctions have more than doubled since the Nonh Korea 

Sanctions and Policy Enhancement Act came into effect on February 18, 2016. Prior to that date, 

Nonh Korea ranked eighth, behind Ukraine/Russia, Iran, Iraq, the Balkans, Syria, Sudan, and 

Zimbabwe. 

Is North Korea the most sanctioned country? 

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--- -·--

" TI>e n:~ e11 ofsaoctioRSiocludedthosccmitiesanl indil d~~alslistcd on the U.S. DcpanO>CruoftheTre3SUI)''s 

OffiCe or Foreign Assets Control Specially Designated Nationals list. The UkrnillCIRussia &1nctions categol) 

iocludcs persons Sllnctioncd under the Sergd ~laslitsiy Rule of Law Aocou!labili~· Act and persons subject to thc 

Ukr.tillC-related Directives. U.S. Deprutment of the TIC3SW). Specially Desigll3ted Nationals LiSI, acocsscd tllrough 

August 29, 2017 Oitos:llsanctioooeareh.ofac.!reas w·D 

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A qualitative assessment of the sanctions imposed on North Korea reinforces the conclusion that 

it has not been targeted aggressively, since U.S. sanctions barely touch the international business 

networks- especially in China - on which Pyongyang relies to evade most restrictions. The Trump 

administration's recent efforts have focused on Pyongyang's international busin~.ss and non-North 

Koreans, but there is still more to do. 

Even the UN acknowledges that North Korea uses "non-nationals of[North Korea) as facilitators, 

and rel[ies) on numerous front companies" to generate "significant revenue" for North Korea.

11 In 

testimony ~fore the House Committee on Financial Sen~ces Subcontmittee on Monetary Policy 

and Trade in mid-July, I noted that 47 percent of U.S. sanctions targeted persons 

located/conducting business outside of North Korea. That number has now increased to 50 percent. 

ln July, only 12 percent of those persons were non-North Korean; that number has increased to 

more than 17 percent (see graphic 2). The UN sanctions numbers are WOIR In July, only 27 

percent of all designated persons were located or conducting business outside of North Korea, a 

number that has improved to 33 percent. In July, only 2 percent of those persons were non-North 

Korean, yet that number has dropped to 1.75 percent. 

D Non-North Koreans facilitate Pyongyang's sanctions evasion, yet UN and 

U.S. sanctions disproportionately do not target non-North Koreans 

98.25% 83% Notth1 --1 

- 1.75% 17% .. 

--- or ol sanclioos on No<th Ketta. only mlof UN sanclioos and SO!iof U.S. sanclioos tarzet 

indMdualsand ~ opmtlngouiSidtof No<th Korta. 

11 ~1ed Nation~ Socurity Couocil. "Repon of the Panel of E'J)ens est:i>lished purn~antto resolution 18 ~ (2009)," 

Februruy 21. 2011. ChnoJ/ur4ocs.orgiSI20111J j()) 

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The Iran Sanctions Modrl for North Korea 

Both critics and supporters of the 2015 nuclear deal agree that sanctions were the main driver that 

brought Iran to the negotiating table. Thus, the Trump administration should look to the Iran 

sanctioos playbook for its North Korea policy. If we want to change North Korea's behavior, our 

sanctions have to be at least as tough as they were on Iran. 

The goal of sanctions on Nonh Korea is different than it was with Iran since the regime already 

has nuclear weapons and will not negotiate away its program. Kim Jong Un views negotiations 

merely as one step toward his goal of recognition ofNorth Korea as a state with nuclear weapons. 

The U.S. goal should be to protect the U.S. and her allies at all costs by strangling the sources of 

revenue and materiel on which North Korea relies for its nuclear weapons program, its military, 

and luxury goods to buy ofT its elites. 

The key aspect of the Iran sanctions model was that it forced companies, individuals, banks, and 

governments in the U.S. and abroad to make a choice; stop doing business w1th Iran, or lose access 

to the U.S. dollar and risk the U.S. freezing their assetS and labeling them as doing business with 

a state sponsor of terrorism intent on developing a nuclear weapon. The approach worked. Around 

the world, banks and companies- and eventually govemments- curtailed or eliminated business 

with Iran. 

By this standard, sanctions on North Korea have a long way to go. Former Deputy Director of the 

CIA and former Under Secretary of the Treasury for Terrorism and Financial Intelligence David 

Cohen has noted, "North Korea is no~ by any stretch, 'sanctioned out.' Despite a broad set of 

international and U.S. sanctions, North Korea has gotten off relatively easy, especially as 

compared with Iran." 12 

We learned earlier this year that Belgium allowed North Korean banks sanctioned by the UN to 

maintain access to SWIFT, the secure financial messaging service, despite SWIFT's checkered 

history with Iran, whose access to SWIFT only ended when Congress began considering 

legislation prohibiting it.1J This shows how many Western governments are not serious about 

imposing sanctions that have sufficient teeth to have the desired impact. Likewise, Austria justified 

the export of ski equipment for Kim's chalet on the grounds that it was not listed as a luxury good 

in the European regulations, taking a literal view of sanctions rather than realizing that building a 

ski resort in a country where its population is starving is the very definition ofluxury.t

4 There are 

other such examples of sanctions violations, in most cases aided by countries that have a lax 

interpretation of the UN sanctions architecture in Southeast Asia, Africa, and the Middle East. 

" 0:1\id S. Co ~n, "One powerful weapon touse ag~~inst NonhKorea: 1he ll'ruiungton Post. April21. 2011. 

https:ll~11 II W3$hi!!2lpQpos! OOnYOOI niOns/O!le·OOWCrf ul·\\ e!!OOIH011Stilgi!!n!!l·!l0nhkoreaf20 17Jil.l/21/ddbb9702·26c2·11e7-bb9d..8cd61 t8et -109 storv.html'hlm tel1ll".fla89212dbcel 

" Altbony Ruggiero. "Titne 1o acugainstroguc Nonh Korean banks." 1he 1/tll. Man:h t 7. 2017. 

lbnolhl!;hitt .c:ont1>Jogslw!!ljts-b!ogifortign.pgli()/32.UJO.tjme-lo«h12ai!JS!·rouf!toonh-kwn4!anksl 

" ~ted Nations Soc:urity Courdl. "Repon of the Panel or E'J)ens estoolished pu=ntto resolution 1874 (2009)," 

February 27. 2017. Chl!DJ!ur4ocs.org!SI201711S0) 

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North Korea's Financial Activities 

A reviewofTreasury and Justice Departments' actions against North Korea's financial activities 

reveals lhree methods Pyongyang uses to finance its sanctions evasion. The first melhod was used 

by Dandong Hongxiang Industrial Development, which was sanclioned by Treasury and indicted 

by Justice in September 2016 (see graphic 3)_tl The method was also used by Dandong Zhicheng 

Metallic Materials which was sanctioned by Treasury and subject to an asset forfeiture request for 

more than S4 million filed by Justice in August.16 Both companies' illicit activities were initially 

exposed by the innovative data-mining organization C4ADS.

11 

The scheme begins wilh North Korea shipping a commodity to a Chinese company - in these 

examples, coal is used. The Chinese company sells the item and pockets a significant profit. The 

money owed to lhe North Korean exporter remains in China, which allows North Korea to use it 

to purchase goods. Each side keeps a ledger that tracks debits and revenue allowing North Korea 

to purchase goods from the Chinese companies' accounts and the Chinese company to receive 

additional profit from facilitating these sales. Most sellers want payment in U.S. dollars, which 

requires hiding Pyongyang's role to continue the transaction. This is where Chinese firms and 

individuals use accounts in Chinese banks to transfer money to front companies in China and olher 

jurisdictions to create lhe illusion of a transaction between the seller and China, when North Korea 

is the real destination. This fraudulent scheme tricks U.S. banks into processing the transaclions 

and Chinese banks are either complicit or fail to ask al>out Chinese companies' business wilh North 

Korea. 

" U.S. Oepano~et• or the Treasul). Press Release, "Treasuty Imposes Sanclioos on Supponers or Nonh Korea's 

Weapons of Mass Destroction Prouferntioo.· September 26. 2016. lhltvrllww\\ treasoi\.RO\/prcss-cclllcr/pn:ss· 

Jt]eascs/P;!gesljtSQS9 asp<\: U.S. Depanment or Justice. Press Release, "Four Chinese Nationals and Cbiro-Based 

Company Cmrgcd "ith Using From Colll(lllniesto E\'ade U.S.San::tionsTa'l)Cting Nonh Korea's Nuclear 

Weapons and Ballistic Missile Programs; Septenilcr 26. 20 t6. ~tos:ll\\"" -iustice !!!)\' ooo!prffour-dlinesenatJOnats-and-<:hina-based-oomoom -<:hamW-us:ing-front<nmoomes<>ade-<1$1 

" U.S. Oepanmcnt or the Treasury. Press Release, •Treasuty Targets Chinese and RuSSian Entibes and lndhiduals 

Supponing 11-.: Nonh Korean Regime," Augustll, 2017. I!Jtos'/ilnm uwuo (!911D!t$S«D[edQRSS= 

releags/P3geslsm0 14S.aspxl: 'n d SuJ/es of Amtnca v. Frmds Associaltd •·lfh Danmng Chenglai Tradmg 

Llmlltd. No. l:l7-<:\'-0I706(D.D.C. Augusl22. 2017). (Accessed '1aPACER) 1' "In Chim's Shadow: Exposing Nonh Korean ()\~~SeaS Networl<s." The Asmr lnsfllule for /Jcy$/ud~es and 

C.!. IDS. Aug11S120t6. 

lhnos:IIS!i!!icl sguarespace.com SI!!tic/566cfflMd8a007232d535~S7df HacdOffi&lli29 57J06/ l4742915394!WI 

p!Cbjrno/o27s±Shadow odO: "Risky Busiooss: A S)stem-l.e\~1 Anal) sis of the Nonb Korean Proliferation 

Fimocing SySICnL" C 4ADS. Jure 201 7. 

(hrtps!/S!!!!icl souarespace.eomlj!iuic/~007232d535~5941ld!!x;bbdloc3194®bl lm.I4758S968/ 

Rim +Bosiress-C4ADS.od0 

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Evasion Method 1: Chinese Banking 

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The second method was identified by the Justice Department following an interaction with an 

unnamed North Korean defector (see graphic 4).

18 The scheme is simple: Chinese companies pay 

each other using the creditS of one North Korean company to pay the debt of another North Korean 

company. It is unclear if these transactions involve U.S. dollars, but they have the benefit of 

avoiding money transfers between China and North Korea that could be subject to increased 

scrutiny. Chinese banks likely facilitate these payments between Chinese companies, and asking 

additional questions about the nature of the business relationship between these companies and 

North Korea could identify these are problematic transactions prompting additional scrutiny. 

Evasion Method 2: Alternative Method of Payment 

,.,. __ 

11 Unirrd Slates of Amtrl<ll ''· F•nds Assoclottd .-lrh Damloog C/retrg!ol Trodmg u nmtd, No. I: I 7-cv-01706 

(D.O. C. Augusl22, 2011). (Aooesscd l'ia PACER) 

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The third method was used by a Russian company to rective payments from North Korea for the 

shipment of oil (see graphic 5). Independent Petroleum Company (IPC) was sanctioned by the 

Treasury Department in early June for signing a contract to provide oil to North Korea and 

reportedly shipped over S I million worth of petroleum products to North Korea.t9 !PC shipped 

gasoil to North Korea and IPC requested payment from North Korea in U.S. dollars, but a direct 

transaction between Russia and North Korea using U.S. dollars is nearly impossible.IPC and North 

Korea devised a schente to create two companies in Singapore to create the illusion of transactions 

between North Korean front companies, Singapore, and Russia. The scheme obscured North 

Korea's involvement and continued Pyongyang's ability, with assistance from a Russian company 

and Russian individuals, to violate U.S. law. The Justice Department requested forfeiture of almost 

S7 million and fines for these alleged \~olations of U.S.Iaws.20 

Evasion Method 3: Foreign Financial Facilitators 

~edNotthKoreaobaobtfn<r~ont 

compan .. tos<Odp>Jm«< to-wl>opoymonttoR ...... ~ 

19 U.S. 0epartmc111 or ~lC Treaswy, Press Release, ' TreasuJ) Saoctiom Supptiers or Nonh Korea's Nuclear am 

Weapons Proliferation Programs." June I. 2017. (b!tpsJilnlll JreaSJID 1!01/presssenter!oress· 

re!ea:;es!P3ges!sm0099.aspxl 

"Unirrd Slates of AmenctJ ''· F•nds Assocloted .-lrh l'elm•r ManagemenT PTE. /Jd, No. I: 17<1'.01705 (D. D.C. 

August22. 2017). (Accessed ria PACER) 

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North Korea's Chinese Banks 

To be as tough on North Korea as it was on Iran, the U.S. should move aggressively against the 

Chinese banks that are integral to North Korea's sanctions evasion efforts. Pyongyang's activities 

taint every Chinese financial transaction conducted through the United States as a possible effort 

to finance prohibited activities. 

Information on North Korea's use of Chinese banks to access the American banking system is 

incomplete and likely represents the tip of the iceberg. The available estimates generally 

encompass only transactions 11ith designated North Korean entities and individuals or those who 

work on their behalf. 

One pattern that emerges from the data is the disturbing extent to which Chinese banks help North 

Korea leverage the U.S. financial system to evade sanctions. 

Merchants that knowingly or unknowingly sell goods to North Korea or its Chinese front 

companies want payment in dollars. Pyongyang has consistently turned to Chinese banks to 

process transactions through the U.S. financial system on its behalf, allowing North Korea to pay 

business partners in U.S. dollars, which is prohibited by U.S. law. The only way for North Korea 

to conduct these U.S. dollar transactions is to obsoure its involvement in the transactions. While 

doing so is illegal, such banks have little to fear from a government in Beijing that has made clear 

its Jack of interest in enforcing sanctions. 

Another disturbing development was first revealed in a mid-June Justice Department request for 

the forfeiture of more than $1.9 million front Mingzheng International Trading Limited, which 

was sanctioned by Treasury in late August.21 Justice stated that Mingzheng acts as a front company 

for a covert branch of North Korea's Foreign Trade Bank (FTB), Pyongyang's primary foreign 

exchange provider, which is operated by a Chinese national.22 Justice noted that the FTB bank 

representative ordered five paymentS to Velmur, a now-exposed Russian-North Korean front 

contpany, totaling more than $1.8 million.23 

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: 

• The Justice Department stated that Dandong Hongxiang and its associated front companies 

- created by four Chinese individuals accused of evading North Korean sanctions -

" United States of Amenca v. F•mls Assoc1ated with .lfi~~g heng lmemauonol Trodi~tg /..lmited, No. :17 <~·~ 1166-

KBJ (DD.C. liU>: 14, 2()17). (Accessed ,;a PACER); U.S.IXjXInment oftl.: Tttas~uy. P!tSS Release. "TrtaSUI)' 

TargeJS Chincst and Russian e..ities aoo tndhiduals Supponing tre Nonh Korean Regime." AuguSI22, 201 1. 

lhnos111\\n\ .ln:asun .!l9\ ipress-gRer/jlress-releasesiP!!!!!:slsn-lll48.aso') 

"United States of Ameriro v. Funds Associated .-llh .lftn¢Jeng lnrematwnal Trading umued, No. I: <~ ~ I t66-

KBJ (D.O. C. JIU>: 14, 2()17). (Accessed via PACER) 

"United States of Amenca ''· F•nds Associated .-ith l'elm•r Management PTE. /Jd, No. I: 17<1 ~1 705 (D. D.C. 

August22. 201 7). (Accessed ria PACER) 

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Anthony Ruggiero September 7, 2017 

processed over $1.3 billion in transactions through the American banking system between 

2009 and 20 16.2' 

• Along with four front companies, Dandong Zhicheng Metallic Material Company Limited, 

which accounted in 2016 for 9.19 percent of total Nonh Korean exports to China, used the 

Chinese financial system from 2009 to 2017 to process $700 million throogh the U.S. 

system, including$52 million this year.

25 

• The Treasury Department stated that Bank ofDandong processed at least $133.62 million 

from May 2012 to May 2015 as an agent for companies transacting with, or on behalf of, 

U.S.-and UN-sancrioned North Korean entities.26 

• In May 2016, Treasury stated that Leader (Hong Kong) International Trading Limited, a 

North Korean front company, from January 2009 to November 2012 cleared at least Sl 3.5 

million throogh correspondent accounts in U.S. banks.

27 

• Further afield, a Singaporean court foond that a local firm, Chinpo Shipping, used its bank 

accounts- including in Bank of China -!Tom April2009to July 2013 to process more 

than $40 million throogh the U.S. for North Korea lS 

• From October to November 2015, Mingzheng International Trading Limited, a front 

company in Shenyang, China, laundered more than $1.9 million using the Chinese banking 

system for U.S.-sanctioned North Korean Foreign Trade Bank.

29 

The Justice Department dedared in Septentber 2016 that there were "no allegations of 

wrongdoing" by Chinese banks involved in the Dandong Hongxiang network.

30 We now know 

"t'nited Slatesof.4merica v. FundsAssodated •·irh .lfmgtheng lnternarional Trading Limited. No. l7<\ ~ t 166-

KBJ (D.O.C.lWlOI4. 2() 17~ (Accessed "ia PACER) 

"'Risky Business: A S)stem-l..erel Ana )~is of the Nonb Korean Proliferation Finaocing System; C./ADS, June 

2017. 

(l!ttDSt!S!aljct.souarespacecomrwttid5§6d8b.ld8a007232d53j8M/594!Jcllbcbbdlac3!2N!!blllm447S88968/ 

Rislt\+Busiress-C4AOS pdO; t'nitetf States of Ammro v .• til lflre TrOI!SilCiiOtls /m'()/ling Dantfong Zhteheng 

Metallic Mlllerial Company, LTD., tt of. (D.D.C moo May 22, 2()17). 

(bnp/6.-w" c!c!b!!SCOWI~go, lsitcs/dg!/ljles/BAJIM£U!!i!nd0rder 000 

l6 U.S. Ocpanmtnt of !he Treasury. Finan:iat Crimes Enforcement Nelwork. "Proposal ofSpociat Mtasure Ayinsa 

Bank ofOandong as a Financial lnstitmion of Primary Money l..aUJldmng Concern.· 82 Fe~crat RegiS!erl29. July 

7. 2017. hn~ ill'l\\ fincenso\'lsttcsldefauh/lilesll'edcrnl re1!JS!er nocices/2017.07-0712017-14026.000 

"U.S. Ocpanment of the Treasury. Finaocial Crimes Enforccment Nel\\ork. ' Finding !lnttb: Oemocr.nic People's 

Reptlblicof Kon:a is a Jurisdiction of Priltlal) Money L.1undcrit1g Concern." 81 Federal Register 354~ !.June 2. 

2016. {h!tos:/il\""-finpen.go\'/SIIcsldefaultlfi!£l{sh;)red/19](> I:Jm81DPRK Fu!dJntl pdf) 

"Andrea Berger, '11nli<s to the Banks: Counter-Proliferation Finance and tb: Chi~ SIUpping Case." 38 North. 

December 16. 2015. (bm·//38oonb ow1015/1211!bergerl216151) 

:9 U.S. Ocpanme1U of Justice. Press Release, "United States Files Complaint to Forfeit More TI~at~ $1.9 Million 

from CIUna-Based Con'qlany Accused of Acting as a From for S3nctioned Nonb Korean Bank.· June 15, 2017. 

(bllor/AI\\w j!!Sljcc to\lgsao=ddprfunited=l!au:s-filewmoJajm.[or(ejt-UJlre-19-rnjl!jonshjm:bazdsomoom·-

acwscd-.1Cimg) 

"U.S. Ocpanme1n of Jusricc, Press Release, •four Chinese Nariona!sand China-Ba9.1d Con1liJliJ' Charged 11itb 

Using Front Corn)Xlnies to E\'ade U.S. Saoctions Tatgeting Nonh Korea's Nucle3r W~n; and Ballisric Missile 

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Anthony Ruggiero September 7, 2017 

that was not correct, as the June 2017 action against Bank of Dandong revealed that Dandong 

Hoogxiang owned a minority stake in the bank through December 2016. The Treasul)' Depanment 

also stated that Dandong Hongxiang used the bank to process $56 million through the U.S. 

financial system between October2012 and December 2014. Treasul)' noted in June 2017that 

"the close relationship between the two entities helped establish Bank of Dandong as a prime 

conduit for Nonh Korean activity. "31 This case illustrates that it is crucial for the U.S. government 

to target entire networks, including the Chinese banks that facilitate these activities. 

RecommendatioJr I: Sanction Atlditional Orilrese &mks. Following its designation of Bank of 

Dandong in June, the Trump administration should move against another Chinese bank using the 

full suite ofTreasul)''s tools. Treasury should issue significant fines against one or more mediumsized banks as a means of signaling there is a systentic problem inside China's financial systemn 

The purpose of such moves is not simply punitive; it is to drive a wedge between Chinese banks 

that covet their access to the U.S. financial system and Chinese leaders who indulge North Korea. 

If the banks fear they will be the next target of U.S. sanctions, they will pressure political leaders 

to change course.

33 

Nonh Korea's Ne!Works 

Tracing North Korea's proliferation activities is difficult, as Pyongyang obscures the true nature 

of the procurements and uses non-North Korean entities and individuals to shield these activities 

from scrutiny.

3

' A report by C4ADS found that "the system ofNonh Korean sanctions evasion is 

centralized, limited, and vulnerable, and that its disruption can greatly increase the pressure on the 

Kim reginte."3s Many of these activities involve Chinese facilitators or have a nexus in China, 

suggesting that Beijing should do more to cunail these activities. 30 Russia has also recently 

emerged as a conduit for Nonh Korea's proliferation activities. A sample of these proliferation 

activities include:

37 

Progmms," Scp«ember26. 2016. <b!tps11\111w-i!IS!ice.goylooolprlfour<hinese-natiomlwnd<him=b;W<llmp;!111· 

cll!fl!\'d ·usjng-from=CO IJIJil!ljcK'@usl 31 U.S. Depanmem of the Treasury. Fio.1rlcial Crimes Enforcement Network, "Proposal of Special Meas11re A!>!illSI 

Bank of Dandoog as a Finaociat Institution of Primary Money Laundering Conce01" 82 Federal Regislerl29.luly 

7. 2017. <hnpsjflnn> fincen.goyfsi@'dcfau!t/files!fc¢ml rcgi$1£1 noci0W201 J.07.07fl017-14026 odO " Artbony Ruggiero, "Scl'eriog Clbr~H<onll Kore3 Fut~ncial Links: Ctnrtr for Slraregic & /nterlllltional Studies, 

April3. 2017. (btms://\niWCStsorgknalvsisfsr:,~ringshira-rorth-korea-fimncral-linksl 

33 Anthony Ruggiero. "Time for Trump to Get Tough on Chin.1," Poliffro.lul)6, 20 17. 

hnp ill~>w oolitico comi!!!!Wincl!lorv/2017/07.Wdona!d.jrurno<him-mnh-korca-21mJ l 

" ~ted Nations Security Council, "Repon of the Panel of E.']JCitS e!!ablished pursuart to resolution 1&7~ {201)9)." 

February 27, 2017. <hnpl/urdocs.org!SI2017/150l 

" "Risl)' Business: A System-lel·cl Analysis of the North Korean Proliferation Financing Systent" C4ADS.luoc 

2017. 

hrrorf &'!lrcl.sgu.1respaa;confunid566d'8b4d8a~J07232d5358;Wj9~134bebbdloc319lca!bl/1497-1-17588968/ 

Ris!q·+Busm;ss·C4ADS 000 

,. Joshua Starnon. "UN report fillis e.'re!ISII·e e1idence tlw Clum hoSIS N. Korea· s proliferation networts," One 

Fm K<Jrta, Ma.n:h t 5, 2017. bup 1frcekorea us/2017m/15Jun-report-fi!!(!s.e,~ttns" ep!dtnce~lw<him-hol!S=nkoreas-prolifelj!!ion-ocmod<s/Nstash.mBO.MEF WXw tkT.dllbs) 

,. Additional examples of North Korea's proliferation activities can be fowxl at: Antholl) Ruggiero, "Restricting 

Nonh Korca's Access to Finance: Twmrony before JfouSt Comnulluon Fmmrctal Stn·ices. Subconunirree on 

.1/()n(raryPoltc:y andTrade.luly 19, 2017. 

(!!ltpilln111'.defenddemoc!j!Cl.o!Yicorteri/uploads!documentYAilhof11' Ruggiero Tesrin!Qfll' HFSC odD 

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Anthony Ruggiero September 7, 2017 

• TheJuly4 1CBM test was delivered to the launch site on a Chinese-made truck.38 The same 

trucks were used by Nonh Korea to parade six road-mobile intercontinental ballistic 

missiles in 2012J

9 Nonh Korea claimed the trucks were for the foresuy ministry, and the 

UN has prohibited since 2006 the export of items for the Kim regime's missile program.

40 

• In 20 I 5, a Chinese company supplied sophisricated machine tools to North Korea, which 

could be used for its nuclear, missile, and military programs, according to a report 

published in April by the Institute for Science and lntematiooal Security. 

4t The UN has 

prohibited these items since 2006, and such activity probably violates China's own exponcootrol restrictions.

42 

• The UN 2016 repon noted that the shipment of Scud missile parts from North Korea to 

Egypt was run out of the North Korean embassy in Beijing. 3 

• [n early June, Treasury designated a Russian company and individual for providing 

supplies to Korea Tangun Trading Corporation and noted the individual is a frequent 

business partner ofTangun officials in Moscow.

44 Tangun was designated by the U.S. in 

2009 for its involvement in Nonh Korea's WMD and missile programs. 

• [n late August, Russia's Gefest·M LLC and its director were sanctioned for procuring 

metals for Tangun's Moscow office.

41 

• UN Security Council Resolution 2371 sanctioned nine North Korean overseas 

representatives for prohibited activities and/or sanctions evasion. Four of the 

representatives are located in Russia and five are in China.

46 

" James Pearson and Jack Kim. "Nonh Korea appeared to use Cllim mtek in its fii'SI daiiOOd ICBM teSI," Rtuttrs. 

July t 2017. lhltptlwww IW\efl comtaruclelus oonbkorea missileK!ina~ntek idUSKBN!9PI!3! 

l'I Lany $1\'lllgluiCssy, ''Truck raises questions about Clum's rotc in Nonh Korea·s missile progr.u11," QI'K, April 

20, 2012. lhltp:lill11w.cnncom12012AW2011\orld/as!alnonh-korea-sl!nesc-truck/l 

., United Nations Security Council. Resolution 1718, October 14, 2006. 

lhup/bnn• n!torxl!:afscarch{\jcw doc I!SJ)7pntoi=S!RES!J718o/t2~0282006o/o29 l 

" D<nid Albrigh• "Shell)ang Machine Tools Compall)," ln.llllllf< for Science and lntlfTiallonal Security, Aprill3, 

2017. lrtp:!T!sis-oriioc orgli~s-!t!)On&'d<:caiVshell\ans maclune~oo!s<Om!!<!ll\D 

" Ututed NationsSccuritv Council. Resolution 1718. October 14,2006. 

lhttplA111" un org/ga/~m:hflie<• doc.asp?syntol•SIRES/1 718"/.20"/ol82006,o29l 

" U1uted Nations Sccurily Cooocil. ~Repon of che Panel of E:<pens estoolishcd punuam to resolution 1874 (2009)." 

Februruy 24. 2016. (hnp:JJu!Wrurg/S/2016/157) 

" U.S. ~nmem of the Treasury, Press Release, -Treasury SaiiCiions Supp~e~ of Nonh Korea's Nuclear and 

Weapons Proliremtion Programs: lun: UOI 7. (ldtpS/11""' IRaS!Ul' oor/oress<:enter!oress· 

!clcm!PaWsni.l099.asp3l •• U.S. Deparunem of ~lC Treasury, Press Release, Treasul) Targets Chinese and Russian Eurities and looil'iduals 

Snppolling tllC Nonh Korean Regime: August 22.2017. (btpSJOnm lreasu!Y !!O)'Ipress=C!lJllq!gress. 

rtlea:;es/P3geslsm() 148.aspil 

" U1uted Nations Security Council Resolution 2371, August 5. 20 I 7. 

ih!Jpiflnnqmom/enl!!i!/searchflicyl doc.aso?S\ ntoJ.S/RES/237 ll201D) 

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Anthony Ruggiero September 7, 2017 

Recommendation 2: Stmction Chinese am/ Russian Facilitators of Pyongyang's Satrctions 

Ewrsiorr. The Trump administration should continue to sanction elements of the Chinese and 

Russian networks that facilitate North Korea's sanctions evasion, preferably with near simultaneity 

for maximum effect. Chinese entities and individuals are at the hean of sanctions evasion, but 

Russia is filling a key void. Beijing and Moscow 11111 object to the sanctions, but the time for 

accepting excuses is over. 

Additional Sanctions Recommendations 

Recommerrtlatiorr 3: Hlock tire Rerenue Nortlr Koren Receives from O>·ersetrs Laborers. To be 

as tough on North Korea as it was on Iran, the U.S. must work to disrupt the stre<UTI of revenue 

generated by Pyongyang's provision of de facto slave labor to foreign countries in exchange for 

hard currency. The regime sends citizens overseas- estimates range from 50,000 to 120,000-into 

terrible work conditions while requiring foreign countries and companies to pay the workers' 

salaries directly to the regime, which passes on just a small percentage to the worltersH These 

slave laborers likely participated in the construction of venues for the upcoming soccer World 

Cups in Russia in 2018 and Qatar in 2022.43 One expert puts North Korea's earnings from the 

practice at some $500 million annually. 49 1n early Au gus~ Kuwait stated that it employs over 6,000 

North Korean workers and said it has no plans to reduce that number, contradicting the State 

Depanment's 2017 Trafficking in Persons report. so The Russian government admitted last week 

that it en1ploys 40,000 North Korean workers in timber processing and construction.st 

UN Security Council Resolution 2371 unfortunately only caps the number of overseas North 

Korean workers, despite stating the revenue is used in Pyongyang's nuclear weapons and missile 

programs.12 The Countering America's Adversaries Through Sanctions Act mandates the 

··Shin Chang-Hoon and Go Mvong·HJ un. "BC)ond the UN COl Repon on Hwnan Ri§us in Nonh Korea,· The 

A$WI Jnstirure for Policy Studies, No~cmber 3, 20t4. (http1/en.asanil!!! omcomcllslasan !t!)On·bcrorxl~h:-<.'lli · 

dprt-OOman-rights:repoJ!I'J: MartUs Noland, "Organired Exports of Labor. Welconx: to the Ecoo Cbamber," 

PetefStJII /nstilure for lnttrnatu)lfa/ f..colwlntcs. June I, 201 ), (btm//pije com'blo!!S/nonh.Jto~ta·~il!!ess· 

h;lllSfonrotionlorgariii.C!k,wns-labor·\\elcome-echo<hamberl 

" IT.wid Conn. "World~ 2018: Fifa admits worters hal'e suffered huntan rights abuses." The Guard10n (UK). 

Mal 25, 2017. (l!l!OSi/1!" w.!hegu.'lfdjan.comlfooibj!)V20!71fl!lvl2511ira-\\Or!d<!JI):20 18-worl<cMuman-rigllJs· 

~; Allie Colli, "Nonh Korean Slal'es Are Building Qatar's World Cup Ccmerpiett." l'tce, NO\~nmer 7, 2014. 

<bnos1/lm" .\'JCC.comlen us/article!nonb-korean-sla,'CS·are-buildin21!atars·workk:o!KCntemiooel 

" MartUs Noland. "Organired E.xpons or Labor. Wclconx: to ~te Ecbo Cllantcr," Petml)n lnslilure for 

lnremational Economics. l1u1C I, 21m. (buos1/piitcom12!ogslnonh-korea-wilncss:JmnsrormationlorganiJ&dcwons-lallor ll~lcorM<eho<hanW> 

lO Jon Gruoorell ·'Kuwait Sa) s North Korean Workers Welcome Then Refu!es liSe If." AsSIICtated Press. Auguslll. 

20 17. lb!U!S'/ill11 " .bloonmerg.comln:ws/anicles/20 17 -08-lllklll'a't-53\ s-non h-kon:an·\1 orl:ers-11 eloonx:~hcn· 

refuteSilseiC'yun con!erc-po!jJ;cs&wm taD!Dilt21FSOCfatOow· 

O!l!l!nk&Ulm soUJW'!IIi!ter&!l!m msdii!!!Ej9CiiJ!&cmp!!!%:J!Esocialfloii:JII!IIet·OObf!cs): U.$. l>cpanment or 

State. "Trafflclci11g in PersonsRepon 2017." JWJC 2017. 

(luiosiilmw sare.ooyfdocU!l!!llfOtgilmjllljon/271339 odD 

" Polina Nikolskal-a and Ka~a Golooko1-a. "Russian-Nonh Korea projectS rowx~ering ~usc or missile tcSls: 

minister." Rturers. Aogus~28. 2017. lhnoiln"" n:utcrs.convaniclelus-russia-nonhl:orea·tradc· 

ldUSJ(CNI BSIBO'!ldm gnnooimnx;Amhenr+ TRD!Ijn&Kome!l!!Y!m con!em=59a.f45159!d30 I !lee! I 52a(M 

U)Ol mcdiWJEJD!tAf!!Jtln&U!m sou!W'IIIJ!(e!) 

'"'United Nations SccurilJ Counci~ Resolution 2371, August 5, 20t7. 

l!!ltoiil11111'.unorg/cnlf!i!lsearcMiell doc aso?S\ ntoi=SIRESI23711201Dl 

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90717017.eps

Anthony Ruggiero September 7, 2017 

president to impose sanctions on persons that employ North Korean workers, and Washington 

should lead an effort to end North Korean slave labor.s

3 The U.S. should then build a coalition of 

like-minded countries that commit to not accept North Korean ove~as laborers. China and Russia 

would block a UN ban on payments to Nonh Korea, but exposing the tenible work conditions and 

links between the revenue and the prohibited programs could pressure Beijing and Moscow to alter 

the payment mechanism providing the money directly to the laborers, while continuing to import 

North Korean laborers. 

Recommendation 4: Pursue an Offensil'e am/ Defensi,·e Cyber Strategy. North Korea is honing 

its cyber skills to use both as an asymmetric weapon against the United States and South Korea, 

and as a means of generating revenue, such as the regime's attempt to steal $1 billion from 

Bangladesh's central bank. 5

4 Pyongyang conducts its cyber activities front inside China. Beijing 

and other supporters value access to the American financial system, and we should issue sanctions 

and criminal charges against them to send a message that enabling cyber attacks has consequences. 

We must harden our defenses and strengthen the castle walls, share data with the private sectorthe primary target of North Korea's attacks- and think more creatively about new forms of cyber 

cooperation with the most technologically-advanced of our allies. 5

5 The New York 7imes reported 

in March that Washington is engaged in a cyber effort to sabotage Nonh Korea's missile launches, 

sending Pyongyang a message that cyber attacks go both ways. 56 

Recommendation 5: lmpo.5e Mtmdatory lnspectioJIS for all Nortlr Korea11 Sir ips. North Korea 

uses its shipping fleet to transfer prohibited materials, which in some cases are disguised as 

shipments of legitimate items The UN reported in February that Egypt intercepted the Jie Shun, 

which was carrying rocket-propelled grenades and components concealed under iron ore. 5

7 All 

North Korean ships should be subject to inspection when they anive at foreign ports or, if 

applicable, in international waters to ensure they are complying with the UN sanctions on transfers 

of prohibited goods. The U.S. and its partners should sanction all elements of the North Korean 

fleet to subject them to increased inspections at foreign ports, including regular updates to assist 

with port state compliance, and expand interdiction exercises with key partners in the region. 

Recommendation 6: Use U.S. and Partner States' A11tflorities to Enforce UN Sanctions. UN 

Security Council resolutions are not self-enforcing, and the United States has a special 

responsibility to lead a UN sanctions implementation effort given the preeminent role of the U.S. 

" Counteri11g Alne~'s Ad\·m:aries Through SanclioiiS ACL 115 U S.C. 

lh!!rr.ll""" whitehousr g01negislalionlhr-3J6!:(ll!!lllcringsumricl!smrwips~hfllll•h§mcrions-actl 

" Michael Corkery and Manbew Go1dsrciJt "Nonh Korea Said ro Be Targc1 or lnqui~· Om $81 Mrllion 

C)berbeist" 'IM .Vt>· York Times. Maltb 22. 2017. Omos:lflnnl.m-llmes cor~l7Al 121i1>osrressldealbool<loonh

korea-s~id~o-bc-U1rgel-or iooum -orer-31-milliorKiberh:rSI.hlml? r-ill 

!5 Sanralllha Ra1 ich and Anlhony Ruggiero. "Th: gro11i11g Nonb Korean C) tor llml." F'ifih Domain C>iler. Juoo 

t 2, 2017. (h!rp//lnnr defendd&moc!!Cl'·oWnp!ia-hilili!m:tnlh.Hn' o;b-!l!Cj!<OIIing-oonltko!ti!!KI'ber-dmt/): 

Saruanrha Ra1ich. "SUIIe-SpoiiSOred C)'be~ ThreaiS: Recent Incidents am U.S. Policy Response," Testtmony 

before the Senate Forttgn klaiiCil$ Commillee. June 13.2017. 

lhnptflnm .dercnddemocracr oWoollleru/uploads/documen! 132011 Ranch Teslimorn .odQ 

" William I. Broad and Darid E. Sa11ger, -u.s. Sll111egy 10 Hobble Nonh Korea Was Hidden in Plain Siglt1. ., The 

.\'t>• York Times, March t 2017. 1)11ps'/hnnv m·urnes comi20)7,!)3A).Ibwddlasja!lcfi1lr·!aurdtm!SSj!e· 

,-

~ 

~red NalioiiS Socuriry Couocil. "Repon or II!C Paool or E'J)ens CSI:i>lished purnran110 resolution 1874 (2009)," 

February 27. 2017. ChnpJ/ur4ocs.orgiSI2017MQJ 

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Anthony Ruggiero September 7, 2017 

dollar in the international financial system. China and Russia will not allow the UN Security 

Council to address the implementation challenges identified by the UN Panel of Expens. The 

United States should coordinate an implementation elTon with other like-minded countries (South 

Korea, Japan, Australia, the United Kingdom, France, and Gennany). In some cases, countries 

may need assistance drafting implementation laws or regulations. In other cases, the U.S. should 

sanction those countries that violate UN sanctions and refuse implementation assistance. 

Additional Recommendations 

Recomme/11/atiOJr 7: Atltfress lra11-Nortlr Korea Cboperation. A February 2016 Congressional 

Research Se!Vice report noted the Nonh Korea-Iran ballistic missile relationship is "significant 

and meaningful."" That missile relationship was serious enough tbr the Obama administration to 

sanction Iran a month earlier, just one day after the nuclear deal with Tehran was implemented.~9 

North Korea's successful tests and stated deployment of the solid-fueled Pukguksong-2 mediumrange ballistic missile could be attractive to lran.

10 The U.S. and its partners should use their own 

authorities and North Korea-related UN sanctions to prohibit the exchange of technicians, review 

the role of Iranian pons in North Korea's proliferation activities, and ensure the intelligence 

community is assessing the relationship for signs of increased missile cooperation or incipient 

nuclear cooperation. 

Recomme11darion 8: Implement Reslrictions on To11risr Trarelto Nortlr Korea. The death of 

American student Ono Wannbier was nothing less than a callous murder at the hands of North 

Korea's Stalinist dictatorship. We should remember that at least three Americans are being held in 

North Korea. These detentions are part of a pattern for Pyongyang, which uses Americans as 

bargaining chips in its standoff with Washington.

6t Senior American envoys have also bought into 

the illusion that engagement could yield resuhs, regardless of how clearly the regime advertised 

its hostility. The State Department has restricted the use of U.S. passports for travel to North Korea 

starting September I, except under limited conditions.

62 This is a good step forward, but Congress 

must ensure it is being implemented and that it is not adversely affecting the operations of 

humanitarian organizations who care more about the Nonh Korean people than the Kim regime. 

ll Paul K. Kerr. Ste\'cn A. Hildmh, and Mary Beth D. Nikitin. "lrnn-Nonh Korc.>t-Syria Ballistic Missile and 

Nuclear Coopcrntion." (Mgrts.<ional Research &,..ice. februaJ)' 26. 2016. 

(httos;//fas org/s!!!)(rn/m•kciR~ 1.180 !!dO 

" ne White House. Press Release. "Statement by the ~idem on han." January 17. 2016. 

lhttos/foba!!llllhireoousc.arehivu.mahe12fCSMfflct./2016.1ltfl7/stai!l!!!CJI12rWdc!t-iranl: u.s. Dcpartn~nt or 

the Treaswy. Press Release. ·Treasury Sanctions Toose hn·oi\'Cd in BalliSiic Missile Procuremem for lrnn." Jamal)· 

17. 2016. httos ill'lw treasutu0\/press<e~J~C!Ioress reteases/Pa:res!il0322.asoxl 

"'Antholl) Ruggiero and Behnam Ben Taleblu, "'The danger of Nonh Korea aoolrnn-and 0011 Tru111> should 

tadle it." The Hill. July 6. 2017. rhnpthhcbOI OOfl\'bloMundjts-blog/forejgn-oo(!Cl/J.!Q8121hc-•real=d3!!!!tr:()fnorth-korq..,-.!!I..J ran-llrd·\\ h:U·bJJnt!Kllnl 

" Altho II)· Ruggiero, "Nonb Korea Takes aoothcr Arocrican Hostage. • Founi/arum for Defense of Democracres. 

Apn12l2017. (!M[pi/\"'" defen!lde!l!lCrncy ort!Jmd!lJ-biJiand!Om·:fl!ggjero-nonh-korea=Jakes.ano!l!)[:{!mencan-

"

~ 

U.S. Deparuncm of State, "United Swes Passpons lmalid forTrn"elto, in. or Through the DeiOOCDlticPoople's 

Reptrbticor Korea; 82 Fcdcrnl RegiSier 36067. August2. 2017. (b[DS'{/ron• goo goylfdm!J)kgiFR-2017.0S021pd[J20 17-16287 pdO; U.S. Department of SLttc. "Notice or tnfonnation CoiiCC1ion Under OMB Em:rgcncy 

Re\'ic11: Request for Appro1'111 To Trnrelto a Resuicred Coull!)' or Area." 82 FOOml Register 36065, August 2. 

2017.11ilns:/il\"1' goo goy/fdsy~'okglfR-2017.0~2/pdf'/2017-16286 !!dO 

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90717019.eps

Anthony Ruggiero September 7, 2017 

Recommemlation 9: Atltlress North Korea 's Hutrratr Rigltts Abu.ses. The North Korean regime 

has perfected torture on its own people. When lhe UN detailed lhese abuses in a ground-breaking 

report in 2014, lhe world collectively shrugged.

63 Even the United States - the "city on a hill" -

waited two years to act against North Korean human rights abusers, an inexcusable dereliction of 

leadership.

64 The UN report noted that Kim's thugs carry out forced abonions, and any baby lhat 

survives is drowned or suffocated in front of the mother; immerse prisoners in a tank until they 

almost drown; hang people upside down; force needles under fingernails; pour a water-bot chili 

pepper concoction down the victim's nose; and use Starvation as an element of statecraft to keep 

innocent civilians fearful of the state.

61 

U.S. Ambassador to the UN Nikki Haley should press for a Security Council session on Nonh 

Korea's human rights violations, including a vote on !he commission ofinquiry's recommendation 

to refer the issue to the International Criminal Court or create an international 1Jibunal.

66 

Washington should lead this effort, which would force serial human rights enablers China and 

Russia to veto the resolution. Congress should consider extending the North Korean Human Rights 

Act lhat expires later lhis year. 67 Congressional action to extend this important law will maintain 

focus on the issue, promote information flow into Nonh Korea, and ensure lhe administration 

makes it a priority in discussions with Pyongyang and Beijing.

63 

Conclusion 

Pyongyang's provocations, including its ICBM tests and sixth nuclear test, deserve increasingly 

harsh responses from Washington. A new North Korea sanctions approach is needed to secure the 

United States and its allies against the dangerous and growing threat from this rogue regime. Iranstyle sanctions are the only peaceful means for dealing with the threat from Pyongyang, and are 

for that reason indispensable. 

On behalf of the Foundation for Defense of Democracies, !thank you again for inviting me to 

testify and I look forward to addressing your questions. 

63 United Nations Hwnan Rig)lls Council. "Rcpon of the Commission oflnqwry on Hwnan Riglls in the 

Dcruocrntic People's RepubticofKorea; Februal) 7, 2014. 

lbnp/bn'" ohchro!WENIHRBodlesiHRC.!Co!DP.RKJ!>ages!BeoonoflheCommjSSJOJ!lfl!!Jui!l'DPRK,a:;oxl 

A!llho~ Ruggjc.ro, "Don't let Nonh Korea's nukes overshado11 hum<Ut rights abuses,- The Ifill, April28, 2017. 

lbnplhb!ltill com'btogs/oondtts-btoglforeign-poliG\/331061-doll-lcl-nonh-kote3s·nul<es-<Yt-e!Wdo\\-humanrigl!ls·abusesl 

~' United Nations Hwnan Rtglus Couocil, ·Repon of the ConuniSSJon of Inquiry on Human Riglls in the 

Democratic People's Republic of Korea." February 7. 2014. 

lhrto:/111 "'"' ohchr omiENIHRBodtes!H!\C/C9!DPBKIPMwRepono0heComnussjooonMuirvDPRKJ!SPxl 66 United Nations Hu1113n Ri8Jus Council, "Repon of the Commission of Inquiry on Hmmn Riglls in the 

Democratic People'sRepublicofKorca." February 7. 2014. 

lhnplill""·ohchrorg!ENIHRBodjes!HRC/C91DPRKIPages!J\eponoObeComnuSS!O!l001!ltnll'DPR!laspx) 

,. NorthKoreaHultl3n Riglus Actof2004, l'llb. L No. 108-333. 118 Stat. 1281.oodificd asam:nded at 22 U.S. C. 

§ 180 I. fbl!ns:/bm" WDl!!!:SS gox/1 08/olaws/mt!ill/PL AW ·I Q8poilll33 Pdf\ 

'* Amhony Ruggiero, "Don'tletNonh Kore.1s nul<esow$lllldowlwm.tnrigllsabuseS: The IIlii, April28. 2017. 

lhrtplhbebtll

~ 

.eonW!ogs/p!lndits,ll!oflforcign-poliQ/Jll061-dor4-le!-nonh-koreas-nukrul''£M!dp•-hu®!l= 

Foundation for Defense of Democracies 19 www.defenddemocracy.org 
57 

1The 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. 2Park, 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. 

3Park, 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/0Blph0c6i87CleGhCOGRhUVFaU28/view. 4The 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-portraitpurge. 

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

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. 

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

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 GeneralSecretary 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. 

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 reVerDate Nov 24 2008 14:07 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00061 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\09-07ZDIST\90717.TXT JASON
58 

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. 

gime’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

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 Korearelated 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 

59 

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. 

60 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER FROM SENATORS SASSE AND DONNELLY 


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comprehensive effort to ensure rigorous enforcement of all U.S. and multilateral sanctions. 

Second, while our witnesses agreed that the U.S. will need to sanction Chinese entities to 

strengthen enforcement against the DPRK, they called for nuance and collaboration over a directly 

adversarial approach between Washington and Beijing. They call for operating 'A1thin a framework 

oflaw and order, working together with China to, as Mr. Zarate put it, "isolate rogue financial and 

commercial activity and those flouting legitimate authority." Without this kind of collaboration, 

Mr. Szubin argued, threatening or imposing secondary sanctions against Chinese targets "may 

change the conduct of indh1dual Chinese entities ... but it 1vi1l not bring about the kind of 

comprehensive and sustained crackdown by Chinese authorities, traders, bankers and 

businesspeople that is required to bring North Korea to the table. That type of sanctions pressure 

"111 only be achieved when the Chinese government agrees to apply it." 

Finally, and most importantly, our witnesses stressed that increasing sanctions pressure on the 

DPRK to the level necessary tO force negotiations requires a deliberate, forceful, and coordinated 

diplomatic effort by the United States coupled l\1th tough sanctions enforcement. Mr. Zarate 

stated, "To be effective, an attempt to use sanctions or financial measures of any sort must nest 

1\1thin a coherent strategy and cannot stand alone." China must be persuaded that our paramount 

interest in addressing the DPRK's nuclear and ballistic missile programs is not necessarily at odds 

1\1th their principal interest in avoiding regime collapse. 

We hope these fundamental findings are useful to you as you consider calling current 

administration officials to testify before the full committee and recommend the following 

questions as worthy of further consideration by the committee: 

• What is North Korea's objective in pursuing its nuclear weapons and ballistic missiles 

programs, and what are its internal and external objectives 1\1th regards to the geographic paths 

of its missiles and its rate of current testing? 

• What is the administration's strategy on the DPRK? What is the end goal on the DPRK and 

will the strategy achieve that goal? 

• How does the Defense Intelligence Agency's assessmen~ as reported in the press, that the 

DPRK has miniaturized a nuclear weapon alter the administration's end goal or strateg)n 

• How does the sanctions-related and illicit finance work of the Treasury Departmen~ 

specifically the Office ofTerrorism and Financial Intelligence, nest within this strategy? 

• What, if any, additional authorities does Treasury need to implement its strategy? 

• How are Treasury Department officials working with other relevant departments and agencies 

to coordinate efforts on the DPRK? 

• Does Treasury believe it has sufficient mechanisms in place to prevent North Korea from 

circumventing sanctions via illicit acti\1ties and underground markets? 

• Is the Treasury Department sufficiently resourced to monitor primary and secondary sanctions 

against the DPRK? 

• Do Treasury Department officials agree that it is possible to bring the DPRK to the negotiating 

table through sanctions pressure, and if so, are stronger U.S. or multilateral sanctions necessary 

to achieve that goal? 

• How1\il! the Countering America's Adversaries Through Sanctions Act (P.L. 115-44) be used 

by the Treasury Dcparunent to increase sanctions pressure on the DPRK? 
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Thank you for your coosidctatioo of our input. We look forward to working with you 10 address 

this timely and important matter before the full commiuee. 

Ben Sasse 

Cbainnan 

Subcommiuee on National Security 

and International Tlllde and Finance 

Sincerely, 

y 

Member 

Subcommittee on National Security 

and International T 111de and Finance